Transfer Pricing Forum - Transfer Pricing for the International Practitioner - NERA Economic Consulting
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Transfer Pricing Forum Transfer Pricing for the International Practitioner Volume: 12 Issue: 1 APRIL 2021 pro.bloombergtax.com
Winter 2020 / Spring 2021: Transfer Pricing Forum
THE TRANSFER PRICING FORUM is Transfer Pricing: A Year in Review
designed to present a comparative study of
typical transfer pricing issues by Country The year 2020 brought many challenges to the global economy
Panelists who are distinguished transfer pricing
practitioners in major and emerging industrial and forced countries to adapt and make changes. The goal of
countries. Their discussions focus on practical this forum is to identify 2020 transfer pricing developments in
questions posed by guidance, case law and
practice in their respective jurisdiction, with
your country and discuss how your transfer pricing practice has
practical recommendations whenever been impacted by these developments, as well as to look
appropriate.
forward to 2021. Please share your thoughts, with a focus on the
All rights reserved. Reuse of any portion of the following general areas:
publication is strictly prohibited unless express
written permission is granted by The Bureau of
National Affairs, Inc. Permission can be obtained • Legislation
through the Copyright Clearance Center at (e.g., new legislation or regulations that have impacted
www.copyright.com. To obtain permission for
any reuses not listed on www.copyright.com, the transfer pricing landscape in your country.)
contact The Bureau of National Affairs, Inc.
directly at 1801 S. Bell Street, Arlington, VA • Cases and Rulings
22202-4501 or www.bna.com.
(e.g., recent transfer pricing cases or rulings, as well as
The TRANSFER PRICING FORUM has been changes in the volume or types of transfer pricing cases
carefully compiled by Bloomberg Tax, but no being litigated.)
representation is made, or warranty given
(either express or implied) as to the
completeness or accuracy of the information it • Transfer Pricing Documentation
contains. Bloomberg Tax is not liable for the (e.g., new master file or local file requirements, as well as
information in this publication or any
decision or consequence based on the use of it. other documentation or reporting requirements.)
Bloomberg Tax will not be liable for any direct
or consequential damages arising from the use • Transfer Pricing Examinations/Audits
of the information contained in this publication.
The information contained in this publication is (e.g., any changes in the tax authorities’ focus on transfer
not intended to be advice on any particular pricing issues during an examination or changes in the
matter. No reader should act on the basis of any way tax authorities audit transfer pricing issues, as well as
matter contained in this publication without
considering appropriate professional advice. a discussion of any changes or enhancements to the
MAP process.)
© Copyright 2021 Bureau of National Affairs
Inc., Arlington, VA 22202.
• Impact of COVID-19
Board of Editors (any specific changes or steps taken by the tax
Director, International Tax authorities to accommodate the impact of the COVID-19
Annabelle Gibson, Esq. pandemic on transfer pricing practice e.g., taking into
Lead Technical Editor account economic circumstances as a relevant
Tiwa A. Nwogu, Esq. LL.M (Tax) comparability factor.)
Technical Editor
Peter H. Rho, Esq. • What Can We Expect in 2021?
Contributing Editors (e.g., any anticipated transfer pricing developments or
Lee Hadnum, LLB ACA CTA issues that we should be aware of as we enter 2021.)
Juan Pablo Osman Moreno, LL.M (Tax)
Andie White, Esq.
Editorial Support
Sally Baird
Shawne Hicks
Xiuyun Lin
Cassandra White
04/01/2021 Copyright © 2021 The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 iWinter 2020 / Spring 2021: Transfer Pricing Forum
Germany
Philip de Homont and Georg Dettmann
NERA Economic Consulting, Frankfurt
Legislation
The German Ministry of Finance issued new Administrative Guidelines, the “Verwaltungsgrundsätze 2020,” in
December 2020, 1. While these guidelines do not constitute formal legislation, they tend to have strong
practical implications, as they are considered binding on the tax authorities.
Overall, the new Verwaltungsgrundsätze primarily cover the documentation and cooperation requirements
applying to German taxpayers in transfer pricing cases, and the likelihood of the tax authorities making
reassessments. By and large, taxpayers are expected to cooperate extensively with the tax authorities and
generally provide most of the information requested. In particular, this not only includes information that
would be directly available to the (German) taxpayer concerned, but also covers information only available
to the transacting counterparty (i.e. other group companies that pay or receive transfer prices). Where the
transacting counterparty is a subsidiary, the Verwaltungsgrundsätze stipulate that the German parent
company can use its shareholder position to extract the information. On the other hand, where the German
company is transacting with sister or parent companies, the tax authorities accept that the German company
may not have full access to the relevant information. However, the tax authorities stipulate that, even in such
cases, the German entity should contractually ensure access to relevant information before engaging in the
transaction in the first place.
That being said, what exactly constitutes “relevant” information is still debatable -- especially when the tax
authorities are trying to evaluate the DEMPE functions of licensors abroad. After all, economic substance can
take many forms and independent third parties typically limit the amount of information they provide to third
parties.
From the point of view of the tax authorities, the new Verwaltungsgrundsätze largely represent a
comprehensive summary of their existing views and the decisions of fiscal courts, which generally provide
guidance for tax practitioners, although in the German system they do not constitute case law as such.
Cases and Rulings
There were relatively few major court decisions on transfer pricing in Germany in 2020. However, in
February 2020 2 the German Federal Fiscal Court (‘‘BFH’’) confirmed earlier rulings from 2019 in which it (the
BFH) had changed its view on the application of the transfer pricing rules in relation to the write-off of
1
GZ IV B 5 - S 1341/19/10018 :001 DOK 2020/1174240.
2
BFH I R 19/17; February 19, 2020.
04/01/2021 Copyright © 2021 The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 47Winter 2020 / Spring 2021: Transfer Pricing Forum
intercompany receivables, when an applicable tax treaty is involved. 3
Before changing its view, the BFH had taken the position that under Article 9(1) of the OECD Model Tax
Convention, the application of the transfer pricing rules was limited to the determination of the interest rate
on intercompany loans. A write-off of an unsecured intercompany loan could thus be recognized as a
deduction from taxable profit without allowing for an income adjustment to be made by the tax authorities
under domestic transfer pricing rules.
In contrast, the BFH’s more recent rulings widen the scope for transfer pricing adjustments to be made when
there is a deviation from the arm’s length principle. Following the recent decisions of the BFH, an
impairment of receivables falls within the scope of the domestic transfer pricing rules. A resulting reduction
of taxable profits can thus be neutralized by the tax office.
In the same rulings, the BFH also changed its position on implicit support (“backing by the group”) in a
multinational enterprise group. This implicit support no longer replaces the provision of collateral.
Conversely, the lack of collateral in an intragroup financing arrangement is considered a strong indicator to
the effect that the transaction concerned is not at arm’s length.
The 2020 ruling also confirmed that the income adjustment (under domestic transfer pricing rules) referred
to above does not conflict with the laws of the European Union.
Transfer Pricing Documentation
Since Germany imposed country-by-country (CbC) and Local File/Master File documentation requirements
for financial years beginning on or after January 1, 2016, no fundamental update has been issued. However,
tax authorities have tried to clarify which information they think should be provided, and under what
circumstances (see the legislation referred to above).
Transfer Pricing Examinations/Audits
The German tax authorities have been building up their transfer pricing capabilities for several years now,
both at the federal level and in several of the states (Länder). Overall, Germany now has several hundred
transfer pricing specialists spread across the various tax authorities. This trend continued in 2020.
From a topical perspective, the tax authorities have continued to focus on licensing arrangements, especially
those involving licensors in perceived low-tax countries. Thus, a comparatively large number of audits have
concentrated on the DEMPE functions of licensors.
Overall, 2020 saw many audits being delayed or making only slow progress as the tax authorities struggled
with the effects of COVID-19 on their operations.
3
For example in BFH ruling I R 51/17; 27 February 2019.
04/01/2021 Copyright © 2021 The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 48Winter 2020 / Spring 2021: Transfer Pricing Forum Impact of COVID-19 The German tax authorities have been active in the OECD discussions concerning the impact of the COVID- 19 pandemic and are expected generally to follow the OECD guidance, for example regarding adjustment calculations for economic circumstances. No specific German guidance has been issued on this subject, but generally, such adjustments are covered by the broader transfer pricing guidance, which is similar to the OCED guidance on comparability factors. In particular it is worth noting that, while the use of comparability adjustments would be accepted in principle, there can still be significant disputes as to how exactly they should be computed and whether or not the parties should have shared in the underlying risks. What Can We Expect in 2021? In day-to-day practice, the tax authorities will be hard-pressed to resolve the backlog of audits, MAPs and other items that have accumulated during the COVID-19 pandemic. That being said, it is expected that the tax authorities will seek to increase their tax collection efforts in the coming years to cover -- at least partially - - the shortfall in tax revenues in 2020 and increased government spending. From the perspective of the broader strategic roadmap, Germany will likely continue to be heavily involved in setting the OECD’s agenda on the taxation of the digital economy. Philip de Homont is a Director, and Dr. Georg Dettmann is a Principal at NERA Economic Consulting, Frankfurt. They may be contacted at: Georg.dettmann@nera.com Philip.De.Homont@nera.com www.nera.com 04/01/2021 Copyright © 2021 The Bureau of National Affairs, Inc. TP FORUM ISSN 2043-0760 49
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