StartInternat. Tax LawTransfer Prices

Transfer Prices

The importance of transfer prices for international business relationships between affiliated companies and the extent of the determination of such increases every year. Even though they are of a certain commercial interest for companies operating internationally, they are much more important in tax law. As tax law attorneys and tax advisers (specialist attorneys for international tax law), we advise clients on all aspects of transfer prices, create or audit transfer price documentations and defend these towards tax offices, auditors and tax investigators.

Almost no tax audit at an internationally operating company ends without a discussion of transfer prices between the tax office and the company concerned, as well as its tax advisers and tax lawyers. This is a result of the increasing globalisation and internationalisation of the economy, as well as international mergers. As of today, approximately 70% of global trade are settled between affiliated companies. Interim gains are usually realised in the border-crossing exchange of deliveries and services within a group. Since, in principle, there is no conflict of interest within a group because of the interrelations under company law, transfer prices for deliveries and services could be selected so as to ensure that the profits are taxed by those corporate companies that have the lowest income tax rate. However, the German legislator has tried to stop this random shifting of profits to countries with a low tax rate ever since the introduction of the German Foreign Transaction Tax Act (AStG) in 1972.

The arm’s length principleis used as the benchmark for the tax recognition of a price selected between two affiliated companies by the OECD member states.

Evidence of compliance with the arm’s length principle by the taxpayer is provided in the so-called transfer price documentation.

Transfer prices - definition, methods, legal bases and taxes

What are the essential legal bases for documenting transfer prices?

Who or what is a related person within the meaning of section 1 sub-section 1 AStG?

What is a business relationship within the meaning of section 1 sub-section 1 AStG?

How is a transfer price established (standard methods)?

What is the structure of the transfer price documentation? - Three-stage OECD documentation approach

Who has to create a master file and what does it contain?

Who has to create a local file and what is the content of the local file?

Who has to prepare country-by-country reporting and what does it have to include?

Does the transfer price documentation have to be submitted to the tax office/the field auditor and, if yes, by when does it have to be submitted?

Can transfer prices be agreed with the tax office (advance pricing agreements)?

Does the Federal Central Tax Office (BZSt) charge a fee for the “advance pricing agreement”?

What is the process for an advance pricing agreement (APA)?

Which legal consequences and sanctions can apply to violations of the documentation requirement for transfer prices?

Current information/perspective

How do LHP Attorneys & Tax Advisers provide support in the preparation and defence of transfer price documentations?

As LHP tax law specialists, tax advisers and international tax law consultants, we prepare and defend your transfer price documentation to tax offices, auditors and tax investigators. Because of our long-standing experience in international tax law we often help our clients as early as during the determination of the “right” transfer price. This helps to prevent possible pitfalls and conflicts with the fiscal administration in a very early phase.

In addition, we also examine existing transfer price documentations of our clients and show possible points of attack and weaknesses. In any case, in preparing for a tax audit, the client should be aware of the points of attack. Because, quite naturally, it is far easier to respond an approaching danger that you know than to an unknown danger.

Nonetheless, there are cases in which as specialists we are called in by clients or their advisers at a very late stage of the proceedings. In these cases, we regularly carry out proceedings regarding transfer prices before the German fiscal courts and the Federal Fiscal Court. However, in many cases regarding conflicts on transfer prices, it is recommended that a mutual agreement procedure be initiated before the start of a fiscal court trial. Depending on which country is involved, mutual agreement procedures can be an effective means to arrive at a mutual agreement relatively quickly. Trials before the fiscal courts over many years often take longer and also involve significantly higher costs.

Furthermore, we also regularly defend companies and their managing directors, management boards and supervisory board in possible criminal proceedings. While it was almost inconceivable that criminal tax proceedings might be initiated in connection with transfer prices, we are, unfortunately, seeing an increasing number of cases in which field auditors threaten to call in their colleagues from the tax investigation department to enforce what they consider to be the “right” transfer price. As a result, criminal tax proceedings in connection with transfer prices are far from rare these days.

Finally, in so-called in-bound cases (foreign company with domestic business establishment) and in out-bound cases (domestic companies with foreign business establishment) we regularly also prepare profit assessments for business establishments including income allocation and transfer price documentation.

 

LHP: Attorneys at Law, Tax Law Specialists, Tax Advisers PartmbB

Cologne

Theodor-Heuss-Ring 14, 50668 Cologne,
Telephone: +49 221 39 09 770

Zurich

Tödistrasse 53, CH-8027 Zurich,
Telephone: +41 44 212 3535