New Amendments to the German Fiscal Code – Easing Compliance Burdens
On October 18, 2024, the German Bundesrat approved the Fourth Bureaucracy Relief Act. This legislation introduces significant changes to transfer pricing documentation requirements in Sections 90 (3) and (4) of the German Fiscal Code (Abgabenordnung – AO). The objective is clear: reducing compliance burdens on businesses while maintaining effective oversight for tax authorities.
The new amendments relieve companies from the stringent submission timelines introduced in recent years. Previously, companies were required to submit comprehensive transfer pricing documentation within 30 days following the issuance of an audit notice. However, these requirements have been recalibrated under the amended law to foster a more practical, less bureaucratic approach to field audits without compromising the authorities’ ability to conduct effective controls.
Key Changes to Transfer Pricing Documentation Requirements
- Revised Scope of Documentation Obligations The legislation redefines the documentation obligations under § 90 (3) AO into three specific elements:
- Transaction Matrix: A structured overview of business dealings.
- Documentation of Facts: Records capturing the economic substance of transactions.
- Adequacy Documentation: Evidence supporting the arm’s length nature of pricing policies.
- Simplified Submission Process for External Audits A significant change comes in § 90 (4) AO, which redefines the list of documents to be submitted during an audit. Now, instead of submitting all relevant documentation upfront, companies need only provide:
- Transaction Matrix.
- Master Documentation (if applicable).
- Records of Extraordinary Transactions.
These documents must be presented within 30 days following an audit notification. This targeted approach is expected to streamline the submission process.
The transaction matrix, a critical component under this new regime, must encompass details such as:
- The nature and subject of the transactions.
- Parties involved and their roles (e.g., service providers and recipients).
- Transaction volumes and remunerations.
- The contractual basis and applied transfer pricing methods.
- Jurisdictions involved in the transactions.
- Any deviations from standard taxation practices in the relevant jurisdictions.
Further specifications for the transaction matrix will be issued in an updated version of the Profit Accrual Recording Ordinance (GAufzV) of 2017.
- Adoption of a Risk-Oriented Approach Under the revised regulations, tax authorities are shifting to a risk-oriented approach. This means only essential documents are initially required for audits, enabling quicker and more focused audits. However, the authorities reserve the right to request additional records as necessary to ensure compliance.
- Enhanced Rights of the Tax Authority Despite the simplified initial submission process, the tax authorities retain their right to demand more comprehensive records if needed. This includes field audits and preliminary procedures, such as advance pricing agreements.
A Balanced Approach to Reducing Bureaucracy
These amendments’ primary objective is to relieve businesses of excessive administrative burdens by reducing the volume of mandatory submissions. However, the substantive documentation requirements remain intact to ensure tax compliance. This legislative shift aims to reduce business costs while maintaining the integrity of tax audits.
When Will the New Regulations Take Effect?
The amendments will take effect the day after they are published in the Federal Law Gazette and will apply to all open financial years and ongoing audit periods.
What’s Next for Legislators and Authorities?
Two key tasks lie ahead:
- Updating the Profit Accrual Recording Ordinance (GAufzV): Legislators must align the ordinance with the revised requirements to provide clarity, as ambiguity during this transition could lead to conflicts.
- Revision of Administrative Principles: The existing administrative principles, last updated in December 2020, must be amended to reflect these changes. Experience indicates that these updates could take several months.
Conclusion: Towards More Efficient Compliance
The Fourth Bureaucracy Relief Act introduces changes aimed at reducing businesses’ compliance burden while preserving the tax authorities’ oversight capabilities. Understanding these amendments will be crucial for tax professionals and companies engaged in intercompany transactions in preparing for upcoming audits.
To keep updated on news, visit our Global News Page.
Don’t miss our most recent updates and articles; follow us on LinkedIn.
