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2020 Administrative Principles – Stricter obligations of cooperation for cross-border transactions

Taxpayers are generally obliged to cooperate in enquiries into tax matters. These obligations of cooperation were specified by the fiscal authority, on 3.12.2020, in the context of the publication of the 2020 Administrative Principles. Taxpayers now have to satisfy stricter requirements in the case of cross-border transactions in order to be able to avoid an estimate of the tax bases and the setting of surcharges.

Obligations of cooperation for cross-border transactions

Taxpayers’ obligations of cooperation exist independently of any official duty of enquiry on the part of the fiscal authority and without being requested to cooperate. In the Federal Ministry of Finance’s circular from 3.12.2020 (case reference: IV B5 – S 1341/19/10018 :001) the fiscal authority once again enhanced the obligations of taxpayers in relation to cross-border transactions and, in particular, in transfer pricing cases.

In case of cross-border transactions taxpayers are generally obliged to clarify the facts, provide evidence and take precautionary measures with respect to preparing evidence. This means that a statement about evidence that is located abroad is not sufficient. Instead, evidence also has to be obtained independently by the taxpayer within its possibilities.

This, in turn, specifically means using the cost plus method to present evidence of the costs and using the resale price method for the selling prices. Evidence is understood to mean, e.g., expert opinions on transfer pricing, yet also information via electronic communication media (e-mails, information from messenger services, etc.) if they are of tax-related relevance to the business transaction under review. This duty of presentation likewise includes documents and data from closely related parties as well as accounts, records and commercial documents.

Please note: Precautionary evidence obligations ensure that taxpayers cannot rely on being unable to clarify a respective transaction or to provide evidence. By implication, this means that the taxpayer has to ensure that the possibility of obtaining evidence has already been agreed when contracts are concluded.

Requirements for transfer price documentation

With respect to transfer price documentation, the taxpayer is obliged to maintain its records in such a way that the fiscal authority is able to carry out an expert risk assessment and perform a transfer pricing audit. Here, the relevant facts and circumstances on the date when the business relationship was established (transaction imposing an obligation) have to be presented. This includes arm’s length comparison data referring to this date for the documentation of the appropriateness of the transfer prices (so-called hypothetical arm’s length comparison).

Please note: These documents should be so comprehensive that the fiscal authority has the possibility to validate the data used on an ex-post basis by using current data.

The taxpayer generally only has to prepare records for the methods it has used. If the fiscal authority considers a different method to be more appropriate then the taxpayer would however be called upon to cooperate and should provide the relevant data for this purpose.

Please note: The OECD requirements were implemented for the application of the above-mentioned hypothetical arm’s length comparison. The taxpayer is required to produce a sensitivity analysis for modified assumptions and parameters.

Estimates in the event of violations of the duty to cooperate

A taxpayer would breach its duty to cooperate if it did not disclose facts and circumstances of which it was or ought to have been aware to the fiscal authority. In such cases the fiscal authority would have the right to make an estimate. However, this would not constitute a punitive estimate. The aim would be an estimate that comes as close as possible to the true facts by being coherent, economically feasible and reasonable.

Please note: In the case of infringements of the rules on transfer pricing documentation (failure to submit, late submission or the submission of records that are essentially unusable) a penalty surcharge may also be determined in addition.

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