Part 1 - AL-Tax

International Taxation Handbook4. The 2003 documentation law of Germany was triggered by the Highest Tax Court (Bundesfinanzhof)decision in 2001 (BFH v. 17.03.2001, I R 103/00; BStBl 2004 II, 171), which ruled that Article92(2) of the Tax Procedures Act was not a sufficient legal basis for the tax administration torequest special documentation from the taxpayer on cross-border transfer pricing issues.5. Administrative Principles are called Verwaltungsgrundsätze or BMF-Schreiben. The German titleis: ‘Grundsätze für die Prüfung der Einkunftsabgrenzung zwischen nahestehenden Personen mitgrenzüberschreitenden Geschäftsbeziehungen in Bezug auf Ermittlungs- und Mitwirkungspflichten,Berichtigungen sowie auf Verständigungs- und EU-Schiedsverfahren’ (abbreviation:Verwaltungsgrundsätze Dokumentation und Verfahren).6. Recently, the administrative principles on advance pricing agreements were published on October5, 2006.7. Given a 2005 decision of the Highest Tax Court (BFH v. 06.04.2005, I R 22/04; IStR 2005, 598),some experts opine whether further administrative provisions on dealing with long-term lossesin the context of related-party business are necessary at all.8. In transaction cost economics, the choice of governance structures is determined by transactionalattributes (cf. Williamson, 1985; Oestreicher, 2000). Transactional attributes can be used as variablesto characterize the functional pattern of related-party business units. The following transactionalattributes are typically deployed: Uncertainty, frequency of coordination, specificity of assetsdeployed (among others, human specificity, physical specificity, time specificity, dedicated specificity),measurability of effort contributed by stakeholders (cf. Brem and Tucha, 2006b).9. We expect that, subject to the thresholds applied, most tested parties follow the company type‘hybrid’. It is a matter of presentation in the course of the transfer pricing analysis to demonstrateif a related party is structured into legal, operative, or hierarchical group structures (cf.Brem and Tucha, 2006a).10. We hypothize that for income allocation purposes and demonstrating arm’s length behavior towardstax authorities, the analytical problem of cost allocation and cost design over the related partiesof a group (including the problem of differences in cross-country accounting principles) plays agreater role than the question of assigning a certain profit margin (as a percentage) to the respectivefunctions. The reason is that the basis of any percentage margin is the cost. So, designing – ormanipulating – the cost basis can have a significantly larger impact than turning the margin screw,especially if that function is allocated in a high-tax jurisdiction in which in practice stable butsmall cost plus markups may be assigned to “satisfy” the revenue service.ReferencesBrem, M. and Tucha, T. (2005). The Organization of the Multinational Firm: Perspectives on GlobalTransfer Pricing. BNA Tax Planning International – Transfer Pricing, 6(12):6–10.Brem, M and Tucha, T. (2006a). Transfer Pricing: Conceptual Thoughts on the Nature of theMultinational Firm. Vikalpa, 31(2):29–43.Brem, M. and Tucha, T. (2006b). Transfer Pricing in Related-party Value Chains: Value ChainPricing, Related-party Organization, Arm’s Length Principle, and Tax Risk Management.Conference Paper presented at the International Conference of Logistics, Hamburg University ofTechnology, 15–16 September 2006.The Economist (2001). Globalisation and Tax. Special Report, 29 January.168