German Ministry of Finance Updates Administrative Principles on Transfer Pricing

• Published in: Journal of International Taxation Vol. 34; no. 9; pp. 11 - 15
• Main Authors: Waldkirch, Ronny, Gehring, Lena
• Format: Trade Publication Article
• Language: English
• Published: Boston Thomson Reuters (Tax & Accounting) Inc 01.09.2023
• Subjects: Interest rates; International taxation; Manufacturing; Principles; Property taxes; Tax courts; Taxpayers; Transfer pricing; Germany
• ISSN: 1049-6378

With respect to intercompany financing transactions, the MoF aligns its interpretation on the examination of income allocation between entities involved in financing transactions with the Organization of Economic Co-operation and Development (OECD) Guidelines and with recent German jurisprudence of the Federal Fiscal Court (BFH) on determining intercompany interest rates for intercompany loans. In particular, the MoF has changed its controversial view that interest expenses exceeding the risk-free market return are not deductible at the level of borrower group entities unless the financing company is "able and authorized" to control the financial investment and has the capacity to bear the corresponding risks. According to the view of German tax authorities, the arm'slength principle is based on economic principles that are independent of time and context. [...]the AP TP 2023 asserts that contrary to the global developments related to the ongoing OECD Base Erosion and Profit Shifting (BEPS) project regarding tax challenges arising from digitalization, the arm's-length principle provides enough flexibility to address current developments in the digital economy without implementing additional legislative measures. The new chapter in the AP TP 2023 is significantly shorter than the existing administrative guidance and the following aspects are noteworthy: * Functions that may be subject to a transfer also include activities to control risks and DEMPE (development, enhancement, maintenance, protection, exploitation) functions (para 3.89). * dire MoF continues to apply a narrow interpretation of the term "function" that is product-related; e.g., a function may be the manufacturing of a certain product or product group, the distribution of a certain product, a certain product group or a certain business activity for a certain region (para 3.90). dire results of the function and risk analyses before and after the restructuring and the resulting changes are decisive of assessing a transfer of function (para 3.92).