Changes in the submission of transfer pricing documentation

Why has the obligation to submit transfer pricing documentation been tightened?

With the law for the implementation of the EU’s DAC 7 Directive (DAC 7 Implementation Act) and the Fourth Bureaucracy Relief Act (BEG IV), the submission obligations for transfer pricing documentations were modified in terms of content and timing.Germany is thus following the global trend of expanding compliance obligations for companies. In addition to speeding up external audits, the main aim of the stricter requirements is to increase the transparency of intra-group business relationships between international companies and thus combat tax-motivated profit shifting more effectively.

For internationally active companies, these changes effectively mean an ongoing obligation to document their international cross-border business relationships within the group and thus additional compliance costs as well as an increased tax and sanction risk.

How the new submission requirement works

As a result of the new regulation, the deadline for submitting the required transfer pricing documentation will be shortened from 1 January 2025 and the scope of the documentation to be submitted unsolicited by taxable companies will be newly regulated.

Until now, taxpayers have only been obliged to submit transfer pricing documentation consisting of country-specific company-related documentation (Local File) and master documentation (Master File) at the request of the tax authorities. SMEs do not have to prepare a Master File if their turnover is less than 100 million euro. The transfer pricing documentation should regularly only be requested as part of an external audit, whereby a period of 60 days must be granted. Records of extraordinary business transactions must be prepared promptly and submitted within 30 days upon request by the tax authorities.

However, following the amendment to the law, the tax authorities can request transfer pricing documentation at any time for taxes arising after 31 December 2024, e.g. as part of a preliminary consultation procedure. In the event of an external audit, the transfer pricing documentation must be submitted to the tax auditor without being requested.

In the future, companies will only have 30 days (instead of the previous 60 days or 30 days for exceptional transactions) to submit transfer pricing documentation following a request from the tax authorities or after an external audit has been ordered. The halving of the submission deadline applies not only to taxes arising after 31 December 2024 but also to transfer pricing documentation that must be prepared for financial years before 1 January 2025 and submitted as part of an external audit for which the audit order is announced after 31 December 2024.

The documents to be submitted within this period include the Master File, provided the 100 million Euro threshold is reached or exceeded, any documentation of extraordinary business transactions, and a so-called transaction matrix. The transaction matrix is an independent new documentation component intended to provide the tax authorities with a quick overview of the essential cross-border intercompany business relationships within the company. The submission of the Local File takes place only in a second step, if this is separately requested by the tax authorities, with the submission deadline still being 30 days.

Note: Particularly in light of the fact that the submission of a Local File within 30 days of the request will hardly be possible in most cases, we recommend, based on our previous experiences in the preparation of transfer pricing documentation, to generally maintain up-to-date transfer pricing documentation. Ideally, the required transfer pricing documentation (Local File and, if necessary, Master File and documentation of extraordinary business transactions) should be prepared for all assessment periods that have not yet been audited and are not yet subject to statute of limitations, or for future assessment periods after the completion of the consolidated financial statements or annual financial statements, e.g., in parallel with the tax returns of the respective assessment periods.

If the documentation obligations are not or only insufficiently complied with, the German legislator has granted the tax authorities various sanction options. These range from penalties to the estimation of income at the expense of the domestic company. In addition, there is often a delay in the external audit, which may be associated with additional time and costs for the company. To avoid these consequences, companies should review their documentation obligations at an early stage and collate information and documents on cross-border intra-group transactions to ensure that transfer pricing documentation is prepared and updated promptly and completely.

How we support you

• We advise you on the conceptualisation, planning, and simulation of transfer pricing systems.
• We use database studies to support you in determining the arm's length values to be recognised for tax purposes.
• We also support you in preparing and updating the legally required transfer pricing documentation and in fulfilling the necessary information, documentation, and record-keeping obligations.
• In addition, we analyse the tax implications of cross-border transfers of functions.
• If the tax authorities question arm's length values in the course of tax audits, we will support you in their defence through to enforcement in appeal proceedings.