Key Update on Transfer Pricing
On September 26, 2024, a significant development occurred in the German realm of transfer pricing. The Bundestag passed the Fourth Act on Bureaucracy Relief, which includes key amendments to Sections 90 (3) and (4) of the German Fiscal Code (AO). These changes aim to ease the burden of transfer pricing documentation. The law must still pass through the Bundesrat for final approval, but its current state already promises notable relief for businesses.
The legal committee of the Bundestag supported these changes to mitigate the recently introduced requirement to submit full transfer pricing documentation within 30 days after the announcement of a tax audit. The outcome of these changes is expected to lead to more efficient and less bureaucratic tax audits while preserving the tax authorities’ ability to exercise control.
Detailed Amendments to Section 90 (3) and (4) AO
The revisions introduced to the German Fiscal Code (AO) simplify the requirements for businesses, focusing on key areas:
- Scope of Record-Keeping Obligations
The documentation requirements under Section 90 (3), Sentence 2 AO will now consist of three key components:
- A transaction matrix,
- Factual documentation, and
- Documentation of the appropriateness of the transfer pricing method.
- New Submission Requirements for Tax Audits
Under the previous rules, businesses were required to submit all relevant transfer pricing documents without specific requests. The new regulation, outlined in Section 90 (4), Sentences 2 and 3 AO, now limits the immediate submission requirements to:
- A transaction matrix,
- The master file (if applicable), and
- Records of extraordinary business transactions.
These documents must be submitted within 30 days following the notification of a tax audit.
Key Components of the Transaction Matrix
The law defines the scope of the transaction matrix, which must include:
- The nature and subject matter of the business transactions,
- The parties involved, specifying service providers and recipients,
- The volume and pricing of transactions,
- The contractual basis,
- The transfer pricing method used,
- The relevant tax jurisdictions, and
- Whether the transactions are subject to standard taxation in the relevant jurisdictions.
A new version of the Profit Allocation Documentation Regulation (GAufzV), originally enacted in July 2017, is expected to further clarify the details of the transaction matrix.
Risk-Based Approach
The tax authorities are shifting towards a risk-based approach with the new rules, requiring only essential documents at the start of an audit. This change is intended to expedite audits and enhance efficiency.
Reduction in Bureaucratic Burden
The goal of these amendments is to reduce the bureaucratic burden on businesses. By limiting the volume of documents that need to be submitted, the legislature aims to decrease the administrative costs associated with compliance, thus relieving some of the strain on companies. However, the real impact on businesses remains to be seen.
Rights of the Tax Authorities
Despite the reduced documentation requirements, tax authorities still retain the right to request additional records during audits or other procedures, such as advance pricing agreements.
Effective Date and Application
The new regulation is expected to come into effect on January 1, 2025. However, it is not yet clear which fiscal years will be affected. This will likely be addressed in upcoming amendments to the GAufzV. Swift clarification from the legislature is necessary to avoid uncertainties and potential conflicts during the interim period.
The Legislative Process Ahead
The Bundesrat, in its response, has generally welcomed the bill but argues that it does not go far enough in addressing the economic relief businesses need. It has proposed additional changes, likely in areas outside of transfer pricing. The timeline for the Bundesrat’s approval and the final adoption of the law remains uncertain. We will keep you updated on further developments.
To keep updated on news, visit our Global News Page.
Don’t miss our most recent updates and articles; follow us on LinkedIn.
