Administrative principles on transfer pricing 2023
The Federal Ministry of Finance amended the administrative principles on transfer pricing on 6 June 2023. The new version focuses on the rules governing the relocation of functions and cross-border group financing.
With the "Administrative Principles on Transfer Pricing" (VWG VP), the Federal Ministry of Finance (BMF) has begun to summarise and explain the most important BMF rulings in this area and to refer to existing rulings. The BMF has revised this central reference work in response to the new version of the Business Functions Relocation Ordinance (FVerlV) and the Federal Fiscal Court's case law on cross-border group financing. In addition, the "Administrative Principles on Transfer Pricing 2023" (VWG VP 2023) of 6 June 2023 makes only selective adjustments and includes the OECD Transfer Pricing Guidelines 2022 as an annex. The reference to the OECD represents a welcome international orientation and alignment with these principles. Unfortunately, however, these are to be used only as a "supplement" to the national principles. According to the Federal Ministry of Finance, the VWG VP 2023 are more detailed guidelines which, with the exception of the explanations on the transfer of functions, are binding for the administration - not for taxpayers - for all open cases and therefore also retroactively.
- Changes in the context of relocation of functions
With the Deduction Tax Relief Modernisation Act (AbzStEntModG), the legislator has enshrined the previous provisions on the transfer of functions in the new Section 1 (3b) of the German Foreign Tax Act (Außensteuergesetz - AStG) with effect from 1 January 2022 and has defined the transfer package in law for the first time. A significant tightening of the law is the expansion of the requirements for a offence. A transfer of functions can now already be deemed to have taken place if "a function, including the opportunities and risks associated with it and the assets transferred or made available with it or [previously: and] other benefits are transferred [...]". In addition, the taxpayer has the option to refrain from an overall assessment of the transfer package only if it can credibly demonstrate that neither significant intangible assets nor other benefits were the subject of the transfer of functions (e.g. routine functions). The two other previously available escape clauses are no longer applicable. In response to the changed legal situation, the legislator has revised the FVerlV with effect from 1 January 2022. This included a number of tightening measures that go beyond those required by the change in the law:
- When determining the area of agreement , the tax effects resulting from the transfer of functions itself are taken into account.
- In determining the capitalisation rate for both the acquiring and the transferring company, the risk premium must be determined on an arm's length basis. This means that the taxpayer must determine market interest rates and can no longer simply rely on internal company data.
- Instead of the previously required prima facie evidence, § 5 FVerlV (capitalisation period) and § 7 sentence 2 FVerlV (claims for damages, compensation and equalisation) introduce a burden of proof. This introduces a burden of proof that is not in line with general tax principles. Under Section 1 (3b) FTC, for example, it is sufficient to provide prima facie evidence that the remaining escape rule has been complied with.
- 4 (2) FVerlV, according to which a transfer of use is to be assumed at the taxpayer's request if there is doubt as to whether a sale or a transfer of use is to be assumed with regard to the transfer package or individual parts, is deleted without replacement.
As a result of these changes, the BMF has adapted its administrative principles for the transfer of functions and included them in the VWG VP 2023.
As part of the revision, the BMF has also removed the de minimis limit for the duplication of functions. Previously, if the reduction in turnover from the function at the transferring company was less than EUR 1 million, this was not considered to be a transfer of functions, but merely a duplication of functions.
DEMPE concept in the context of relocation of functions
The DEMPE concept (Development, Enhancement, Maintenance, Protection and Exploitation) is also explicitly included. In the examples of functions listed, the BMF also mentions the performance of risk control and DEMPE functions. This is likely to significantly increase the number of cases in which the tax authorities assume a transfer of functions, in line with the fact that, according to VWG VP 2023, the secondment of personnel within a group as such does not generally constitute a transfer of functions, but one does exist, for example, "if the seconded personnel take their previous area of responsibility from the sending company with them and perform the same activity in the receiving company".
Probability of termination
In addition, the administration comments on the consideration of termination probabilities in the case of functional mergers. When merging routine functions that remain in Germany, the agreed termination clauses must be reviewed in accordance with the principles of the OECD Transfer Pricing Guidelines 2022. Practical experience from external tax audits shows that this issue is becoming increasingly important.
Price adjustment clause
With the AbzStEntModG, the price adjustment clause was adapted in line with the BEPS initiative and enshrined in law in Section 1a FTC. According to Section 1a AStG, in cases of the transfer of a significant intangible asset, the appropriate adjustment amount is taxed in the eighth year after the transaction is concluded if the actual profit development deviates significantly from the profit expectation within seven years after the transaction being concluded and no price adjustment clause was agreed that would have been agreed between independent third parties. A significant deviation is deemed to exist if the arm's length price on which the actual profit development is based deviates by more than 20 per cent from this transfer price.
- Changes in the context of intercompany financing activities
Intercompany loans
With regard to financing relationships, in the new administrative principles, the BMF takes up the case law of the BFH on the determination of arm's length loan interest rates for intercompany loans (judgements of 18 May 2021, I R 4/17 and of 13 January 2022, I R 15/21).
In the first ruling, the BFH stated that the interest rate is based on the economic circumstances of the borrower and not of the lender and that the price comparison method takes precedence over the cost-plus method. The price comparison method takes precedence even if it is applied only after an adjustment calculation. A restriction to a risk-free interest rate should also not be applied.
In the second BFH ruling, the judges clarified that when granting unsecured loans, the agreement of unsecured loans can be at arm's length, taking into account risk compensation, if a corresponding market for unsecured loans can be identified. The VWG VP 2023 now explicitly states that a lack of collateral can be at arm's length. According to the Federal Ministry of Finance, the circumstances of the individual case and the alternative courses of action must be taken into account.
Cash-Pools
In the context of cash pools, the Federal Ministry of Finance explicitly refers to the OECD Transfer Pricing Guidelines 2022. There is fundamental agreement on cash pools, in particular on the view that a cash pool leader should generally only earn a routine cost mark-up. In contrast to the OECD, however, the BMF leaves no room for manoeuvre for a cash pool leader who earns debit and credit surcharges.
Brief summary
- Als Reaktion auf die Neufassung der Funktionsverlagerungsverordnung (FVerlV) und die Rechtsprechung des BFH zur grenzüberschreitenden Konzernfinanzierung hat das BMF die “Verwaltungsgrundsätze Verrechnungspreise” (VWG VP) überarbeitet.
- According to the Federal Ministry of Finance, the VWG VP 2023 are binding specifications for the administration, not for taxpayers. With the exception of the statements on the relocation of functions, they apply retrospectively to open cases.
- Taxpayers should familiarise themselves with the changes promptly and examine the possible effects in detail.
