Transfer Pricing of a
contract manufacturer
Markus Volkmann
Federal Central Tax Office Germany, Bonn
Federal Audit Department
OECD Transfer Pricing Case Studies Workshop
San Jose, 31 March – 4 April 2014
• Germany, a
federation with
16 federal states
• Consent tax law,
but federal states
are responsible
for their own tax
matters
• 16 views of one
problem may exist.
German Tax Administration
Federation
16
Federal States
Federal Ministry
of Finance (Berlin)
16 Ministries
of the States
Federal Central
Tax Office (Bonn)
11 Regional
Revenue Offices
42,100 employees
144,700 employees
640
Local Tax Offices
Federal Central Tax Office
• International
responsibilities for:
– tax refund
– information exchange
– Mutual Agreement
Procedures
– Advance Pricing
Agreements
• Federal Audit
Department
– audit of LTP
Federal Audit Department
• 230 auditors
– cooperation with the local tax offices
– joint audit teams
• Audit of large taxpayers
(turnover > 100 million Euro)
• Industry specialists
• Priority: transfer pricing
• Working on APA and MAP
Audit of TP in Germany
• 640 Local Tax Offices
– 13.200 auditors (2012)
– 19 bn Euro additional taxes (2012)
• Specialists for international tax issues
– Seminars at the Federal Finance Academy
– Basics / Transfer Pricing / Business
Restructuring / Permanent Establishments
– International tax law / Use of databases
„Large Enterprise“
• Classification every three years
last 01.01.2013
Parameter
Examples
Commercial
Production
Other
Turnover
Profit
Turnover
Profit
Turnover
Profit
Large
Enterprise
7,300 k€
280 k€
4,300 k€
2250 k€
5,600 k€
330 k€
„Large Enterprise“
Classification
Enterprises
Large enterprises
2012
8,571,212
191,335
Large enterprises (examined 2012)
41,365
Audit period (average)
3 years
Cycle of audit
4.6 years
Regulations
• General Tax Audits
– Audit procedure: Notification / tax audit report /
adjusted tax base
– Taxpayer: Obligation to co-operate
– Penalties for late submission of information and
documents
• Audit (Transfer Pricing)
– More taxpayer obligations, if international tax issues
(Sec. 90 (2) General Tax Code)
– TP documentation requirements since 2003
– Penalties
Documentation requirements
• Since 2003: Sec. 90 (3) General Tax Code
– Taxpayers with foreign connections
• Shareholder / participation: 25 %
– Exceptions: Small and medium sized
enterprises
• Content of documentation
– Facts and details of the transaction
– ALP – Compliance
Documentation requirements
• Taxadministration: request to document
– No obligation to do it in advance
• Exception: business restructuring / permanent
contracts*
– Time limit: 60 days (*30 days)
– Language: German (upon taxpayers request,
any other living languages - english)
• Burden of proof
– depends on the documentation
Penalties
• Non-Compliance with documentation
requirements
– Late submission of documentation
– Failure to provide
• Applied rarely, only in cases of refusal
– Crucial, effort to cooperate with the
taxadministration
Other Regulations
• Foreign Tax Law (AStG)
– Sec.1 AStG: arm‘s length principle
• Administration Guidelines
– Transfer Pricing (1983)
– Permanent establishments (1999)
– Documentations (2005)
– Business restructurings (2010)
• Double Taxation Agreements
Transfer Pricing Workshop
• Case: Contract
manufacturer
• Parent company: P
• Subsidiary: P1
• Foundation: 2003
• P1 produces for P
• No important
tangibles or
intangibles
P
100%
P1
Product 1
• Tanks for machines since 2003
– main work in Germany
• Material
– free of charge from P to P1
• P1
– assembles the parts
• P
– leak testing, completing, delivering to the
customer
Product 2
• Tubes for machines since 2005
• Material
– supply of material to P1 not free of charge
– production scrap remains
• P
– procurement and logistic services
Transfer Pricing System
• Price per unit
• Cost plus method
• Expected production costs + 8% profit
margin
• Material for product 2:
– material costs + 2% overhead + profit margin
• No Price adjustments
Financial performance
k€
2004
2005
2006
2007
Net Sales
1,115
1,616
1,862
3,769
Operating
Profit
Net Profit
174
388
-582
-393
177
398
-884
-221
Problem / Question
• Permanent losses - arm‘s length?
• P anticipates corrections of the foreign TA.
• What changes in the transfer pricing
system are necessary?