Post on 23-Jan-2016
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Transfer Pricing of a contract manufacturer
Markus Volkmann
Federal Central Tax Office Germany, Bonn
Federal Audit Department
OECD Transfer Pricing Case Studies WorkshopSan Jose, 31 March – 4 April 2014
• Germany, a federation with16 federal states
• Consent tax law,but federal states are responsiblefor their own tax matters
• 16 views of one problem may exist.
German Tax Administration
Federation16
Federal States
Federal Ministryof Finance (Berlin)
Federal Central Tax Office (Bonn)
11 RegionalRevenue Offices
640Local Tax Offices
16 Ministriesof the States
42,100 employees
144,700 employees
Federal Central Tax Office• International
responsibilities for:– tax refund– information exchange– Mutual Agreement
Procedures– Advance Pricing
Agreements
• Federal Audit Department– audit of LTP
Federal Audit Department
• 230 auditors– cooperation with the local tax offices– joint audit teams
• Audit of large taxpayers(turnover > 100 million Euro)
• Industry specialists
• Priority: transfer pricing
• Working on APA and MAP
Audit of TP in Germany
• 640 Local Tax Offices– 13.200 auditors (2012)– 19 bn Euro additional taxes (2012)
• Specialists for international tax issues– Seminars at the Federal Finance Academy– Basics / Transfer Pricing / Business
Restructuring / Permanent Establishments– International tax law / Use of databases
„Large Enterprise“• Classification every three years
last 01.01.2013
ExamplesParameter Large
Enterprise
Commercial TurnoverProfit
7,300 k€
280 k€
Production Turnover
Profit
4,300 k€
2250 k€
Other TurnoverProfit
5,600 k€
330 k€
„Large Enterprise“
Classification 2012
Enterprises 8,571,212
Large enterprises 191,335
Large enterprises (examined 2012) 41,365
Audit period (average) 3 years
Cycle of audit 4.6 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
Transfer Pricing Workshop
• Case: Contract manufacturer
• Parent company: P• Subsidiary: P1• Foundation: 2003• P1 produces for P• No important
tangibles or intangibles
P
P1
100%
Product 1
• Tanks for machines since 2003– main work in Germany
• Material– free of charge from P to P1
• P1– assembles the parts
• P– leak testing, completing, delivering to the
customer
Product 2
• Tubes for machines since 2005
• Material– supply of material to P1 not free of charge– production scrap remains
• P– procurement and logistic services
Transfer Pricing System
• Price per unit
• Cost plus method
• Expected production costs + 8% profit margin
• Material for product 2:– material costs + 2% overhead + profit margin
• No Price adjustments
Financial performance
k€ 2004 2005 2006 2007
Net Sales 1,115 1,616 1,862 3,769
Operating Profit
174 388 -582 -393
Net Profit 177 398 -884 -221
Problem / Question
• Permanent losses - arm‘s length?
• P anticipates corrections of the foreign TA.
• What changes in the transfer pricing system are necessary?