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Jobst Wilmanns |
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Chayalaak Chutima |
On July 17 2009 the finance ministry released the first draft of a decree giving guidance on cross-border transfers of functions between related parties. This decree should be the final action in a ministerial campaign to ensure taxation of the actual value of functions transferred abroad in the course of international group restructurings. It follows a statutory order of May 2008.
The draft is a comprehensive document. It makes much of the conformity of the German approach with the OECD principles of income allocation at arm's length within a multinational enterprise. Unfortunately, however, it does not mention the OECD draft on business restructurings of September 2008 and on which the OECD has recently held a public discussion with the international business community. The ministry concludes that it is following international practice, hence there should be no problem with international acceptance of a tax office finding in a specific case. The draft is vague on the position, should the other taxing authority disagree.
Despite intensive discussion, there is still no clear definition of transfer of function, not useful in borderline cases. Thus, there will continue to be uncertainty in distinguishing functional transfers from sales of plant, staff assignments and even service contracts, particularly where several countries are involved.
A transfer of a function should be valued as a package. In the ministry's clear view this will be more than the sum of the component parts in almost every case. Exchanges of functions – say, in the course of an international pooling of resources – are two separate transfers. A simple reorganisation without outside involvement can thus lead to significant realisation of intangibles to be capitalised by each recipient. It will be interesting to see the ECJ's view on this, when the time comes.
The ministry argues, not illogically, for application of the same principles to transfers to a foreign permanent establishment. There is, however, considerable legal authority for suggesting that there can be no profit realisation from a transfer to one's own branch. Here again, the issue will be for the courts to decide.
Jobst Wilmanns, Chayalaak Chutima Transfer Pricing Team of PricewaterhouseCoopers, Frankfurt
