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.

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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.