Is your business spread out over multiple business entities in several countries, e.g. Germany and/or The Netherlands? Then there is a high likelihood of relationships between affiliated companies where business and financial transactions take place that fall within the scope of transfer pricing rules. At least two tax authorities are looking to tax the profits made. How much tax each state is allowed to tax depends on the key functions, assets used and the risks that are attributable to each company within the organization. If transfer pricing has not been a consideration within your business, then taxation will most likely take place to your disadvantage. The German tax authorities make transfer pricing one of their key items in their tax audits. The following discusses the theme of transfer pricing in relation to Germany.
You are required to conduct business with your affiliated companies in Germany as you would conduct business with any third party company. The international at arm’s length principle dictates that transactions between affiliated parties, should take place in the same fashion as transactions with independent, third party companies. This applies to all intercompany transactions between the entity in your state and the business entity in Germany; for products sold and services offered and for financial contracts such as loans and bank overdrafts. It is wise to test beforehand if the at arm’s length principle is met in relation to the business in Germany.
In order to determine what the at arm’s length price is for an intercompany transaction within a MNE group than includes Germany and the Netherlands, a FAR analysis has to take place. This is the method used to determine which functions, assets and risks can be attributed to the individual business entities within the group structure. One of our TP specialists, along with your financial manager will carry out the FAR analysis by determining what functions and assets lie within the group and what risks are incurred. The following main principle applies: the number of functions, assets and risks that can be attributed to an affiliated (group) entity in Germany determine how much profit (or loss) has to be attributed to Germany. The same applies for The Netherlands or any other country.
In addition to the FAR analysis, our TP specialists always carry out a value chain analysis (VCA). In this process primary and support activities that add value in your value chain, are identified. Is most profit attributed to a business in a country where almost no value is being added? Then it most likely that is related to your intercompany transactions and transfer pricing.
On the basis of the FAR analysis and value chain analysis, we can make a sound judgement of the real function and added value of a certain group entity in the Netherlands or Germany. When an intercompany transaction with this group entity has to be reviewed, it has to be determined which method of transfer pricing is the most fitting to the situation. Some methods are better fit for a sales business , others for manufacturing companies.
In the Netherlands and Germany there are differences in legal requirements regarding transfer pricing documentation for businesses that operate internationally and do business with affiliated companies. Regardless of the size of the company, the Dutch tax authorities “Belastingdienst” can always demand substantiation of transfer prices. For company groups that pass a threshold amount of group turnover, additional documentation requirements apply, see below. When no proper transfer pricing documentation can be provided to the authorities about transfer pricing policy, no defensible position can be argued. In such a case you are at the complete mercy of the German or Dutch tax authorities’ opinion. Therefore, we advise you to document the used transfer pricing methods, along with the FAR analysis and VCA in a designated Transfer Pricing Manual.
The German and Dutch tax authorities expect your business to present a Master File for the entire group and a Local File per group entity with group turnover that concerns Germany. In situations where the group turnover surpasses €750,000,000 per annum, a country-by-country report is also mandatory.
Our TP specialists will gladly advise you on these matters. Is your business internationally active in the Netherlands and Germany, or are you employed as financial manager or adviser for such a company, then please contact us.