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Germany: Transfer pricing risk assessment

Susann van der Ham and Carsten Hüning of PwC Germany discuss recent developments in tax audits practice towards transfer pricing risk assessments strategies.

To cope with the growing complexity and standards in the requested transfer pricing systems, the OECD launched a draft handbook of transfer pricing risk assessment on April 30 2013. It is intended to guide national tax authorities towards an effective assessment of transfer pricing risks. The handbook specifies relevant indicators and discusses how critical characteristics have to be evaluated. Although this handbook was primarily provided by the OECD for tax authorities to establish more efficient audit structures and inherent audit routines, it can be very helpful for taxpayers as well.

The handbook and the individual answers concerning the addressed questions can support taxpayers to identify potential risks in their transfer pricing matters and can generally serve as a good starting point for the diligent preparation before tax audits. In this context, it should also be noted that risk assessments are conducted by tax authorities in several countries to identify and mitigate risks and/or potential conflicts between the tax authorities and the taxpayer before the start of a tax audit. The German tax authorities, however, do not share their results of the respective risk assessment which leads to the assumption that an active mitigation of disputes between the German tax authorities and the taxpayers in the course of a tax audit is momentarily not conducted. However, because we expect the tax authorities will adapt their tax audit routines and share their findings, efficiency in transfer pricing risk assessment will increase. Consequently, we expect this development will lead to stricter tax audit procedures for the taxpayers on the one hand, but more predictable tax audit procedures on the other hand.

Tax authorities are expected to introduce a systematic transfer pricing risk assessment

Based on our experience in German tax audits, transfer pricing is very often one of the key areas in the course of tax audits of internationally acting groups. Additionally, in the meantime, a significant number of countries have increased their compliance requirements regarding transfer pricing and have released respectively strict tax laws and regulations for taxpayers to comply with. Because of the increasing complexity and the rapidly growing transaction volumes of cross-border transactions, the importance of transfer prices and its influence on the respective profit allocation of international acting taxpayers is still growing. In consequence, the workloads with regard to the preparation of transfer pricing documentation, the avoidance of disputes and/or the establishment of a pragmatic and economically reasonable transfer pricing system are often enormous for taxpayers.

However, tax administrations also spend a lot of time on tax audits and tie up considerable resources inspecting whether or not the transfer pricing systems are in line with the arm's-length principle and, in addition, if the taxpayer's transfer prices are not in line with the arm's-length principle or formal requirements for dispute resolution activities. As the German tax authorities, like other countries, have very limited resources available (especially on the level of the tax auditors), there is a growing need to establish efficient tax audit processes. Efficient tax audit processes, however, would allow the tax authorities to conduct a maximum of detailed audits and would assure that a large number of taxpayers are compliant with local tax laws. As the legislative framework on the taxation of internationally acting groups can be described as complex, tax authorities object to audit a large number of taxpayers that are exposed to a considerable amount of transfer pricing risks.

The above mentioned OECD handbook provides indicators that are adequate guiding tax authorities as well as taxpayers towards an effective analysis of transfer pricing risks. Table 1 displays the most critical features/risks and also specifies where the respective information could be gathered.

Table 1: Guidance towards transfer price risk assessment
FeatureBrief DescriptionWhere to look
Significant transactions with related parties in low tax jurisdictionsWhere transactions take place with lowly taxed and related entities there is a risk that mispricing will incorrectly attribute excess profits to the lowly taxed jurisdiction.Information return (Form)
Contemporaneous documentation
Transfers of intangibles to related partiesTransactions of this nature raise difficult valuation questions, especially where the intangibles are unique and consequently there is a lack of comparables.Information return (Form)
Contemporaneous documentation
Financial accounts Patent office
Business restructuringsThe transfer pricing aspects of business restructuring were the subject of a specific OECD study published and incorporated as a new Chapter IX of the Transfer Pricing Guidelines in July 2010.Information return (Form)
Contemporaneous documentation
Taxpayer’s website
Financial accounts
Press reports / trade magazines
Securities analysts’ reports
Specific types of paymentsPayments of interest, insurance premiums and royalties to related parties because the underlying rights are highly mobile and consequently there is a risk that the payments do not reflect the true value being added by the related party.Information return (Form)
Contemporaneous documentation
Financial accounts
Loss makingYear on year loss making where there is no attempt made to change business operations or financing. Sustained losses may be evidence that the reported results do not reflect the true value of the business.Information return (Form)
Contemporaneous documentation
Financial accounts
Poor resultsSimilarly results that are not consistent with industry norms or with the functions carried on by the enterprise in the country concerned may be evidence that related party transactions have not been correctly priced.Information return (Form)
Contemporaneous documentation
Financial accounts
Commercial databases
Press reports / trade magazines
Securities analysts’ reports
Effective Tax RateSignificant variations between the effective tax rate reported at group level and the nominal rates to which it is subject can be the result of transfer pricing that allocates too much profit to low tax jurisdictions.Contemporaneous documentation
Consolidated financial accounts
Poor/Non-existent DocumentationEvidence that transfer prices and the methods used to compute them are inadequately recorded casts doubt on the reliability of the prices themselves.Contemporaneous documentation
Excessive DebtDebt that appears to be in excess of the amount that an entity could borrow if it were a free standing entity, or interest rates that appear to be in excess of market rates.Information return (Form)
Contemporaneous documentation
Financial accounts
Source: OECD Draft “Handbook on Transfer Pricing Risk Assessment”, 30 April 2013, p. 28 and 29.

Status quo in German tax audit procedures and its implications

In general, the handbook on transfer pricing risk assessment can be seen as a guideline for tax auditors and taxpayers to evaluate potential transfer pricing risks. From a tax authority's point of view, the results of a transfer pricing risk assessment could be used as an up-front indicator on the importance of the transfer pricing matters for a taxpayer and, consequently, how the respective tax audit concerning transfer pricing might be staffed for the particular taxpayer.

The German tax authorities have already recognised the importance of transfer pricing, which demonstrates the tendencies in German tax audits. In the past it could be noted that taxpayers were mainly audited by general tax auditors who also reviewed transfer pricing matters in the course of general audit measures. This situation changes more and more as general tax auditors call in punctual support from transfer pricing specialists on respective transfer pricing matters or tax pricing matters are handled autonomously by a particular transfer pricing specialist. A systematic risk assessment, however, cannot be identified in Germany. This means that most of the taxpayers do not know whether they will be audited by a transfer pricing specialist or how intense the transfer pricing inspection will be in the up-coming tax audit.

The above displayed questionnaire in table 1 will, however, enable the taxpayer to receive an indicative impression whether transfer pricing topics may be of importance and potentially cause discussions in the course of the next tax audit. Additionally, the respective answers should allow the taxpayer to determine whether further efforts have to be undertaken to prepare for an up-coming tax audit, such as defining a reasonable tax audit strategy for transfer pricing.

Irrespective from a risk assessment, it is, nevertheless, necessary to provide a transfer pricing documentation in a tax audit because the preparation of a transfer pricing documentation is a formal regulatory requirement in Germany and it is mandatory to comply with the taxpayer's legal obligations with regard to cross-border intercompany transactions. We would also like to mention that the risk assessment and its results, not highlighting major transfer pricing concerns, cannot be seen as a guarantee that the transfer prices applied will be accepted in their entirety in the course of the next tax audit because of different interpretations on the fulfilment of formal requirements and on the adequacy of transfer prices.

Nevertheless, it can be seen as a first evaluation of material risks indicating if and where the taxpayer might need to intensify its tax audit preparation. As a rule of thumb, the more risks are applicable, the more detailed documentation and preliminaries are required. In addition, a similar risk assessment might also be used for the formation of tax accruals in the annual financial statements.

Risk management and communication – a contribution towards efficient and predictable tax audit procedures?

Beside the above mentioned indication of risks, the outcome of the risk assessment could also be seen as a possibility to get a closer and better communication between the tax authorities and the taxpayers to avoid long lasting conflicts and inherent costs in tax audits and/or ideally to mitigate risks before their realisation. At the moment, communication between German tax auditors and taxpayers does not take place on a regular basis outside of tax audits, especially not regarding potential tax audit risks in transfer pricing matters. Based on our experience, German tax auditors usually interact with taxpayers once they have localised potential transfer pricing issues which regularly result in conflicts in tax audits. In this context, in can also be observed that discussions in tax audits might lead to extensive transfer pricing investigations in the following tax audit period covering, for example, discussions on insufficient documentation and/or on potential inadequacies of transfer prices regarding existing transactions.

Open exchanges of ideas or opinions on transfer pricing matters in general, or a more definite communication on a specific topic, are uncommon in Germany or eventually done under certain circumstances only. From a German point of view, the negotiation of advance pricing agreements with the German tax authorities before audit, or a diligently prepared and detailed transfer pricing documentation, are the only reliable possibilities to reduce transfer pricing uncertainties in up-coming years. In contrast to this, some countries – such as the Netherlands – offer the opportunity to have a frequent communication with tax authorities identifying and discussing potential conflicts.

German tax authorities, nevertheless, have at least made an effort to reduce the time gaps between the end of the tax years to be audited and the start of the tax audit for the respective years (zeitnahe Betriebsprüfung), especially to minimise potential interest impacts resulting from possible adjustments of the taxable income and to reduce the other downsides like the loss of documents/information in case of organisational changes at the taxpayer.

Considering the above described tendencies, it might also be an opportunity to separate transfer pricing audits from the general tax audits as transfer pricing adjustments might result in material tax adjustments and double taxation (whereas its elimination may consume a lot of time and resources). As a result, the OECD handbook of transfer pricing risk assessment will help to find a more pragmatic approach to attain certainty whether the transfer pricing system of a taxpayer is in line with the arm's-length principle and whether the taxpayer has acted accordingly in its daily operations. Thus, the thoughts and ideas presented in the OECD handbook of transfer pricing risk assessment may contribute that the workload for the taxpayers and for the tax authorities can be reduced and may help the taxpayer to limit transfer pricing risks in tax audits as well as efforts to eliminate double taxation.


Susann van der Ham


Tel: +49 211 981-7451

Susann van der Ham is a transfer pricing partner at PwC Düsseldorf.

Susann has more than 10 years of experience in consulting multinationals in the field of transfer pricing. Her expertise encompasses transfer pricing structuring, value chain transformation, system implementation, documentation and tax audit defence. She advises large international clients (both German and foreign headquartered) and has led a variety of projects in the retails & consumer, automation and automotive industries, among others.

Susann frequently publishes articles in international and domestic tax and transfer pricing journals and she is a regular speaker on transfer pricing events. Susann holds a degree in economics and she is a German Certified Tax Advisor (Steuerberaterin).


Carsten Hüning


Carsten Hüning is a transfer pricing senior manager at PwC Essen.

After his studies in Economics at the University of Muenster, Carsten was a member of the PwC transfer pricing team in Dusseldorf in the years 2002 and 2003. From 2004 until 2013, he has worked for another Big-4 company focusing on transfer pricing. Since April 2013, Carsten has started to build up the transfer pricing team at PwC Essen.

Carsten supports his clients in various transfer pricing matters, especially in the field of tax audit defences and the preparation of local and global transfer pricing documentation. Moreover, Carsten regularly advises his clients in base shifting issues which can arise in the course of expansions of the business activities into foreign countries and in structuring the transfer pricing system considering legal and economic aspects. He consults middle-market clients and large multinationals from different industries such as automotive, retail, steel trading and industrial products.

Carsten is a frequent speaker on internal and external seminars and regularly publishes on transfer pricing topics. Beside the office in Essen, Carsten supports the local teams from the PwC offices in Bielefeld and Siegen in transfer pricing related work.

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