On 15 December 2017, the OECD released the second batch of peer review reports relating to the implementation by Austria, France, Germany, Italy, Liechtenstein, Luxembourg and Sweden of the Base Erosion and Profit Shifting (BEPS) minimum standards on Action 14 on improving tax dispute resolution mechanisms. Some countries assessed had also requested that the OECD provide feedback concerning their adoption of the Action 14 best practices. Overall the reports conclude that these jurisdictions meet most of the requirements of the Action 14 minimum standard.
The peer review report for Germany evaluates the country’s implementation of the Action 14 minimum standard by analyzing its legal framework and administrative practice relating to the mutual agreement procedure (MAP), as governed by its tax treaties, domestic legislation and regulations, as well as the practical application of that framework. The report, which includes peer input, identifies a few areas for improvement and describes changes adopted and implementation plans shared by Germany. Overall, Germany meets most of the requirements of the Action 14 minimum standard. Where it has deficiencies, it is working to address them.
BEPS Action 14 minimum standard
Under BEPS Action 14, countries have committed to implementing three overarching principles that represent a minimum standard for the MAP process by transposing these principles into domestic law and/or their treaty interpretation and application. The minimum standard principles are:
- Allowing taxpayers access to the MAP process when the relevant requirements are met
- Ensuring that domestic administrative procedures do not block access to the MAP process
- Implementing Article 25 of the OECD Model Tax Convention (OECD MTC) in good faith
German peer review report
The German peer review report contains four sections:
- Preventing disputes
- Availability and access to MAP
- Resolution of MAP cases
- Implementation of MAP agreements
With over 90 tax treaties, Germany’s treaty network is extensive. The country also has an established MAP program and long-standing and extensive experience with resolving MAP cases. Its MAP inventory is very large, with a substantial number of new cases submitted each year and almost 1,200 cases pending on 31 December 2016, of which 44% relate to transfer pricing. Germany has also signed and ratified the European Union Arbitration Convention.
Germany’s competent authority, the Federal Central Tax Office located in Bonn, was found to resolve MAP cases pragmatically, effectively and efficiently.
Germany meets the Action 14 minimum standard for the prevention of disputes. All of its tax treaties include a provision relating to MAP. Disputes may arise that do not necessarily relate to individual cases but are more generally concerned with the interpretation or application of a tax treaty. Germany’s tax treaties generally contain a provision equivalent to Article 25(3) first sentence of the OECD MTC allowing the competent authority to solve such cases.
Moreover, Germany has a bilateral Advance Pricing Arrangement (APA) program in place. This program also enables taxpayers to request rollbacks of bilateral APAs; such rollbacks are granted in practice.
Availability and access to MAP in all eligible cases
Germany also meets the requirements for availability and access to MAP under the Action 14 minimum standard. It provides access to MAP in all eligible cases. A notification/consultation process is in place for situations in which the competent authority finds that the objection raised by taxpayers in a MAP request is not justified. Germany also has clear and comprehensive guidance containing practical information on MAP (Link).
A minimum three-year period for submitting a MAP request, beginning on the date of the first notification of the action resulting in taxation not in accordance with the provisions of the particular tax treaty, is the baseline to provide certainty to taxpayers and competent authorities on the availability of MAP. Although most German tax treaties contain a provision that allows taxpayers to submit a MAP request within three years, a small number contain a time limit of only two years. Some treaties do not include a time limit at all. In those cases, Germany considers a MAP request only if it has been filed within four years of the notification of the tax measure in question.
An audit settlement can be valuable to taxpayers by providing certainty on their tax position. Nevertheless, as double taxation may not be fully eliminated by agreeing on such settlements, taxpayers should have access to the MAP in such cases.
In Germany taxpayers and tax auditors can agree on the factual findings of the audit. Such agreements provide legal certainty on taxpayers’ tax position and are standard procedure for the settlement of transfer pricing audits in Germany. However, taxpayers may also declare a waiver of rights to request MAP. Although double taxation may not be fully eliminated in this way, access to MAP will generally be denied by the German competent authority on the grounds that the taxpayer accepted the findings of the audit and it is generally no longer possible to establish the facts during a MAP or arbitration procedure in such a way that it possesses evidentiary value.
Furthermore, it is a longstanding practice of transfer pricing auditors in Germany to propose audit settlements under the condition that taxpayers waive their rights to MAP or to suggest reduced income adjustments in exchange for a waiver. This audit practice discourages access to MAP and might be considered as out of line with the spirit of the BEPS Action 14 minimum standard.
In recent times Germany has not denied access to MAP in relation to the application of treaty and/or domestic anti-abuse provisions or in situations where taxpayers complied with the information and documentation requirements set out in Germany’s MAP guidance.
Resolving MAP cases effectively and efficiently
Germany in essence meets the other requirements under the Action 14 minimum standard for resolving MAP cases. Germany’s competent authority was found to use a pragmatic approach to resolve MAP cases effectively and efficiently. The performance indicators used are appropriate to perform the MAP function.
However, from the peer input it followed that audit personnel from tax administrations of the federal states directly involved in the adjustment at issue sometimes attend competent authority meetings and participate in discussions to resolve MAP cases. Although this may not per se cause Germany’s competent authority to enter into MAP agreements dependent on the approval or direction of personnel of federal tax administrations directly involved in the adjustment, the report indicates a risk of this personnel being or becoming involved in the decision-making process – or it could be perceived by treaty partners that the German competent authority depends on their approval or direction.
On average, Germany’s competent authority resolved MAP cases in 26.34 months, which is outside the pursued average time of 24 months. At 33.09 months, the average time to resolve transfer pricing cases is considerably longer than the average time to resolve other cases (22.1 months). However, it is our experience that Germany’s competent authority did resolve transfer pricing MAP cases relating to other OECD member states within 24 months.
In the last few years Germany has recruited more staff in charge of MAP, and a further addition is scheduled for the near future. The report recommends implementing a mechanism to monitor whether the increase in personnel resources will result in transfer pricing MAP cases being resolved more quickly, effectively and efficiently.
Regarding MAP arbitration, the German policy is to incorporate mandatory and binding arbitration in all of its tax treaties. Germany seeks to include a mandatory and binding arbitration provision in all of its future treaties, and it strives to update existing treaties accordingly via bilateral negotiations on the Multilateral Instrument.
Timely implementation of MAP agreements
Germany also meets the Action 14 minimum standard on the timely implementation of MAP agreements, although some of Germany’s tax treaties do not include a provision equivalent to Article 25(2) second sentence of the OECD MTC, dealing with the implementation of a mutual agreement reached notwithstanding time limits in domestic legislation, nor the alternative provisions provided for in Article 9(1) and 7(2) OECD MTC setting time limits for making adjustments. Taxpayers are allowed to submit a MAP request irrespective of whether they have also invoked available domestic remedies for the same case. This means taxpayers are allowed to submit a MAP request regardless of whether their case has already been resolved using domestic remedies. The German competent authority is allowed to deviate from decisions of Germany’s tax courts.
When the German competent authority reaches an agreement with the other competent authority concerned, the agreement is communicated to the taxpayer. On receiving the taxpayer’s acceptance of the MAP agreement, the local tax authorities implement the agreement by issuing tax assessments. Although Germany does not monitor the implementation of MAP agreements, as this is dealt with by the federal tax administrations, the peer review process has not flagged any implementation issues. However, it is our experience that the federal tax administration in one federal state only partially (95%) implements certain income adjustments governed in transfer pricing MAP agreements on the grounds of German domestic tax law.
Peer review implications for MNEs
The peer review report shows that Germany has an effective and practical MAP program in place as well as longstanding and extensive experience with resolving MAP cases, although the average time necessary for resolving MAP cases slightly exceeded the 24-month aim. Germany complies with most of the elements of the BEPS Action 14 minimum standard. It has mechanisms to prevent disputes from arising, and when disputes occur, it has an efficient MAP process available and accessible. Main area that requires improvement concerns the achievement of the average time of 24 months for the resolution of MAP cases.
MNEs face increased scrutiny from German tax auditors over their international tax and transfer pricing positions. This has led to an increased risk of international double taxation and an accelerated number of MAP cases in Germany. MNEs confronted with taxation that is not in accordance with one of the 90-plus tax treaties or the EU Arbitration Convention, including double taxation, should consider using the efficient MAP process in Germany. MAPs between the competent tax authorities are often preferred over court litigation to avoid international double taxation if the German tax authorities challenge the amount of transfer prices. MNEs’ decision must be balanced against the transfer pricing audit practice in Germany of achieving audit settlements and/or reduced income adjustment in exchange for a waiver of rights to request MAP. Another point to consider is that audit personnel directly involved in the income adjustment also become involved in the process of resolving MAP cases due to Germany’s federal tax structure.