Transfer Pricing: 5 Tips

David McDonald from PwC suggests in TMI (Treasury Management International) 5 things that help you stay active and up to date on transfer pricing:

1. Statement: Group Tax is responsible for transfer pricing. Treasury sets and applies the policies.
   Risk: Without clear communication between the treasury and tax departments, there is a risk of penalties.
2. Statement: We have a great policy established and 2017 by a specialist and run it this way.
   Risk: In 2020, the OECD published detailed guidelines focused on IC-loans, cash pool, guarantees, hedging, and captive insurance. We stayed tuned and made the necessary updates.
3. Statement: We have benchmarks; we use fixed rates from 2020.
   Risk: Prices have changed significantly in the last 12 months. The use of outdated benchmarks is dangerous.
4. Statement: The excellent bank relationship ensures indicative quotes for IC-transactions.
   Risk: OECD guidance state clearly that bank quotes are not an acceptable form because tax authority can/will ignore them. Use a transfer pricing benchmark that can be defended.
5. Statement: Performing detailed analyses on every loan and related party.
   Risk: IC-Loan amount/size matters for tax at risk. A 5m IC-loan is less at risk than a 50m IC-loan. Use a standard policy that applies to 80-90% of intra-group loans and only evaluate the largest transactions.

Details in the PwC report on TMI (Login required, report available at Tomato)

Transfer Pricing: New German Guidelines

Gerhard Foth and Andreas Wiesner of KPMG explain in their blog the new administrative guidelines regarding audits of transfer pricing matters recently issued by the German Ministry of Finance. These guidelines may impact all groups in Germany that are subject to Transfer Pricing legislation. The Administrative Guidelines 2020 update earlier guidelines on Transfer Pricing and replace certain parts of the Administrative Guidelines 2005.

Important for taxpayers:

• Ensure that they have access to relevant evidence at the time of the audit;
• Maintain data and information that allows tax authorities to apply other Transfer Pricing methods than the one actually chosen;
• Information such as accounts ready for consolidation can be requested by the tax authorities;
• Emails, messages etc. can be requested by the authorities for a further “reality check” between the information given in the Transfer Pricing documentation and the actual conduct of the parties.

Topics relevant for the documentation preparation:

• The Guidelines introduce a “best method rule” (in the past, taxpayers had to apply “an adequate method”); one now also needs to justify why other methods have not been applied;
• German language of the documentation still seems to be very important, although, in practice, this is often handled in English;
• The increasing requirements to provide evidence and support to the “best method” come along with a reduced burden to estimate the income of a taxpayer.