Transfer Pricing

Transfer Pricing

Posts 1-1 of 1
  • Sebastian Pawlita
    Sebastian Pawlita    Premium Member
    The company name is only visible to registered members.
    Transfer of Function Taxation - Mitigation Currently in the Legislative Process
    It wasn't much reported in the press, but legislation seems to be planned aimed at mitigating the transfer of function taxation:

    The German government introduced draft legislation into the parliamentary process to implement certain changes in EU law. This government draft itself does not contain any reference to the transfer of function taxation, but the parties supporting the government in the lower house (Bundestag) proposed several amendments to the draft of which one deals with the transfer of function taxation. These amendments were proposed at the occasion of the first debate of the government draft in the lower house's fiscal committee on January 27, 2010. The contents of the suggested amendments can be gathered from documents published at the occasion of a hearing of experts conducted by the fiscal committee on February 9, 2010, but the actual text itself was unfortunately not published.

    http://www.bundestag.de/bundestag/ausschuesse17/a07/anhoerun...

    From the information available, the suggested amendments to the government draft seem to propose to introduce another escape clause allowing the taxpayer to determine the transfer price of a function by valuating the individual assets transferred.

    Presently, a function usually has to be valuated as a whole on the basis of profits expected to be generated by the function in the future. This usually results in a higher transfer price than if the individual assets transferred were valuated. The proposed amendment now seems to suggest that individual valuation should be made possible provided that the taxpayer identifies all essential intangible assets that are transferred and that no complete business or separable part of a business are transferred. It seems to be proposed that these changes apply to transfers of functions effectuated on or after 1 January 2008, i.e., to all transfers that were affected by the new transfer of functions taxation introduced as of 1 January 2008.

    The planned timeline is as follows: 5 March 2010: vote in the lower house; 26 March 2010: vote in the upper house (Bundesrat).

    On the assumption that these amendments become law with the contents reported above, it may be possible in many cases to mitigate the tax burden triggered by a transfer of a function, although the situation will probably still worse than prior to 2008:

    - RISK OF MISSING AN ESSENTIAL INTANGIBLE ASSET:

    If the taxpayer fails to identify all essential intangible assets, the escape clause does not set in. Tax audits might focus on such omissions.

    - INDIVIDUAL ASSET VALUATION IN CASE NO COMPARABLES CAN BE FOUND:

    If no comparables can be found, assets have to be valuated by determining a hypothetical transfer price on a range between a minimum and a maximum price. The minimum price is the price an omniscient, diligent manager of the transferor (= German company) would demand at least in order to make sure that the transferor does not end up making a loss. The maximum price is the price an omniscient, diligent manager of the transferee (= related party abroad) would be willing to pay at most in order to make sure that the transferee does not end up making a loss. The transfer price is therefore based on profit potentials of both the transferor and the transferee, entailing the risk that profits of the transferee are taxed once in Germany when the asset is transferred and again abroad when the profit actually materialises. Prior to 2008, one would have looked only at the profit potential of the transferor. The double taxation risk existing since 2008 is in particular acute in case of intangible assets as it is often difficult to find comparables for them.

    - TRANSFER OF AN ENTIRE BUSINESS OR SEPARABLE PART OF A BUSINESS:

    The escape clause does not set in if an entire business or a separable part of a business are transferred. In these cases, there is therefore still a double taxation risk resulting from the inclusion of the profit potential of the transferee in the transfer price.

    - RETROACTIVE APPLICATION:

    There may be cases where the rules in place since 1 January 2008 are better for the taxpayer than the suggested amendments, in particular in inbound cases where a function was transferred from abroad to Germany. It is therefore a bit doubtful if it is possible to apply the amendments as suggested to periods prior to 2010. However, the actual wording remains to be seen. For instance, the taxpayer could be given the choice of applying the old or the new rules.
    • 03 Mar 2010, 06:55 am