International transfer prices must be documented in Germany. However, transfer pricing documentation must first be submitted on the basis of a request from an auditor. However, a period of 60 days applies. In the case of exceptional transactions, however, only 30 days are provided as a deadline for submission of the transfer pricing documentation. Therefore, no submission of the transfer pricing documentation is required at the annual filing of the tax return. Nevertheless, accompanying transfer pricing documentation makes sense. The creation of transfer pricing documentation is very extensive and therefore labor-intensive. If you have to do this work within a certain period of time, this can also be cost-intensive.

If you run a multinational company that manufactures or buys goods on the one hand and sells through another company, then this requires an international supply chain. However, since several own companies in the individual countries are involved, one must also consider taxation in these countries (transfer pricing). In this context, certain transfer pricing methods are used to determine the respective benchmarks. In this way, the taxable domestic profit is also determined in Germany. Of course, this also applies to the provision of other services.

But you also have to document these data for the taxation of profits. This also involves documentation based on all business transactions. Therefore, in our present article, we address all aspects related to transfer pricing documentation.

There are several legal bases for transfer pricing documentation. The general legal basis for preparing transfer pricing documentation is § 90 (3) AO. It contains the reference to § 1 AStG. Paragraph 1 thereof also provides for the definition of transfer prices. In addition, this paragraph clarifies that transfer pricing as a relevant tax basis should in principle be in line with the arm's length principle.

However, the most important detailed rules for the preparation of transfer pricing documentation are contained in the Profit Accruals Recording Regulation (GaufzV). It is structured in eight paragraphs and an appendix and provides information on, among other things, the principles of record keeping, the nature, content and scope of the records and many other details.

On the obligations to cooperate within the meaning of § 90 AO, a separate BMF letter has been published, which once again clarifies essential aspects of this.

In principle, all entrepreneurs who have business contact with foreign affiliates or other related parties and therefore have to determine transfer pricing for taxation are obliged to provide transfer pricing documentation. However, there are exceptions. Although transfer pricing documentation basically makes no distinction between small companies and large corporations, there is no need to produce detailed transfer pricing documentation for certain annual amounts. Only if the sum of all goods deliveries or comparable services exceeds the amount of EUR 5.000.000, transfer pricing documentation is necessary. At the same time, however, there is another regulation. For other business transactions from an amount of EUR 500,000 per year, you also have the obligation of transfer pricing documentation. This could be the case, for example, when paying advisor fees.

First of all, at least at first glance good news: For the annual tax return, the transfer pricing documentation is irrelevant. Although the transfer pricing set out in the tax return should be appropriate, a displayed transfer pricing documentation is not required.

However, you have to submit a transfer pricing documentation if requested by an auditor. Ideally, all information should then have already been integrated into the transfer pricing documentation. However, Section 90(3) AO grants a period of 60 days to submit the transfer pricing documentation.

On the other hand, only half of this period is available for the submission of the transfer pricing documentation when it comes to information on exceptional transactions. In this context, transactions are considered to be exceptional only if there are transactions that fall outside the normal scope of the company’s business activity and at the same time have a significant impact on profit. The payment of advisor fees also fits here as an example. Apart from the shortened deadline for submitting the transfer pricing documentation relating to exceptional transactions, there is a requirement for timely recording. For this purpose, the record must be made within the first six months following the end of the relevant marketing year in order to be considered timely.

Due to the restriction of the obligation to submit transfer pricing documentation in the context of company audits, one can conclude on the purpose of this documentation. The transfer pricing documentation serves only as a basis for the assessment of the previous taxation of cross-border transactions with affiliated companies and other related parties. Conversely, this means for the assessment that the information on transfer prices provided in the tax returns should already be consistent if one wants to exclude subsequent taxation. Only the formal documentation is irrelevant.

Transfer pricing documentation must comply with certain legal requirements. Furthermore, the information should be structured in a way that is also based on legal regulation.

Transfer pricing documentation is required to be structured into an introductory part, the factual documentation, and a second part based on it, the adequacy documentation.

The information in the factual documentation first includes a general description of the company including its intangible assets. Information on the shareholdings of the shareholders in the company can also be considered. This is followed by information on the company’s business fields and its business contacts. In particular, the business contacts that one maintains with foreign-based affiliates or with related persons on site are relevant.

Furthermore, the factual itemisation provides a functional and risk analysis. Their results also affect the level of reasonable transfer prices. Here, the own business strategy is the focus of this analysis. Equally important is a review of the company’s value chain. However, general information on the market situation is also well received in the factual documentation. They provide important information on the adequacy of the transfer prices established later in detail. Therefore, backgrounds about the competition or the general situation on the market are also quite appropriate.

Thus, the factual documentation provides a first general overview of the economic situation of a company. On the basis of this, an auditor can then assess whether a more precise examination of the transfer prices used makes sense.

The really interesting part of the transfer pricing documentation is however included in the subsequent adequacy documentation. This should ideally make it clear to the auditor that the transfer prices used are actually appropriate from a legal point of view. Therefore, all legal requirements regarding the determination of transfer prices must be included here. In particular, the adequacy documentation shall clearly show that the transfer pricing methods used are actually applied and well-founded. In other words, the transfer pricing documentation must convince the auditors that they would have used the same transfer prices in the same situation.

In order to underpin the statements in the transfer pricing documentation, it is also accompanied by a number of documents and other documents. This includes contracts, price lists and invoices of all kinds. The purpose of these attachments is, of course, that an auditor receives a conclusive picture of the company on the basis of all this information. This should, of course, lead him to the conclusion that the transfer prices used are reasonable.

If an auditor finds the transfer prices set in the previous tax returns to be too high, it follows that the profit was set too low. Ergo you have to tax the difference amount. This is a situation that has a multidimensional effect. After all, this means in reverse that you have paid excessive taxes abroad. If this were left after a re-taxation in Germany, however, at this status, this would be equivalent to a partial double taxation. However, the willingness of the foreign treasury to correct the tax to its disadvantage is likely to be at best small.

Since we assume that there is a double taxation agreement with Germany (otherwise there would be an unavoidable double taxation anyway), the only way out would be to resolve the dispute within the framework of an agreement procedure. However, the period for clarification in this procedure should be set at years rather than months or even weeks.

For this reason alone, comprehensive expert support in the context of ongoing accounting should seem useful.

Is it then perhaps sensible to do without this elaborate and risky transfer pricing documentation? Not at all! The mere fact that a requested transfer price documentation is missing has financial consequences. Already from the first day of the expiry of the period, penalties of EUR 100 can arise. In addition, the maximum amount of the penalty is EUR 1,000,000, without the tax being paid. Because then an estimate may also come into consideration in the context of the audit.

However, if the foreign-related business transactions are complex and extensive, then even 60 days is likely to be too short a period to realize transfer pricing documentation on time. Therefore, the recommendation here is that it is best to carry out the determination of appropriate transfer prices in parallel with current transactions. This should be accompanied by a compilation of information resulting from ongoing accounting and becoming relevant for transfer pricing documentation in a possible later audit. In this way, transfer pricing documentation could be produced relatively easily and quickly on time.

Many years ago, when at least the German economy was still far away from the current extent of globalization, there may have been only in certain cases a closer examination of the calculation price documentation. Small and medium-sized enterprises at least were hardly affected. But the more often companies in these size classes go into cooperation with foreign subsidiaries, the more interested the Treasury is in compliance with the legal requirements regarding the calculation prices. The logical consequence of this is that company audits are now increasingly focusing on these issues. Therefore, for this reason too, all existing obligations in this context should be respected. Because no matter how complex this may be, it is by far the cheapest alternative.