Stricter documentation requirements for transfer prices

Transfer prices, also known as transfer pricing, are an essential element of international tax planning and compliance for companies that conduct cross-border business. Transfer pricing refers to the prices charged between affiliated companies – for example, a German company headquarters and its foreign subsidiaries or branches – for goods, services, management services or rights (such as licences).

With the law implementing the so-called “DAC-7” directive, the German legislator has now tightened the obligation to submit transfer pricing documentation in terms of content and timing. What are the consequences?

Tightening due to “DAC-7” implementation

It can be assumed that transfer pricing documentation will not only be requested as part of the external audit, as has been the case to date. Instead, it must be expected that such a request can already be made as part of the assessment.

Shortening the deadline from 31.12.2024

As part of an external audit, the documentation must be submitted unsolicited within 30 days (instead of the previous 60 days) of notification of the audit order.

The tax authority can also request submission at any time. In this case, there is also only a deadline of 30 days after the request.

These changes will apply for the first time for tax periods beginning after 31 December 2024 and for taxes incurred before then if a tax audit is ordered for these after 31 December 2024.

Tip: As the effort required for proper documentation is very high, we recommend preparing the transfer pricing documentation at the same time as the tax return.

Increasing risk of sanctions

The tightening of the previous legal situation increases the risk of sanctions for companies. Failure to submit the documentation on time can be penalised with late payment penalties of up to one million euros (at least EUR 100/day per transaction) in accordance with Section 162 (4) of the German Fiscal Code (AO).

Which companies are obliged to provide transfer pricing documentation?

The obligation to prepare transfer pricing documentation depends on various factors, including the size of the company, the type and volume of cross-border transactions and the specific legal requirements of the country in which the company operates. In general, the following applies:

• Companies that are part of a multinational group and carry out cross-border transactions with affiliated companies are generally obliged to prepare transfer pricing documentation.
• Certain types of transactions, such as the transfer of intangible assets or significant financial transactions, can trigger a documentation obligation regardless of the size of the company.
• The thresholds above which companies are obliged to prepare and maintain transfer pricing documentation and the specific requirements may differ from country to country. It is therefore important to check the legal requirements in each country in which the company operates.
• The OECD Guidelines for Multinational Enterprises and Tax Administrations provide a framework that has been adopted by many countries. This includes the documentation requirements for transfer pricing, including the preparation of country-by-country reporting for large multinational groups.

What needs to be considered when documenting transfer prices?

Transfer prices are particularly relevant for multinational groups, as they have a direct influence on the distribution of profits between different countries and therefore on the tax burden of the group as a whole.

However, internal transactions must be carried out at prices as if they were taking place between independent third parties in order to ensure a fair and market-based valuation. This price determination must be documented by the taxable company and disclosed to the tax authorities

Companies must therefore pay careful attention to this,

• that their transfer pricing policy complies with local and international regulations and
• that the documentation is appropriate and recorded on an ongoing basis.

In view of the global tax reforms and the increased auditing activities of the tax authorities, you could otherwise face high additional tax claims!