In the case of service relationships with affiliated companies abroad, companies must comply with precise specifications for calculating the service and consideration (so-called transfer prices). This is to ensure that international tax differentials are specifically exploited through inadmissible pricing. Transfer prices and their documentation for cross-border business relationships between affiliated companies are becoming increasingly important for companies with foreign subsidiaries. The tax authorities and tax lawmakers have also taken on this topic more and more in recent years and passed a large number of new laws and regulations. This will apply equally to subsidiaries and operating facilities in the future.
From our transfer pricing consulting services:
- Development or review of transfer pricing documentation and choice of method
- Coordination with professional colleagues from the countries concerned
- Implementation of transfer pricing systems in tax and legal terms
Transfer prices must be assessed for all cross-border business relationships between the affiliated companies, taking into account the arm's length principle. This implies that companies affiliated with one another must enter into transactions with one another on the same conditions as would have opted with unrelated third parties ("dealing-at-arm's-length"). This not only affects the delivery of goods, but also any exchange of services, such as facilities, financing, the assignment of trademarks, patents and know-how as well as secondment of personnel, etc.
The arm's length principle can be complied with using different methods that the fiscal authorities provide for the most diverse types of exchange of services. At both national and international level, five transfer pricing methods have been established to determine remuneration in accordance with arm’s length principle for the exchange of intra-group goods and services
- Comparable Uncontrolled Price method
- Resale Price Method
- Cost Plus method
- Profit Split Method
- Net Margin Method
From an international and German perspective, these methods are based on business transaction in each case. On the contrary, the application of the methods would be to the overall result of a company, which may be composed of several and absolutely different transactions. Contrary to the OECD guideline, these are still accepted in some countries, for e.g., in the USA.
The examination of cross-border transfer prices, the choice of the right method and the observance of the arm's length principle with existing foreign investments in the context of tax audits has moved into the focus of the tax auditors. Violation of these principles will lead to tax adjustments to the transfer prices applied if discovered by the tax audit. This can lead to an increase in a taxable profit in Germany, which is not automatically adjusted in the foreign company to decrease the profit. Although the tax audit basically bears the burden of proof for non-compliance with the arm's length principle, there are extensive documentation obligations, divided into documentation of facts and documentation of appropriateness.
The transfer pricing documentation must be submitted for a statutory audit within 60 days, within 30 days in relation to exceptional business transactions. If no documentation or documentation that is not applicable is presented for the statutory audit, there is a legal presumption that the transfer pricing is in order. In this case, the tax auditor is granted extended authority for assessments and surcharges are mandatorily determined. It is therefore advisable not to wait for the statutory audit to prepare transfer pricing documentation, but rather to set proper pricing or service relationships and their documentation right from the start in the case of service relationships with affiliated companies or permanent establishments abroad
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