Has Germany solved Transfer Pricing documentation bureaucracy?

Further changes to Transfer Pricing (TP) documentation are in the pipeline after the German Bundestag recently passed the county’s Fourth Bureaucracy Relief Act. The outcome of this latest Act is anticipated to simplify record keeping, which companies hope will lead to more efficient and less bureaucratic tax audits.

On September 26, 2024, the German Bundestag passed the fourth Bureaucracy Relief Act (BEG IV). This significant development aims is to simplify administrative processes, reduce the bureaucratic burden on companies, and advance digital transformation. Although Federal approval by the German Bundesrat is still required, its implementation into German tax law by January 1, 2025, seems almost certain.

A central aspect of the BEG IV addresses the documentation of cross border intercompany transactions within a multinational group. There have also been key amendments to Sections 90 (3) and (4) of the German Fiscal Code (AO). This has been introduced to partly help mitigate the requirement to submit full transfer pricing documentation within 30 days following the announcement of a tax audit.

The legal team of the Bundestag fully supports the changes to the former DAC7 Implementation Act rule, which was introduced January 1, 2023. In order to expedite audits, BEG IV will now only require essential documents at the start of an audit.

Documentation details

The record keeping documentation obligations listed under Section 90 (3), Sentence 2 AO will now limit company, country-specific documentation to three categories. These include a new transaction matrix overview, factual business transaction documentation, and transfer pricing method documentation in line with arm’s length principles.

Tax audit submission requirements outlined in Section 90 (4), Sentences 2 and 3 AO also limits the immediate submission requirements to a transaction matrix, the master file of a multinational group (if applicable), and records of extraordinary business transactions.

The new transaction matrix will now need to detail business transactions, including their nature and subject, involved parties, volume and pricing, contractual basis, transfer pricing method, relevant tax jurisdictions, and taxation status.

Assuming the BEG IV is applied in its current form, only these three documentation requirements will need to be submitted within the 30 day deadline following the notification of a tax audit.

Practical challenges and cautions

Although the definition of a ‘request package’ in Section 90 (4) AO-E draws attention to a simplified locally filed transaction matrix, multinational companies need to stay mindful that tax authorities retain their right to request full TP documentation at any time during an audit or other ongoing procedures. This could include audits of advance pricing agreements. Clarification on how this could be implemented in practice by tax authorities is still needed.

Should full TP documentation be requested at a later stage, companies may be granted an extra 30 days to prepare the factual documentation, the documentation of the arm’s length analysis and the functional and risk analysis.

Given that there remain several uncertainties with regard to how much actual relief  there is, TP specialists Benno Lange and Nadine Sinderhauf from CLA Global member firm in Germany, dhpg advise caution and recommend preparing back-up TP documentation. They also suggest supplementing this with the defined audit transaction matrix.

Taking precautions is prudent to avoid uncertainties and potential conflicts while awaiting further clarifications, they suggest. Benno Lange expands: “It is better to be prepared. Although there are many notable benefits, there are currently no clear guidelines for example on the thresholds for ‘material/significant’ transactions. If these cannot be submitted in advance within the transaction matrix, no real relief can be expected regarding the scope of transfer pricing documentation. Even with the implementation of the BEG IV, the required scope of transfer pricing documentation remains uncertain. Regardless of the shorter submission deadline, instances like this could present companies with significant challenges.”

For further information

Benno Lange
Senior Partner
dhpg
https://www.dhpg.de/en/company/team/detail/benno-lange

Nadine Sinderhauf
Partner
dhpg
https://www.dhpg.de/en/company/team/detail/nadine-sinderhauf

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