Transfer Pricing

Question 1

What are the goals of an OECD conform transfer pricing documentation?

Answer 1

-Compliance : ensure that the taxpayer sets prices in accordance with the arm’s length principle, as well as national transfer pricing laws when preparing the tax return.
-Risk : provision of a corresponding data basis for a risk-orientated pre-audit of the transfer prices by the tax authorities
-Audit : provision of useful information, which allows for a reasonable audit of the transfer prices

Question 2

What are the three-layered Transfer Pricing documentation concept?

Answer 2

• Master File
• Local File
• CbC Template

Question 3

Explain the concept of Master File (1 of the 3-layered transfer pricing documentations)

Answer 3

-Organisation structure of MNE
-Nature of global business operations
-Intangibles
-Intra-group financing
-Income and tax positions

Question 4

Explain the concept of Local File (1 of the 3-layered transfer pricing documentations)

Answer 4

-Detailed information on local entity
-Focus on transaction-based information
-Economic analysis according to the arm’s length principle

Question 5

Explain the concept of CbC Template (1 of the 3-layered transfer pricing documentation)

Answer 5

-Aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity

Question 6

What is Transfer Pricing?

Answer 6

It is the source of tax.
It relates to the charged prices of cross-border transactions among related entities. Which country is entitled to tax what??

Question 7

List the National German Laws on Transfer Pricing Regulations

Answer 7

-Tax Code ‘Abgabenordnung’ (Duty of Cooperation and Documentation)
-Tax Laws : AStG, EStG, KStG (with regard to income adjustments)
-GAufzV : Decree-LAw on the Manner, Content and Extent of Documentation
-Ordinance on the Allocation of Profit of Permanent Establishments
FVerlV : Decree-Law applying in cases of Cross-border Relocations of Functions
-Relevant Circular Letters (BMF Schreiben)

Question 8

What is the OECD?
(Organisation for Economic Co-Operation and Development )

Answer 8

It is an international organisation of specific member countries where they all speak about what they need.
They work together to :
-Compare policy experiences
-Seek answers to common problems
-Identify good practices
-Coordinate domestic and international policies

Question 8

List the EU International Transfer Pricing Regulations

Answer 8

-Double Tax Treaties / OECD Model Tax Convention
-OECD Transfer Pricing Guidelines 2022
-Multilateral Convention to implement Tax Treaty related Measures to prevent Base Erosion and Profit Shifting (Multilateral Instrument)
-EU Arbitration Convention
-EU Directive on Tax Dispute Resolution Mechanism
-EU Code of Conduct for the Documentation of Transfer Prices
-Documents of the EU Joint Transfer Pricing Forums

Question 9

What is the OECD Model Tax Convention on Income and on Capital (International Regulation)

Answer 9

-A pattern for double tax treaties
-The 2017 edition of the OECD Model mainly reflects a consolidation of the treaty-related measures resulting from the work on the OECD/G20 BEPS Project under:
>Act 2 (Neutralising the effects of hybrid mismatch arrangements)
>Act 6 (Preventing the granting of treaty benefits in inappropriate circumstances)
>Act 7 (Preventing the artificial avoidance of permanent establishment status)
>Act 24 (Making dispute resolution more effective)

Question 10

What is the OECD Transfer Pricing Guidelines 2022

Answer 10

-Used as a basis for Mutual Agreement Procedures and are therefore an important source of interpretation
-Only ‘soft law’
-Substantial revisions to reflect the clarifications and revisions agreed in the 2015 BEPS Reports on:
> Acts 8-10 (Aligning Transfer pricing Outcomes with Value Creation
> Act 13 (Transfer Pricing Documentation and Country-by-Country Reporting)

Question 11

Explain Article 9 in the OECD Model Tax Convention

Answer 11

Associated enterprises and profit attribution
-where an enterprise of a Contracting State participates directly or indirectly in the management, control, or capital of an enterprise of the other Contracting State or
-where the same people participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State

-In either case, conditions are made between 2 enterprises in their commercial or financial relations that differ from those which would be made between independent enterprises.

Question 12

What is the definition of control in Art 9 OECD Model Tax Convention

Answer 12

Control doesn’t mean it’s only happening on legal grounds but also on business grounds.
The definition includes any kind of control, including :
-Direct or indirect
-Exercisable or not
-Exercised or not

Therefore control is not limited to legal ownership but depends on all the facts and circumstances. The concept of control may differ between countries.

Question 13

Define Controlled Transactions

Answer 13

• related party transactions
• These transactions are happening between related parties.
• e.g the sale or purchase of tangible or intangible property or the provision of services are considered ‘controlled transactions’
• Rooted in article 9

Question 14

Define uncontrolled transactions

Answer 14

• Between unrelated parties
• e.g. the sale or purchase of tangible or intangible property , or the provision of services.

Question 15

What are the types of uncontrolled transactions?

Answer 15

-External uncontrolled transactions occur between two unrelated entities
-Internal uncontrolled transactions occur between a related party and a third party

Question 16

Define control transactions in relation to domestic German Regulations

Answer 16

-German Foreign Tax Act (AStG)

-Sec 1 Abs 2 Foreign Tax Act : A person is a related party of the taxpayer if :
1. The person i) has an interest in the taxpayer or the taxpayer has an interest in that person of atleast one quarter, directly or indirectly, of the subscribed capital, membership rights, participation rights, voting rights or assets of the company. Or ii) is entitled to atleast one quarter of the profits or liquidation proceeds vis-a-vis the taxpayer or the taxpayer is entitled to at least one quarter of the profits or liquidation proceeds vis-a-vis that person

2. The person can exercise a controlling influence, directly or indirectly, over the taxpayer or vica versa
3. A third person i) has a material interest in both the person and taxpayer. ii) is entitled to at least one quarter of the profits or liquidation proceeds from both the person and taxpayer or iii) can directly or indirectly exercise a controlling influence over both the person and the taxpayer or can control the 2 transaction parties
4. the person or taxpayer is able to exercise influence over the taxpayer or the person in agreeing the terms of a business relationship that is based outside that business relationship, or if either of them has a vested interest in earning the income of the other

Question 17

What is the Arm’s length principle

Answer 17

-A price used if firms co operate with each other
-OECD definition => Profits earned by each enterprise in a transaction amongst related enterprises should be consistent with those earned by independent enterprises
-Value of transaction measures ‘as if’ the related entities were independent, unrelated entities
-Transaction value of related entities / independent entities
-Reflects market prices

Question 18

What is the Arms length comparability analysis?

Answer 18

Analysis of controlled vs uncontrolled transactions

Question 19

Define Transfer Pricing

Answer 19

-Charged prices of cross-border transactions
e.g. transfer of goods, intangibles and services among related entities

Question 20

Why has transfer pricing become a significant issue for companies?

Answer 20

-Increased enforcement by governments around the globe
-Increased cross-border transactions amongst related parties (globalisation)
-Increased regulations surrounding transfer pricing (regulations are increasing)
-Increased outsourcing to associated companies in low-cost countries

Question 21

Why does Transfer Pricing differ from normal pricing?

Answer 21

Transactions occur between related parties