On 13 October 2022, the Court of Justice of the European Union (CJEU) ruled in case: C-431/21 on sanctions for non-compliance with transfer pricing (TP) documentation requirements. Under German law, there is a rebuttable presumption that the German taxable income of a taxpayer who fails to retain and submit the relevant transfer pricing documentation is greater than that declared.
In these cases, tax authorities must estimate the incremental revenue based on certain price ranges and could select the upper value of the range and impose additional penalties calculated as a percentage (5% to 10%) of the estimated incremental revenue. plus default interest (if applicable). The referring court asked the ECJ to rule on whether these rules are compatible with the freedom of establishment and the freedom to provide services under the Treaty on the Functioning of the European Union (TFEU).
The Court also distinguished that the obligation to provide tax documentation applies only to cross-border transactions between related parties, whereby one entity has a definite influence on the other. The Court, therefore, concluded that the measures under dispute need to be assessed in light of the freedom of establishment.
