International transfer pricing



For a long time, the issue of transfer pricing was reserved for multinational conglomerates. But the German tax authorities have significantly increased documentation requirements in recent years, and the question of transfer pricing is increasingly being raised in the course of tax audits.

Taxpayers are required to compile written transfer pricing documentation for transactions with related persons with a foreign connection. This requirement applies for intra-group deliveries of goods of more than EUR 5 million or upon the purchase of more than EUR 500,000 in intra-group services. As a result, even small and mid-sized enterprises (SMEs) frequently have to document transfer pricing.

In case of a tax audit, transfer pricing documentation is typically requested when the audit itself is ordered. If this documentation is not presented within 60 days, or if the documentation is unusable, the tax authorities are authorized to make their own estimates, and stiff penalties are also typically imposed.

Transfer pricing documentation is typically broken down into documentation of factual information and documentation of adequacy. Documentation of factual information consists of records of the type, content and scope of transactions with related persons, as well as legal and financial conditions. The group’s value chain is to be explained as part of a functional and risk analysis. Group companies are to be classified as routine, hybrid or strategic units, depending on the risks and opportunities associated with them. How each company is classified, in turn, has significance for selection of the transfer pricing method (comparable uncontrolled price, resale price, cost plus, etc.).

Documentation of adequacy explains and describes the selected transfer pricing method, as well as explaining the margin applied. The arm’s length principle is to be observed and supported with internal or external comparison data. It is particularly necessary to explain transactions with continuing losses and to present countermeasures taken by management.

Many SMEs do not consider this issue until they are requested to present transfer pricing documentation by the tax authorities. Based on our experience, however, the (only) 60-day deadline for presenting this documentation is not enough to compile transfer pricing documentation from scratch. Accordingly, the affected SMEs would be well-advised to consider the issue of transfer pricing documentation at an early stage.


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