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Transfer Pricing of a contract manufacturer
Markus Volkmann Federal Central Tax Office
Germany, Bonn Federal Audit Department
OECD Transfer Pricing Case Studies WorkshopSan
Jose, 31 March 4 April 2014
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• Germany, a federation with16 federal states
• Consent tax law,but federal states are
  responsiblefor their own tax matters
• 16 views of one problem may exist.

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German Tax Administration
Federation
16Federal States
Federal Ministryof Finance (Berlin)
16 Ministries of the States
Federal Central Tax Office (Bonn)
11 RegionalRevenue Offices
640Local Tax Offices
42,100 employees
144,700 employees
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Federal Central Tax Office

• International responsibilities for
• tax refund
• information exchange
• Mutual Agreement Procedures
• Advance Pricing Agreements
• Federal Audit Department
• audit of LTP

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Federal Audit Department

• 230 auditors
• cooperation with the local tax offices
• joint audit teams
• Audit of large taxpayers(turnover gt 100 million
  Euro)
• Industry specialists
• Priority transfer pricing
• Working on APA and MAP

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Audit of TP in Germany

• 640 Local Tax Offices
• 13.200 auditors (2012)
• 19 bn Euro additional taxes (2012)
• Specialists for international tax issues
• Seminars at the Federal Finance Academy
• Basics / Transfer Pricing / BusinessRestructuring
  / Permanent Establishments
• International tax law / Use of databases

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Large Enterprise

• Classification every three yearslast 01.01.2013

Examples Parameter Large Enterprise
Commercial TurnoverProfit 7,300 k 280 k
Production Turnover Profit 4,300 k 2250 k
Other TurnoverProfit 5,600 k 330 k
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Large Enterprise
Classification 2012
Enterprises 8,571,212
Large enterprises 191,335
Large enterprises (examined 2012) 41,365
Audit period (average) 3 years
Cycle of audit 4.6 years
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Regulations

• General Tax Audits
• Audit procedure Notification / tax audit report
  / adjusted tax base
• Taxpayer Obligation to co-operate
• Penalties for late submission of information and
  documents
• Audit (Transfer Pricing)
• More taxpayer obligations, if international tax
  issues (Sec. 90 (2) General Tax Code)
• TP documentation requirements since 2003
• Penalties

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Documentation requirements

• Since 2003 Sec. 90 (3) General Tax Code
• Taxpayers with foreign connections
• Shareholder / participation 25
• Exceptions Small and medium sized enterprises
• Content of documentation
• Facts and details of the transaction
• ALP Compliance

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Documentation requirements

• Taxadministration request to document
• No obligation to do it in advance
• Exception business restructuring / permanent
  contracts
• Time limit 60 days (30 days)
• Language German (upon taxpayers request, any
  other living languages - english)
• Burden of proof
• depends on the documentation

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Penalties

• Non-Compliance with documentation requirements
• Late submission of documentation
• Failure to provide
• Applied rarely, only in cases of refusal
• Crucial, effort to cooperate with the
  taxadministration

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Other Regulations

• Foreign Tax Law (AStG)
• Sec.1 AStG arms length principle
• Administration Guidelines
• Transfer Pricing (1983)
• Permanent establishments (1999)
• Documentations (2005)
• Business restructurings (2010)
• Double Taxation Agreements

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Transfer Pricing Workshop
P

• Case Contract manufacturer
• Parent company P
• Subsidiary P1
• Foundation 2003
• P1 produces for P
• No important tangibles or intangibles

100
P1
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Product 1

• Tanks for machines since 2003
• main work in Germany
• Material
• free of charge from P to P1
• P1
• assembles the parts
• P
• leak testing, completing, delivering to the
  customer

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Product 2

• Tubes for machines since 2005
• Material
• supply of material to P1 not free of charge
• production scrap remains
• P
• procurement and logistic services

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Transfer Pricing System

• Price per unit
• Cost plus method
• Expected production costs 8 profit margin
• Material for product 2
• material costs 2 overhead profit margin
• No Price adjustments

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Financial performance
k 2004 2005 2006 2007
Net Sales 1,115 1,616 1,862 3,769
Operating Profit 174 388 -582 -393
Net Profit 177 398 -884 -221
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Problem / Question

• Permanent losses - arms length?
• P anticipates corrections of the foreign TA.
• What changes in the transfer pricing system are
  necessary?