Pricing methods
Accepted methods
Which transfer pricing methods are allowed? What are the advantages and disadvantages of each method?
In general, the transfer pricing methods used to determine the arm’s length price are not restricted and all recognized methods are used. If no comparable transaction can be found, the transfer price can be determined using recognized economic valuation methods. The advantages and disadvantages of these transfer pricing methods generally apply without any German peculiarities.
Cost sharing
Are cost sharing agreements allowed? Describe the acceptable price sharing methods.
Cost sharing agreements are generally permitted under German tax law. According to the administrative principles published in 2018 for the examination of cost-sharing agreements between internationally affiliated companies, Chapter VIII of the 2017 OECD Transfer Pricing Guidelines must be applied to the examination of the distribution of income between internationally affiliated companies.
Best method
What are the rules for choosing a transfer pricing method?
In 2021, the rules for choosing a transfer pricing method have generally changed to a best practice rule, unless the price comparison method and any other transfer pricing method are equally reliable. In this case, it is pointed out in the explanations that the price comparison method should preferably be used.
Adjustments initiated by the taxpayer
Can a taxpayer make transfer pricing adjustments?
The tax authorities only accept subsequent price adjustments or adjustments after the conclusion of the business transaction in exceptional cases. As described in the administrative principles – procedure, this is the case, for example, if the taxpayer can prove on the basis of records that such a procedure would also have been agreed between third parties. In general, the tax authorities require, among other things, that all price determinants are agreed ex ante and that the parties to the business transaction are not subject to any subsequent influence. In the case of business transactions relating to significant, insignificant values and advantages, special statutory provisions apply to subsequent adjustments.
In the case of hidden profit distributions within the meaning of the Corporate Income Tax Act, the special formal requirements for controlling shareholders (including clear and valid agreements in advance) must be observed.
Safe havens
Are there specific “Safe Harbor” methods available for certain types of related party transactions? What are these methods and what types of transactions do they apply to?
German tax law does not provide for any safe harbor rules in connection with transfer pricing and the tax authorities do not apply safe harbor rules.
Act specified date
Correct on
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June 20, 2020.