Part 1 - AL-Tax

Chapter 7that as of September 1992 and again as of June 1994, proposed adjustments for transferpricing cases of large taxpayers (i.e. those with assets over $100 million or morein a year of return) awaiting administrative resolution in appeals or litigation totaledUS$14.4 bn (Ring, 2000, p. 171). This figure may also explain why this tax pie is soeagerly advertised by consulting teams specializing in transfer pricing. 3To mitigate the shortcomings of the standard approach of the arm’s length test,expert groups seek to further develop the model to establish arm’s length transferpricing behavior. As the need for model revisions emerges on the horizon ofinternational taxation, the transfer pricing and documentation provisions inGermany appear to provide an interesting and promising model for future arm’slength analysis. Being a laggard regarding documentation provisions in the1990s, in 2003 Germany introduced its law on documentation requirements inthe form of Article 90(3) AO (Abgabenordnung; Tax Procedures Act) and GAufzV(Gewinnabgrenzungsaufzeichnungsverordnung; Regulations on Documentationof Income Allocation, BR-Drs. 583/03) about a decade later than the USA and laterthan many other OECD countries. 4 The 2003 documentation law was completedby the very detailed Administrative Principles on Documentation and Procedures(IV B 4 – S 1341 – 1/05) 5 published by the Federal Ministry of Finance on 12 April2005. 6 Further administrative procedures can be expected soon, such as procedureson base shifting, long-term losses, 7 and advance pricing agreements.Within the European Union, the Administrative Principles on Documentationand Procedures (Administrative Principles 2005) represent some progress towardsmore economic soundness of the arm’s length analysis compared with approacheswhich explicitly make use of classical margin analysis (cf. Tucha, 2002). On somepoints, the German provisions even exceed the forerunners in the transfer pricingmethodology, for example the provisions in the USA (for a detailed comparison, seeHirsch, 2005).Diversified global business structures of multinational groups in general, and aneconomic pushing of the economic concepts in the OECD Guidelines and nationaldocumentation provisions (such as in Germany) in particular, have triggered thedemand for rethinking the structure and concept of arm’s length analysis. A discussionon the economic foundation of legal provisions is essential to keep the arm’slength principle alive and to enforce transfer pricing documentation as set forth inmany economies.While the Internal Revenue Service of the USA (US IRS) has made use of provisionson arm’s length analysis in the form of US Regulations 1.482, in Germany theAdministrative Principles of 1983 and 2005 introduce to the jurisdiction’s tax auditorsthe methodology of arm’s length analysis. There, the type of appropriate arm’s151