The BMF letter Administrative Principles 2020 dated 3 December 2020 (hereinafter: "VG 2020") contains regulations for the review of income accrual between internationally affiliated companies with regard to the duty to cooperate pursuant to Section 90 AO and the estimation of tax bases and surcharges pursuant to Section 162 AO. The letter partially replaces the administrative principles for procedures from 2005 (hereinafter: "VGV 2005"), which remain applicable with the exception of the regulations on Sections 90 and 162 AO. In particular, Chapters 1 and 2 as well as 5 to 7 of the VGV 2005 therefore remain unchanged. The VG 2020 are immediately applicable to all open cases.

The background to the VG 2020 - based on OECD BEPS Action Point 13 - is the updated OECD Transfer Pricing Guidelines 2017 and the subsequent changes made in Germany to Section 90 (3) AO and the Profit Deferral Recording Ordinance (GAufzV) as amended on 12 July 2017. The VGV 2005 still contained the old legal status and therefore had to be updated.

However, the BMF is tending to go one step further with the VG 2020 and is taking this opportunity to spice up the German documentation requirements once again. At the same time, the BMF is missing the opportunity in various places to answer long-standing questions and provide the necessary guidance, e.g. on value chain analyses. Furthermore, the opportunity to merge the Administrative Principles 1983 and the VGV 2005 into a single BMF circular was not utilised. Instead of one, there will now be three BMF letters. In particular, the coexistence of VGV 2005 and VG 2020 without a clear demarcation of individual chapters and text paragraphs is very difficult to handle.

The key points of VG 2020 are:

  • Extended duties of co-operation and submission;
  • Domestic retention periods extended to foreign countries;
  • Introduction of a best method rule;
  • Very confrontational choice of words;
  • Important topics such as digital business models or value chain analyses are not addressed;
  • Criminal tax law aspects will become even more relevant in future;
  • Applications for recognition of other languages are becoming more important;
  • Right of the tax authorities to select an alternative method;
  • TP documentation can also be requested outside of a BP in future, and
  • Offer of preliminary discussions and coordination with the tax authorities.

 

On the duty to co-operate according to § 90 AO

The obligations of taxpayers with regard to data access have been tightened in that Section 200 AO has been added to Section 90 AO. In future, the obligation to submit data will apply explicitly to the procurement (and not just the naming) of, for example, expert opinions and statements on transfer prices, insofar as they are required for the formation of transfer prices or the determination of income in connection with them (from the tax audit) are considered significant. This includes emails, messenger service messages (e.g. WhatsApp) or other electronic communication media, books and records. Domestic retention periods are transferred to foreign countries (para. 11). This is in direct contradiction to Chapter V of the OECD TP Guidelines, according to which in Chapter 5.35 the taxpayer should not be obliged to do so.

When concluding intercompany agreements, the tax authorities require information clauses in order to be able to access information from abroad more easily in future (point 14).

In the case of majority shareholdings or a simultaneous management activity abroad in personal union, the tax authorities assume, as in the VGV 2005 (always), that these documents can be obtained (para. 17).

Compared to the VGV 2005, the case of a so-called collision of duties of the taxpayer (foreign prohibition to provide information vs. domestic obligation to cooperate pursuant to Section 90 (2) AO) has also been tightened in para. 18. According to the VGV 2005, a resulting refusal to cooperate in Germany was still justified; now, according to the VG 2020, it should lead to the possibility of an estimate in accordance with Section 162 (1) AO.

Numerous undefined legal terms such as "certain probability" and "vagueness" are not exactly helpful in clarifying questions of interpretation, such as the question of when the results of an alternative method applied by the tax authorities should be "more probable" (para. 46).

The letter devotes 4 (!!) paragraphs in points 22 and 34 alone to language requirements, the official language German and any translations. Even the master file, which is only intended to provide a general overview and, according to the OECD's understanding, should actually only be prepared once within the group and has therefore basically been given an English-language character, should only be authorised in English on request and may have to be translated. As a taxpayer, you have to ask yourself why the German tax authorities are still revealing such linguistic deficits in their international dealings in the 21st century.

It is also not further specified how the taxpayer should demonstrate its serious endeavours on the basis of "objectified circumstances" with regard to the factual and reasonableness documentation (para. 36).

The so-called best method rule in paragraph 45 obliges the taxpayer to explain and justify why he considers the method ultimately chosen to be the most suitable method.

In paragraph 46, the letter grants the tax authorities the right to select the "correct transfer pricing method" in the form of the method they consider to be the most appropriate. For this purpose, it should be sufficient that the results of the alternative method applied are "more probable". This of course harbours explosive potential for future tax audits, as the letter leaves it completely open as to how this probability is to be determined. In any case, the taxpayer should provide the necessary information.

The "time" factor plays a significant role in paragraphs 35 and 49: the relevant time for the arm's length comparison and for the preparation of records is generally the conclusion of a contract, i.e. the circumstances at the time of the agreement of a transaction. Therefore, in future, information must be provided on the time at which the transfer price is determined. Arm's length data that subsequently becomes known can still be used, provided it relates to the time at which the transfer price was determined. Price setting/profit checking models that are now very common in practice should therefore continue to work.

Point 61 provides that, in justified individual cases (e.g. mutual agreement procedure), documentation can be requested outside of a tax audit. In conjunction with point 64, which recommends the regular and prompt collection of data and information, the tax authorities are increasingly pushing for prompt transfer pricing documentation.

The possibility for the tax authorities to request additional, more detailed or further documents in accordance with point 66 opens the door to so-called fishing expeditions. In case of doubt, taxpayers should have it explained to them exactly what the indications for such further enquiries are and how they can be justified.

 

Authorisation to estimate according to § 162 AO

According to para. 67, the so-called spoiler of evidence should not be favoured by the fact that an estimation authority will then be triggered in future.

The unspecified term "maximum possible probability" in para. 71 is intended to ensure that the tax authorities determine and apply the "correct" transfer price in the case of an estimate. According to paragraph 72, database studies should be permitted for estimation purposes. A reference to sections 3.4.10.2 and 3.4.10.3 of the VGV 2005 would be useful here, according to which database studies are only applicable for the company characteristics deemed suitable therein, and not in general. Otherwise, this opens the door to benchmarking scenarios in estimation cases that are not really justifiable.

Usable records should not be able to prevent the tax authorities from nevertheless requesting further information or carrying out verifications (para. 73). This means that usable records do not rule out estimates

The choice of words is at least provocative if, due to a breach of record-keeping obligations in accordance with Section 90 (3) AO, it can be rebuttably presumed in accordance with point 80 that the income from I/C transactions has been reduced by a "non-arm's length arrangement". The BMF thus provides the tax audit with formulations that are suitable for equating the economically unavoidable need to use transfer prices within the group with categories such as at least tax avoidance, tax arbitrage or "bad citizenship". It can be strongly assumed that such a choice of words can at least put a strain on the atmosphere in tax audits.

Point 82 sets out the criteria that are applied to a record in order to classify it as unusable. An opportunity for rectification by the taxpayer is provided for in paragraph 84.

According to paragraph 91, the VG 2020 are immediately applicable to all open cases.

 

Take Away

To summarise, the letter does not exactly give the impression that the tax authorities intend to pursue the issue of transfer pricing in a dispute-avoiding manner in future. On the contrary.

Taxpayers should therefore promptly review their transfer pricing documentation for all open years for the new requirements under the VG 2020 and, if necessary, revise and supplement it in order to avoid running the risk of not fulfilling the new requirements and/or even ending up in an estimation situation.

Your TAXGATE transfer pricing experts can provide you with comprehensive support in order to avoid serious tax disadvantages and implement the necessary measures in good time.