Taxation of Large Businesses – Audit of Transfer Pricing in Germany Markus Volkmann Federal Central Tax Office, Bonn (Germany) Federal Audit Department SUNAT / CIAT / OECD / GIZ Regional Exchange Seminar Lima, November 2011

Basics German Tax Administration –Structure / Organization Human Ressources –Specialization of auditors Large Enterprise –Definition / number of Regulations –General audit and audit of transfer pricing –Penalties

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) Federal Central Tax Office (Bonn) 11 Regional Revenue Offices 640 Local Tax Offices 16 Ministries of the States 48,000 employees 153,300 employees

Federal Central Tax Office Bundeszentralamt für Steuern International responsibilities –Tax refund –Information exchange –Mutual Agreement Procedures –Advance Pricing Agreements Federal Audit Department –Audit of large taxpayers

Federal Audit Department 230 auditors –Cooperation with the local offices –Joint audit teams Audit of large taxpayers (turnover > 100 million Euro) Industry specialists Priority: transfer pricing Working on APA and MAP

Local Tax Offices Responsible for annual tax assessments and tax audits Tax audits: –2010 data : 13,200 tax auditors 16,8 bn Euro additional taxes –Small and medium sized enterprises –Special audit offices for large enterprises –Special auditors for international tax issues

Auditors for international tax issues Further education at the Federal Finance Academy Workshops / seminars: –Basics of International tax law –Taxation in other countries (USA, UK …) –Transfer pricing –Exit taxation –Business restructuring –Databases (new in 2012)

„Large Enterprise“ Classification every three years last Examples ParameterLarge Enterprise CommercialTurnover Profit 6,900 k€ 265 k€ ProductionTurnover Profit 4,000 k€ 235 k€ OtherTurnover Profit 5,300 k€ 710 k€

„Large Enterprise“ Classification2010 Enterprises8,571,515 Large enterprises191,638 Large enterprises (examined 2010)40,502 Audit period (average)3 years Cycle of audit4.7 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

Experiences How do we use the documentation requirements? –Risk assesment –Significant transactions Topics, up to date –Cost plus method –Databases Evaluations –APA –Up-to-date audits

Risk Assessment Transfer Pricing Audit: Information are very important –But only information about the transaction Which transactions, how can we find them? –Risk of „information overkill“ Large taxpayers cannot prepare extensive documentations for all transactions –Costs / benefit

Risk Assessment General documentation –Masterfile: Proposal of the EU JTPF –Information about the group / transactions Risk analysis –on the basis of the masterfile and other sources –Business restructuring, new or unusual methods, businesses with tax holidays

Risk assessment Documentation for a specific transaction –General facts / details Settlements, advance plannings, budgets –Reason for the used transfer pricing method No reasons for non-application –Compliance ALP Uncontrolled transactions / databases

X- AG Risk Assessment (Case) Corporate group in the automotive industry Brand X has subsidiaries in 15 European countries and further 7 in countries in America, Africa, Asia 62 production plants Worldwide 26,000 different vehicles each working day In addition to brand X are 9 more brands in Europe, with equal structures

Risk Assessment (Case) Masterfile: –Company audit reports and reports of the subsidaries –Transfer pricing guideline of the group Business model / functions and risks ALP –Overview: transactions, Intellectual property, classification, TP method

Risk Assessment (Case) Risk analysis: –Group guideline –Contract manufacturer: Method: Cost plus Basis: on full costs or on value added costs, depends on circumstances of the case –Cost plus on full costs, if X-AG is responsible for the procurement and controls this function?

Risk assessment Documentation: –More information about facts / details for 8 production plants –One common documentation for ALP (group guidelines) Result: –Discussion about cost plus only on value added costs. A controversial issue, which is up to date.

Up to date Cost plus on value added costs Licence agreements –Skimming of profits Location savings –Investment incentives –Tax holidays –Other local savings Business Restructuring

Databases Increase: –Documentation and APA –International standard –Tax auditors have licences for Bureau van Djik (Amadeus, Orbis …) Problem: –Little information about the comparables / financial datas

Databases Independence –< 50% - < 25 % - < 10% Market analysis –Europe - one market? Functions and risks –Other industries –National Sales Company = Wholesale? Number of comparables?

Databases Impact of business cycles? –Financial crisis – a normal event? Loss makers –Permanent losses = arm‘s-length? Use of statistical tools Range of results –a range of results acceptable? –Interquartil ranges?

Evaluation APA –Advance Pricing Agreements (2006) –„Certainty amidst chaos“ in transfer pricing –Easier planning / reduction of tax risks –Faster tax audits Up-to-date audits –Attemption to audit the enterprises just in time –Question of human ressources

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