A, as in Arm's Length Principle
The Arm's Length Principle (ALP for short) is the English translation for ,arm's length principleThis rule, which is laid down, among other things, in Section 1 Paragraph 1 of the German Foreign Tax Act (AStG), requires that related parties (companies within a group) behave like independent third parties in their intra-group business relationships. The business relationship must therefore be conducted under the same or comparable conditions as with or between independent third parties.
The rationale behind this standard is that individual companies within a group are treated as separate entities for tax purposes in their respective countries. This necessitates a proper allocation of profits in line with local activities. Consequently, the companies must determine their income separately and set arm's-length prices for their supply and service relationships within the group.
But why is this the case? Business relationships between related companies are not necessarily subject to a conflict of economic interests that, in a free market and its inherent principle of competition, determines the level of market prices. This leaves room for profit shifting, which runs counter to the fiscal interests of states. To counteract this profit shifting through taxation, the arm's length principle was defined internationally, which is intended to ensure appropriate transfer prices.
B, like Base Erosion and Profit Shifting (BEPS)
The joint OECD and G20 project against Base Erosion and Profit Shifting (German: Profit reduction and profit shifting) and its 2015 findings represent a milestone in international tax policy. Previously, there had never been such a close understanding on international taxation standards.
The so-called BEPS project was intended to reduce tax inconsistencies that had arisen, among other things, due to a lack of coordination and tax competition between individual states, and offered the possibility of reducing the tax burden to a minimum.
The BEPS project produced an action plan with 15 different recommendations – the so-called BEPS Action Points. These address the various fiscal challenges in dealing with multinational corporate groups and propose recommendations for managing them. Particularly noteworthy in the context of transfer pricing are Action Points 8 to 10 and 13, which address the updating of the Transfer Pricing Guidelines and transfer pricing documentation, respectively.
The BEPS project aims to optimize the international harmonization of taxes, tax standards, and tax competition. It is now applied in over 145 countries and thus represents a significant component in the regulation of international tax matters involving affiliated companies.
C, as in Compliance
Compliance in connection with transfer pricing refers to the Compliance with all relevant legal and regulatory requirements in the setting of transfer prices by companies, particularly in multinational groups. Compliance encompasses the following aspects:
Arm's length principle: Companies must be able to demonstrate that their transfer prices comply with the arm's length principle. This principle states that prices for cross-border transactions between related companies should correspond to the prices that would have been agreed upon between independent, unrelated companies.
Documentationspflichten: Many countries require companies to prepare comprehensive documentation of their transfer prices. This so-called transfer pricing documentation is intended to provide tax authorities with the necessary information to assess the appropriateness of the transfer prices.
Consistency and transparency: Consistency and transparency are crucial. Companies should ensure that their transfer prices are consistent. Furthermore, transparent and clear guidelines for setting transfer prices should be established.
Compliance with local regulations: Since transfer prices involve cross-border activities, companies must be fully aware of and comply with the transfer pricing regulations in the countries where they operate.
Risk management: Companies should implement risk management processes to ensure that transfer pricing strategies comply with tax requirements and thus protect the company from potential tax risks.
D, as in double taxation agreement
Double taxation agreements (DTAs) are international treaties and a relevant component of international tax law. Double taxation agreements (DTAs) define the Taxation rights between states and should both be double taxation as well as one double non-taxation prevent.
To this end, the states participating in the agreement negotiate which state will be considered the primary country for dual-resident companies. State of residence This should apply and thus stipulates in which state the taxes are to be paid.
Germany currently has over 90 double taxation agreements (DTAs) with other countries, and further agreements are being negotiated successively.
As a result of the Action Point 15 of the BEPS project Furthermore, the Multilateral Instrument (MLI) established and now signed by 100 states and territories.
The MLI is intended to Adaptation of existing double taxation agreements with regard to the BEPS action plan, it should be implemented between as many states as possible, which is made possible by the possibility of reservations by states. increased testing effort In international matters, this means that in addition to the individual tax regulations of the respective states and the consideration of any double taxation agreements, it is also necessary to compare the application of the MLI by the states.
Double taxation agreements (DTAs), as international treaties, regulate the taxing rights between states, aiming to prevent double taxation or double non-taxation. A relevant development is the Multilateral Convention on Income (MLI), which Germany has also signed and which may lead to changes in existing DTAs.
E, as in unilateral transfer pricing methods
Unilateral transfer pricing methods refer to those methods that only one of the participating transaction parties These include, among others, the cost-plus method, the resale price method, and the transaction-based net margin method (TNMM).
It should be noted that the Selection of the transaction party, whose one-sided consideration is not carried out at one's own discretion – for example, the TNMM stipulates that the one-sided consideration is always on the side of the transaction party with the less complex Functional and risk profile must be done.
Furthermore, unilateral transfer pricing methods come with various advantages and disadvantages, with their lower reliability in highly integrated business transactions being a crucial point to mention. We will examine the individual methods and their respective advantages and disadvantages in more detail in future articles.
Unilateral transfer pricing methods consider only one of the transaction parties involved. Similarly, bilateral transfer pricing methods also exist, which we will discuss in a later article.
F, as in functional analysis
Compensation in transactions between unrelated third parties is generally based on the respective Value creation contribution of the companies involved. Regarding intra-group business transactions. abgrenzen and the comparability To determine the value of transactions between affiliated companies and unrelated third parties, an analysis of the respective contribution – the so-called... is required. Functional analysis.
Functional analysis is based on business transactions. The aim is to determine, for the companies involved in the business transaction,
- which economically significant functions and activities were performed,
- which Risks borne, and
- which (intangible) assets used
Behind these three broad terms lies a regular... A multitude of different factors, the consideration of which is necessary when conducting a functional analysis. We will examine these in more detail in future articles.
The focus of functional analysis is on value creation and the contributions of the transaction parties to it. It is essential to consider which company performs which relevant activity, involving which assets, and what risks it bears in the process.
G, as in GAufzV
The regulation concerning the content and scope of records within the meaning of Section 90 Paragraph 3 of the German Fiscal Code (Profit Allocation Records Regulation, hereinafter referred to as the Profit Allocation Records Regulation) GautzV) is the legal source in German tax law when it comes to the Specification of the cooperation obligations of German taxpayers in the context of transfer pricing documentation. The German Transfer Pricing Documentation Ordinance (GAufzV) is extremely important for the world of transfer pricing, as it the “how?” of transfer pricing documentation standardized.
But where do the contents of the GAufzV actually come from? They are based on considerations of the OECD's BEPS working group. The basis is the three-tier approach to transfer pricing documentation -consisting of the Master File, Local File, and Country-by-Country Report. This three-tiered approach was proposed under Action 13 of the BEPS project and, after its finalization, incorporated as a new Chapter V into the 2017 OECD Transfer Pricing Guidelines. Shortly thereafter, these substantive details were adopted into the revised 2017 German Transfer Pricing Documentation Ordinance (GAufzV), thus becoming binding for German taxpayers.
The GAufzV contains relevant information on the Mandatory contents of transfer pricing documentation: So codified § 4 GAufzV the requirements of the German legislator for the country-specific Local File, whereas the Annex to § 5 GAufzV the essential components of the Master Files arranges.
The GAufzV (Regulation on the Receipt of Taxable Income) clarifies the taxpayer's obligations to cooperate as set out in Section 90 Paragraph 3 of the German Fiscal Code. It transposes the three-tiered documentation approach proposed by the OECD into national tax law, thus establishing its binding effect for the taxpayer.
H, as in hierarchy of methods
According to German transfer pricing regulations and the OECD Transfer Pricing Guidelines, the transfer pricing method to be applied is the one that best suited for the underlying business relationship In this context, the taxpayer has a number of transfer pricing methods at their disposal, which can be divided into the following groups: Standard methods and Gewinnmethoden have them divided up.
A Method hierarchy is not legally required in Germany.However, in cases where both a standard method and a profit-based method can be applied with equal reliability, the standard method should be given preference. Furthermore, the 2023 Administrative Principles on Transfer Pricing express a preference for the comparable uncontrolled price method over other transfer pricing methods, provided that comparability allows for appropriate application.
Within the Selection of a suitable transfer pricing method For example, the following considerations should be taken into account:
- What Strengths or weaknesses What are the respective transfer pricing methods?
- Does the present Functional and risk profile Have the transaction parties already specified individual transfer pricing methods?
- What requirements are placed on the comparability Are intra-group transactions treated as external transactions?
Although there is no fundamental hierarchy of methods, the standard method should always be used when both standard and winning methods are equally possible.
I, as intangible values
What exactly is IP?
The OECD Transfer Pricing Guidelines, which aim to establish an international consensus on transfer pricing issues, characterize intangible assets based on three criteria:
- you are neither of a physical or material nature, nor of a financial nature
- They represent a good that a to convey an actual or legal position about it or to be the subject of a business transaction may be;
- your use or transfer within the framework of a comparable transaction Transactions between unrelated third parties would be compensated.
But why is IP important in the context of transfer pricing? relevant?
The identification of intangible assets is highly relevant in transfer pricing matters, as their existence is always a prerequisite for the Choice of transfer pricing method to take into account and means, for example, the categorical Exclusion of the transaction-based net margin method
What does this mean for determining arm's length transfer prices?
As with other transactions, transactions using intangible assets also require a Functional analysis for determining arm's length transfer prices. When intangible assets are involved in a transaction under review, the Value creation contributions regularly examined using the so-called DEMPE functions. Consequently, it is crucial which transaction party... significant contributions during development (Ddevelopment), the improvement (Eenhancement), the preservation (Mmaintenance), the protection (Pprotection) as well as the utilization (Eexploitation).
J, as in Jurisdictions
Arm's length transfer prices are always relevant when Supply and service relationships between affiliated companies across national borders exist. These business relationships are established in both countries where the respective companies of the group operate. tax-relevant incidents The cross-border nature of these transactions therefore means that at least three parties with their own incentive function gives: the taxpayers themselves, the Financial administration in country A and the Financial administration in Country B
Countries A and B each constitute a separate sovereign territory with its own tax law. We would like to address this fact in our discussion today. Transfer pricing ABC for J as in Jurisdictions, which in German means something like jurisdiction(area) means to address.
For a practical understanding of transfer pricing, it is important to note that the tax authorities of country A and country B generally aim to maximize tax revenues within their jurisdiction – taxpayers regularly experience this during tax audits.
The fact that countries A and B may have different transfer pricing regulations makes tax audits more complex for taxpayers in practice. Consequently, this means that they must be aware of and comply with the different requirements of countries A and B.
Even though the OECD's efforts aim to create uniform transfer pricing regulations with the broadest possible scope, some challenges still remain. Differences in the requirements of different countries, ranging from the selection of the transfer pricing method to the transfer pricing documentation.
K, as in corporate services
Intra-group services generally refer to those Services that exist between affiliated companies – common examples are the Bundling of IT services in a shared service center or the Maintenance of a central tax departmentThis causes Cost, which usually need to be settled between the affiliated companies.
During tax audits, questions are regularly asked about...
- whether the audited taxpayer has a appropriate benefit from these costs
- and whether these vproportionally
Companies are often unaware that this could become a problem during an external audit – after all, they have factored in a cost markup and thus seemingly implemented the cost allocation appropriately. While the cost markup is an important aspect, it also leads to... primarily the deductibility of costs in principle as well as those appropriate cost basis to considerable Income correction plans of the tax authorities.
The proper allocation of costs from a transfer pricing perspective and the corresponding documentation (Proof of appropriateness) usually require several steps that precede the selection of an arm's length markupUnfortunately, these steps often receive less attention from companies, which can lead to high additional payments during external audits.
L, as in Local File
Anyone who has dealt with taxes within multinational corporate groups has likely already encountered the concept of transfer pricing documentation. These records are intended to demonstrate the serious effort made to ensure... Structuring of business relationships in accordance with arm's length principles to prove the existence of a taxpayer and to provide the tax authorities with the relevant information they need to examine cross-border business relationships with affiliated companies.
The obligations of German taxpayers to cooperate in this regard are codified, among other things, in the Profit Allocation Recording Ordinance (GAufzV) and the Fiscal Code (AO). If you are interested in what these regulations entail and what they mean for German taxpayers, you can read the linked articles.
Of high practical importance is the fact that German transfer pricing documentation largely adheres to OECD guidelines. These stipulate a three-stage documentation approach fixed, which includes, among other things, the Local File, which we would like to examine more closely in our post today for L as in Local File.
The Local File is intended to provide information on the extent to which a local taxpayer is subject to the arm's length principle in its cross-border business transactions with affiliated companies has taken into account and provides evidence about the suitability of the chosen Transfer pricing methods and the appropriateness The transfer prices are included. As a rule (and this also applies to Germany), the records (the Local File) consist of a factual report and an appropriateness report.
It should be noted that the scope and filing requirements for the Local File often diverge despite OECD harmonization efforts. This means that taxpayers not only need the capacity to prepare the Local File, but also a thorough understanding of the relevant regulations – requiring significant expertise in transfer pricing.
M, as in obligations to cooperate
A key challenge for taxpayers in transfer pricing matters is their duty to cooperate. Failure to do so can result in far-reaching sanctions from the tax authorities, ranging from fines to the estimation of tax bases.
The main sources of the cooperation obligations of German taxpayers in the context of transfer pricing are the German Fiscal Code (AO) and the German Profit Allocation Recording Ordinance (GAufzV).
Basically, the AO regulates the procedural level The world of transfer pricing: It stipulates that the taxpayer must Participation in the investigation of the facts is obligated – this is all the more relevant due to the special and increased cooperation obligations in international matters. It codifies that the preparation of a Transfer pricing documentation is mandatory (record-keeping obligation pursuant to Section 90 (3) AO). Furthermore, it defines the Legal consequences, which can occur if the duty to cooperate is not fulfilled.
The rather general requirements of the AO are specified by the GAfzVThis is how the GauzV regulates it. Type, content and scope of transfer pricing-relevant records The German Transfer Pricing Documentation Ordinance (GAufzV) is the legal source for transfer pricing documentation. Since July 2017, it has incorporated the OECD's proposed three-tiered approach to transfer pricing documentation, thus transposing non-binding international principles into binding national law.
In summary, taxpayers should be aware of their obligations to cooperate and fulfill them, given the potential sanctions for non-compliance. If you are interested, please feel free to review our previous articles, which provide a more detailed look at the individual legal sources and current developments.
N, as in grant of use
Example 1: Own handler
Let's imagine a group company abroad that acts as a proprietary trader of goods in one's own name and at own expense distributes and bears the associated market risks. Provided that the company receives this from the strategy leader or brand owner. Right to use of the brand was handed over and through its utilization a economic advantage (Profit) discontinues this transfer of use subject to remuneration. An unrelated third party (a prudent and conscientious business manager) would, in this case, presumably also be willing to pay a fee for the use.
Example 2: Low-risk sales unit
In this example, imagine a group company that markets the products of the strategic leader or brand owner in the local market only as a so-called sub-brand. Routine companies with limited functional and risk profiles distributes (for example, commission agent or sales representative companies). In such a case, no independent use of the IP through the sales support unit. These companies are generally compensated for their sales (service) services and, lacking their own residual claim from sales proceeds, also pay out no separate compensation for the IP, which is related to the products sold.
As you can see, in both cases the products being sold are from the group's own brand. In one case, intellectual property was licensed for use, in the other it was not. When setting transfer prices, the individual circumstances must always be taken into account. This makes the topic interesting, but also complex.
O, like OECD
The OECD – short for Organisation for Economic Co-operation and Development – is an international institution that works to improve policies and lives. The OECD's goal is policies that promote prosperity, equality, opportunity, and well-being for all.
The OECD works with governments, policymakers, and citizens to develop evidence-based international standards and find solutions to a range of social, economic, and environmental challenges. From improving economic performance and creating jobs to promoting sound education and combating international tax evasion, the OECD provides a unique forum for sharing experiences, disseminating best practices, and advising on policymaking and the setting of international standards.
The OECD, founded in 1948 and thus almost 80 years old, now has 38 member states. These are spread across the world's continents and include not only European countries but also those from North, Central, and South America and Asia, underscoring its international character. Our featured image graphically represents the OECD members.
Please note that we only refer to the general member states of the OECD and do not show which countries follow the OECD Transfer Pricing Guidelines – fortunately, there are significantly more!
P, as in price comparison method
The price comparison method – also known as the Comparable Uncontrolled Price Method or "CUP" for short – involves Prices as a benchmark for comparison used to examine the arm's length nature of transactions between related companies.
It can be between the internal and the external price comparison A distinction can be made between:
- At the internal Price comparison involves comparing prices that between one of the linked transaction parties and an unrelated third party agreed for a comparable service or product;
- In contrast, when external Price comparison: those prices were compared that between independent, unrelated third parties agreed upon for a comparable service or product.
The price comparison method is generally considered the best. most direct and reliable transfer pricing method, if the transactions are identical or only minor and quantifiable differences exist. Accordingly, the 2024 Transfer Pricing Principles formulate a Preference for the price comparison method compared to other transfer pricing methods, provided that comparability allows for appropriate application.
The applicability of the price comparison method therefore depends heavily on the comparability the service or product, which in practice is regularly assessed according to criteria such as quality, market conditions, contractual terms, geographical features and the risk position of the company or product used for price comparison.
Q, as in Questionnaire
In daily practice, the world of transfer pricing is characterized by a multitude of uniform principles and procedures. However, although there are numerous templates and audit categories, every transfer pricing-relevant business transaction is an individual matter requiring case-by-case analysis.
Therefore, the following is necessary for determining and documenting transfer prices: Creating a comprehensive understanding unavoidable due to the economic circumstances of the individual business transaction.
But how can transfer pricing-relevant issues be reliably analyzed, even in the case of complex business transactions? We would like to address this in today's article for... Q is for Questionnaire explain.
To ensure a comprehensive understanding, regular monitoring is necessary. targeted survey a wealth of relevant information. A questionnaire – that is, an information query list – can be used to support this process.
For the purpose of gathering the facts in the context of transfer pricing documentation projects, the so-called “GautzV checklist"Proven. This checklist is a catalog of questions along the lines of the mandatory content of a Transfer pricing documentation, as described in the Profit Allocation Recording Ordinance (GautzV) are defined for German taxpayers. The OECD Transfer Pricing Guidelines also define such lists in Annexes I and II to Chapter V.
The GAufzV checklist is therefore a suitable instrument for ensuring a structured assessment of the facts while simultaneously taking into account the formal requirements for transfer pricing documentation. Such a questionnaire can also be effectively expanded and used as a status tracker for transfer pricing documentation projects.
R, as in routine services
In the world of transfer pricing, there are hardly any rules of thumb that can definitively prove the arm's length nature of business transactions. One of the few exceptions is the pricing of routine services with low added value (often simply...). Routine services called).
What are routine services with low added value?
They are characterized by the fact that
- they have a supportive character,
- they do not constitute the main activity of the group in its external dealings with third parties,
- for the provision of which neither unique nor valuable intangible assets are used or created,
- it does not involve the assumption or control of significant risks for the service provider.
In accordance with the Administrative Principles on Transfer Pricing 2024 (‘VWG VP 2024’), intra-group services are generally to be remunerated using the cost-plus method. when The application of the comparable uncontrolled price method is not the most suitable method. (Note: a regular point of contention in tax audits)
To minimize the compliance burden for demonstrating the arm's length nature of transfer prices for routine, low-value-added services and to promote a uniform assessment by different tax authorities, the OECD Transfer Pricing Guidelines (OECD-VPL) introduced a simplified approach for demonstrating the appropriateness of low value-added services. According to this approach, a profit markup of 5% (even without submitting an individual appropriateness certificate) is to be assumed to be at arm's length, provided that it is applied within the group. consistent is applied and the services are in line with the defined requirements for low value-added services. The German VWG VP 2024 follows this approach (Chapter G.2.2).
Practical insight
A common misconception in tax audit practice:
Since some activities are explicitly excluded from being characterized as low value-added services due to their economic relevance – e.g., research and development and marketing – the opinion has formed in practice that these services necessarily require a higher profit margin (than 5%).
Technically, however, this is incorrect, as the OECD VPL's simplified approach merely allows for the invoicing of low value-added services with a consistent 5% profit markup, thus eliminating the need for individual proof of appropriateness. This does not affect the fact that 'higher-value' activities are also subject to this requirement.
They can be compensated with a profit margin of 5%, as long as a individual proof of appropriateness is presented.
S, as in Shared Service Center
As part of our collaboration with a wide range of companies of various sizes and industries, we regularly observe that small and medium-sized enterprises (SMEs) are increasingly also affected. Company already about Shared Service Center in the surrounding European countries.
Shared Service Centers (‘SSC’) are regularly used to refer to independent units of a multinational corporate group, which relate to the group-wide Provision of services specialize in other group companies and perceive this as their core business.
These are regularly the following: Routineaufgaben such as accounting or IT support. However, it is also the Centralization of functions with higher added value, such as (contract) research and development, is conceivable.
SSCs have a number of advantages: Firstly, the centralization of tasks can lead to economies of scale lead and a Cost reduction This can have various consequences. For example, implementing SSCs in countries with lower wage structures can lead to material savings, or the sourcing problem can be better addressed by recruiting skilled workers from abroad.
Shared service centers should not be understood merely as units capable of performing only simple, routine, low-value-added functions. They often also represent so-called... Centers of Excellence These are facilities where know-how is pooled and used to provide higher-value services across the group.
However, the introduction of SSC is not entirely without risk. Potential risks include fundamental business hazards such as inadequate controls or quality assurance issues.
In order to avoid jeopardizing the advantages of SSCs through adverse tax effects, the arm's length principle, i.e., the arm's length structuring of transfer prices, must always be observed in such situations.
The provision of intra-group services (e.g., through SSCs) is regularly scrutinized during tax audits. Subject of dispute, so that their correct billing is of high relevance for taxpayers.
T, as in Transactional Net Margin Method
The TNMM This is a profit-related transfer pricing method that examines the net profit margin a taxpayer achieves with one (or more similar) intra-group transaction(s) compared to a suitable benchmark (e.g., revenue or costs). It compares the net profits from intra-group transactions with the net profits independent market participants would achieve on comparable transactions. For this purpose, the net margin is measured using a suitable profit level indicator and compared with "arm's length" net margins of unrelated market participants.
The TNMM, whose main application area is transactions with at least one less complex transaction party (e.g., a so-called routine company), offers the advantage that less product comparability is required than with the so-called standard methods.
The TNMM is a one-sided VP method, in which only one of the two transaction parties is considered (the transaction party with the less complex functional and risk profile). This should allow for the identification of more reliable comparative values and/or reduce the need for any adjustment calculations.
However, there are also special aspects to consider when applying TNMM:
- The application of TNMM is, for example, in transactions involving intangible values Not regularly permitted.
- Despite (and also because of) lower requirements for product comparability, the importance of functional comparability is growing. Accordingly, a sound functional and risk analysis is still essential.
U, for UN Manual
The United Nations Practical Manual on Transfer Pricing for Developing Countries ('UN Manual') describes an approach that UnitedNations (UN), which is intended to support developing countries and their financial administrations in the arm's length principle of intra-group transactions of multinational corporate groups.
What does the UN have to do with tax transfer pricing?
The UN is an international organization with 193 member states. It not only addresses well-known issues such as world peace, international law, and fundamental rights, but also promotes international cooperation in economic matters. Similar to the OECD The UN works to establish a consistent practice for taxation, avoid double taxation, and settle disputes between the tax administrations of different states.
In this context, transfer pricing regularly poses a challenge for developing countries, as their financial administrations sometimes lack the technical and administrative know-how and resources to apply and enforce the arm's length principle in accordance with international standards.
To this end, the UN proposes various approaches (such as the UN Manual) which are intended to support developing countries in particular in dealing with transfer pricing issues.
At the same time, they also represent an interesting source for German taxpayers with ties to developing countries.
What are the key contents of the UN Manual?
The third edition of the UN Manual, published in April 2021, simplifies the existing approaches to considering transfer pricing-relevant issues by providing more specific details.
The UN Manual focuses in particular on transactions that are relevant to developing countries and places special emphasis on the comparability of transfer prices, the different methods, as well as functions and risks.
The UN Manual is therefore worth reading, especially for German companies that are also active in developing countries.
V, as in Administrative Principles
Administrative principles supplement the formal regulatory scope of tax law.
- Letter from the Federal Ministry of Finance to the highest financial authorities of the federal states
- Specification of requirements from laws and regulations
- Binding for the tax authorities, but not for the taxpayer.
- Guidance on the procedures of the tax authorities during external audits
- Further implementation of the OECD Transfer Pricing Guidelines in the German context
Administrative principles have shaped the approach of the tax authorities in the transfer pricing context for over 40 years.
- 1983 saw the first comprehensive specification of the procedure for auditing transfer prices through administrative principles.
- Continuous revision and supplementation, which repeals and replaces previous BMF (administrative principles) circulars.
- Material modernization of the administrative principles (VWG) in the area of transfer prices (VP) with the VWG VP of 14 July 2021
The VWG VP 2024 of 12 December 2024 are the latest version of the administrative principles in the area of transfer pricing.
W, as in resale method
To determine arm's length Transfer pricing There are a number of different methods, each more or less suitable depending on the specific circumstances of the business transaction. Having already discussed various methods in previous articles... Transfer pricing methods Having explained the previous point, today we will discuss the resale price method.
The resale price method (RPM) is one of the so-called transaction-based methods. Standard methods, which rely on the prices or gross margins that unrelated third parties have agreed or would have agreed upon to provide evidence of appropriateness.
The basis of the resale price method is therefore a price at which a product is sold by a related party. Company The acquired product is resold to an independent company. The price to be applied to the transaction between related companies is therefore calculated based on the resale price.
An appropriate gross margin is deducted from this resale price. This appropriate gross margin must enable the reseller to cover its sales and other operating costs and, in addition, to generate a reasonable profit. This profit should – in accordance with other transfer pricing methods – correspond to the functions performed, the risks assumed, and the assets employed.
This retrospectively determined residual amount, which remains after deducting an arm's length gross margin, can be regarded as the arm's length price for the original service between the related companies.
The resale price method is regularly used in business transactions with distribution companies that add little value and do not change the products.
Adjustment calculations can increase the comparability of the business transactions used.
X, as in External Databases
How do I actually demonstrate that my transfer prices are at arm's length?
It is no secret that the remuneration of intra-group supply and service relationships must be based on arm's length transfer prices – but the process of finding them is not known to everyone.
- Transfer prices are often based on database studies.
- The transactional net margin method (TNMM) is based, for example, on the net profit margin of unrelated third parties in comparable transactions.
- This approach requires reliable comparative data.
- This comparative data can regularly be found in external databases that contain comprehensive company data and financial figures.
- There are a number of databases with different focuses.
- The Orbis database (formerly Bureau van Dijk) contains data from companies in different countries and industries.
- For database studies in the USA and Asia, there are also dedicated databases such as Compustat.
- RoyaltyRange and RoyaltyStat are regularly used for intangible assets and brands.
- Several principles must be observed when using databases.
- The inclusion and exclusion of potentially comparable companies must be validly justified.
- The comparability of the included companies is essential for the reliability of the study.
- Consequently, a thorough qualitative screening of the identified companies must be carried out.
- A range is formed based on the profit margins of comparable companies.
- The interquartile range (IQR) is typically used as a tool.
- If the chosen transfer prices fall within the IQR, their arm's length nature is generally assumed (spoiler alert: no guarantee).
- If the chosen transfer prices are outside the IQR, this indicates potentially incorrectly set transfer prices.
- Database studies are regularly used as a target in tax audits.
- When preparing the study, it is essential to ensure its traceability by the tax authorities.
- In particular, the inclusion and exclusion of individual companies, as well as their independence, often become points of contention.
- Each step of the database study must be meticulously documented.
