Germany’s Updated Transfer Pricing Administrative Principles
Transfer pricing in Germany has been put in adjustment mode. First with new deadlines for TP files submission and cooperation request and later with another basket of changes packed in the Transfer pricing Administrative Principles issued on 6 June 2023 (TP AP 2023).
The TP AP 2023 in Germany build one of the pillars of tax provisions together with the tax law and order decree law. As such the TP AP 2023 are not legally binding on either taxpayers or the tax courts but are to be applied by the tax authorities. As a result, they are very valuable guidelines for taxpayers.
The TP AP 2023 are presented on over 800 pages and tackle various transfer pricing issues. Some of the stronger attention drivers are adjustments and their influence on customs, cross-border transfer of function, and intercompany financing transactions.
The relation between transfer pricing and customs is quite interesting. Last year Germany’s highest tax court issued its decision in the Hamamatsu case, which ruled that both upward and downward lump sum retroactive transfer pricing adjustments, which occur after the decisive moment for customs valuation purposes, have no relevance for the customs value. The customs value shall only reflect the “real economic value” at the time of importation. However, both the “old” and “new” TP AP state that taxpayers should notify the customs administration of upwards TP adjustments. The penalties for non-compliance may be painful (including criminal liability).
For cross-border transfer of function the TP AP 2023 clarifies the definition of a “transfer of function” and presents the calculation of the transfer package by following the stricter legal rules. It’s worth mentioning that the new guidance does not include a de minimis rule as a threshold for a transfer of function and some other points that were helpful from a practical point of view.
Another issue refers to intercompany financing transactions, where the TP AP 2023 clarifies that the interest rate should be determined based on the economic circumstances of the borrowers (not the lenders).
The TP AP 2023 apply to all open tax cases effective immediately, with the exception of cross-border transfer of functions realized before January 1, 2022, for which the existing Administrative Principles on Transfer of Business Functions as of 13 October 2010 apply.
Transfer pricing world is constantly evolving, and taxpayers should carefully review the changes and identify any implications on their transfer pricing policy and documentation strategy in advance.