On 10 December 2019, Germany published a draft law implementing EU anti-tax avoidance directive. The Draft Law includes significant changes to the German transfer pricing rules.
The following proposed changes have been taken place under the draft law:
Transfer pricing method
The draft law proposed to implement the internationally adopted “best method rule” requiring that the taxpayer select the most appropriate transfer pricing method, considering the advantages and disadvantages of each method. The draft law proposed to introduce a more precise version of the German interpretation of the arm’s length principle by comprehensively implementing the principles laid out in the OECD’s 2017 transfer pricing guidelines into domestic law. The law also proposed to eliminate the current hierarchy of transfer pricing methods, prioritizing the taxpayer’s actual conduct, the facts and circumstances of the business transactions, and codifying the functional and risk analysis as the basis to determine if the business transactions are deemed comparable.
Intangibles
The law introduced a legal definition of the term “intangibles” in the newly proposed section 1 paragraph 3c of the FTC, based on the OECD transfer pricing guidelines. The draft law proposes the implementation of the “DEMPE” (development, enhancement, maintenance, protection and exploitation of intangibles) concept – originally developed by the OECD – in German tax law.
Related parties
The definition of related parties has been proposed to expand under the draft law for aligning the German definition of affiliated entities with the definition in the ATAD Directive.
Master file
The draft law proposed to reduce the turnover threshold for preparing a master file from EUR 100 million to EUR 50 million, which is likely to result in a considerable increase in the number of taxpayers subject to the master file filing requirement in Germany. The master file must be filed electronically with the competent tax office “at the latest after the end of a fiscal year.”
Advance pricing agreements (APAs)
The draft law codifies the requirements and the procedure for obtaining an APA and creates a legal basis for the APA program in § 89a GTC. The law proposed to increase the basic fee for an APA application from EUR 20,000 to EUR 30,000. The fee can be reduced if the APA follows a coordinated bilateral or multilateral tax audit (“joint audit”). If the draft law is passed, companies need to act swiftly since these rules will apply for financial year 2020, meaning that taxpayers with deviating fiscal years that end after 1 January 2020 will need to consider the TP changes described above for their current fiscal year.
