German Federal Council recommends: Postpone revision of transfer pricing regulations
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German Federal Council recommends: Postpone revision of transfer pricing regulations

A recommendation published on September 28 by the responsible committees of the German Federal Council caused a sensation. The committee recommends that the German Federal Council postpones the revision of the transfer pricing regulations. Our overview provides all information needed.

A draft bill on the revision of the transfer pricing regulations in Article 1 of the Foreign Tax Act (AStG), which was first published in November 2019, called for a far-reaching revision. This should cause a change in the taxation of intra-group cross-border supplies and services relations. Now the responsible committees of the German Federal Council recommend postponing the revision of the transfer pricing regulations.

The reason for the recommendation – apart from clearly perceived criticism from the economy and the consulting profession – is that the modifications in the area of transfer prices are not part of the ATAD directive, which must be implemented under European law.

The German Federal Council can postpone the revision of the transfer pricing regulations in a meeting scheduled for October 9.

What this actually means is explained in the following section.

What is regulated in Article 1 of the Foreign Tax Act?

Article 1 of the Foreign Tax Act is the central legal provision regarding transfer pricing. The arm’s length standard as well as the regulations on transfer of functions are most familiar examples.

According to the arm’s length standard, taxpayers must set the prices for their intra-group and cross-border exchange of goods and services (transfer prices) based on what they would have agreed upon with independent third parties under the same or comparable conditions. If they fail to do so, Article 1 AStG entitles the tax authorities to make a correction, which could result in a double taxation.

Content of the revision of Article 1 Foreign Tax Act

In context of the ATAD II directive implementation, the draft bill (AStG-E) foresaw major changes to the existing regulations. Among other things, it recommended splitting the existing Article 1 of the Foreign Tax Act into three parts.

  1. Article1 AStG-E is to be expanded to include, along with other things, concrete regulations on the interquartile approach and methodological hierarchy, and to implement the OECD’s DEMPE concept into national law.
  2. However, in Article 1a AStG-E precise legal grounds concerning the transfer pricing treatment of financial transactions are to be included.
  3. Article 1b AStG-E includes specific regulations for transactions concerning significant intangible assets and benefits.

What are the ATAD directives?

The Anti Tax Avoidance Directives (ATAD) are the legally binding EU implementation of the OECD project against base erosion and profit shifting (BEPS). They are designed to prevent aggressive tax structuring.

As an EU directive, ATAD must be implemented directly into national law by the EU memberstates. However, ATAD II does not focus on transfer pricing, but rather on exit taxation (Article 6 AStG) and controlled foreign corporation rules (Article 7 f. AStG) as well as so-called hybrid mismatches.  As an EU directive, ATAD must be implemented directly into national law by the EU members. However, ATAD II does not focus on transfer pricing, but rather on exit taxation (Article 6 AStG) and additional taxation (Article 7 f. AStG) as well as so-called hybrid mismatches. The latter include, for example, payments which are considered as operating expenses by the debtor but do not generate operating revenues for the recipient.

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Düsseldorf, Georg Friedrich Wenz
Georg Friedrich Wenz
Tel.: +49 211 908 67 671
Büro Düsseldorf
Georg.Wenz@ecovis.com