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Revised Administrative Guidance on Transfer Pricing and Tax Audits

Transfer pricing and the documentation of arm’s-length transfer prices are closely scrutinized and often disputed in tax audits. Germany has had administrative guidance in place since 2005, specifying German taxpayers’ obligations during a tax audit. On December 3, 2020, the German Ministry of Finance published a revision of this guidance, now known as the ‘Administrative Principles 2020’. The revised guidance focuses on taxpayers’ obligations to cooperate with German tax auditors, the burden of proof of arm’s-length transfer prices and the assessment of apparently more appropriate transfer prices. Although such administrative guidance does not bind either taxpayers or the tax courts, it acts as an interpretation of German tax law, to which German tax auditors are bound.

Overview of revised administrative guidance on transfer pricing

The key aspects of the Administrative Principles 2020 are the following:

That said, it is important to prepare correct transfer pricing documentation, which complies with the legal requirements. Otherwise, this may justify a change of the burden of proof of arm’s-length transfer prices to the taxpayer. Moreover, the tax authorities may be authorized to estimate transfer prices, i.e. by fully utilizing a range of self-elaborated comparables, normally to the detriment of the taxpayer. The now tightened administrative guidance underlines this even more. Taxpayers should always take care to comply with their documentation duties in a timely and complete manner.

Overarching implications for global businesses

The revised administrative guidance on transfer pricing has led to stricter rules, enhancing the position of German tax auditors. One must wait and see whether German tax courts will follow these broad compliance requirements.