Germany - Modernisation of procedural transfer pricing law

Germany on 20 December 2022 enacted legislation to improve cross-border cooperation implementing the EU automatic exchange of information obligations for digital platforms, better known as the DAC 7 directive, into domestic law. More importantly from a transfer pricing perspective, the legislation also introduced changes to the German procedural law.[1] Two important changes in the area of transfer pricing are highlighted below.

Tightening of transfer pricing documentation requirements

Under German tax law, taxpayers involved in cross-border business transactions have a heightened obligation to cooperate with the tax authorities in the course of tax audits.[2] As a result of that obligation, German tax auditors have the right, when certain thresholds are exceeded, to request that taxpayers provide transfer pricing documentation reports that meet form and content requirements. Specifically, auditors may request documentation of the arm’s length pricing of intragroup cross-border transactions.[3] Currently, taxpayers have 60 days (30 in the case of extraordinary transactions) from the day they receive such a request to hand over the documentation to the tax auditor.

Under the new legislation, provided the pertinent (unchanged) thresholds have been exceeded, the taxpayer may be asked at any time to provide transfer pricing documentation reports to the tax authorities. During a tax audit, the taxpayer will be required to provide transfer pricing documentation to the tax auditor within 30 days of the start of the audit.

The new legislation applies only to tax audits that commence after 1 January 2025. Because of the German statute of limitation, however, the subject of such tax audits may be financial years as far back as 2018. As a result, taxpayers should be aware that the new legislation may apply to the current or earlier financial years.

Practical experience shows that in many cases, meeting even the current 60-day deadline may be ambitious. Often, late communications, holidays or personnel changes, with the resulting lack of “historical” knowledge of facts for the period under tax audit, may hamper the timely creation of transfer pricing documentation. In light of this change in the law, duly diligent management in Germany may be expected to prepare more comprehensive -- and more contemporaneous -- transfer pricing documentation reports to avoid penalties.

Illustration: Shortening of deadline to present TP documentation

Qualified cooperation request

The new legislation also introduces the concept of a “qualified request for cooperation” whereby a taxpayer may be asked, within six months of the commencement of an audit --in writing or electronically (and with instructions on how to appeal) -- to cooperate with the tax authorities; in other words, to provide certain information. The taxpayer must respond to the qualified request within one month; otherwise, the tax authorities may impose a penalty of EUR 75 EUR per day for a maximum of 150 calendar days. In addition, a surcharge of a maximum of EUR 25,000 per day (for a maximum of 150 calendar days) may be imposed if it is assumed that the taxpayer will otherwise not comply with the request. This is in particular the case if the taxable person's revenues in one of the calendar years covered by the tax audit amounted to at least EUR 12 million or the taxpayer belongs to a group of companies whose consolidated sales reported in the consolidated revenues in one of the calendar years covered by the tax audit amounted to EUR 120 million or more.
 

Richard Wellmann
BDO in Germany