German Bureaucracy Relief Act (“BEG IV”): Far-reaching changes to transfer pricing documentation

The transfer pricing documentation is being restructured (Art. 90 (3) AO (German General Tax Code)). In future, the country-specific, company-related documentation (“local file”) will be structured as follows:

• Overview of business transactions (transaction matrix)
• Presentation of the business transactions (factual documentation)
• Presentation of the economic and legal basis for an agreement of conditions in accordance with the arm's length principle (arm’s length documentation)

Reduced submission requirements

Previously, the legislator stipulated that the complete transfer pricing documentation must be submitted within 30 days of the audit order’s notification in accordance with Art. 90 (4) AO. With the entry into force of BEG IV, this regulation will be amended. According to the revised wording of Art. 90 (4) AO, a reduced documentation package consisting of the following must be submitted within the 30-day period:

• the transaction matrix
• the master file (master documentation of the multinational group)
• the documentation of extraordinary business transactions

However, the complete transfer pricing documentation must be submitted to the tax authorities within a further 30 days upon separate request.

New introduction of the transaction matrix

The introduction of the transaction matrix is a key new element in this context. In future, companies are to use the transaction matrix to provide detailed information about their cross-border business transactions. The tax authorities want to use it to identify key audit areas, thus allowing for more effective tax audits. Furthermore, transaction matrices are supposed to become an integral part of transfer pricing documentation. The transaction matrix includes:

• subject and type of business transactions
• parties involved in the transactions, stating the recipient and provider of the service
• volume and consideration of the transactions
• contractual basis 
• transfer pricing method applied
• tax jurisdictions concerned
• information as to whether transactions are subject to standard taxation in a relevant tax jurisdiction

Against this backdrop, it remains to be seen whether the German Regulations Regarding the Documentation of Profit Allocations (“GAufzV”) of July 12, 2017 (BGBl. I p. 2367) will be readjusted, which may have an impact on the design of the transaction matrix. 

Transaction matrix: additional initiative effort – reduced administrative effort

The introduction of the reduced documentation package offers companies the opportunity to reduce administrative effort in many areas. However, the initial creation of the transaction matrix should not be underestimated and can involve considerable additional work.

The tax authorities still retain the right to request full transfer pricing documentation after receiving the reduced documentation package (consisting of transaction matrix, master file, record of extraordinary business transactions). Such request is at the tax authorities’ discretion, which is why companies should continue to prepare their transfer pricing documentation in order to be able to submit it on time when requested. Corresponding records on factual documentation, arm’s length analysis as week as a functional and risk analysis must then be submitted within an additional 30 days following the request.

What does BEG IV mean in practice?

The effectiveness of BEG IV strongly depends on the actual implementation by the tax authorities and companies. According to the legislator, the new structure is intended to promote a risk-oriented audit, make tax audits more effective and help reduce bureaucracy.

For taxpayers, the restriction of submission obligations in the context of tax audits to primarily the transaction matrix is associated with great uncertainty. After requesting the “shortened documentation”, in particular the transaction matrix, the tax auditors can still request full transfer pricing documentation. Consequently, the supposed simplification is de facto an additional requirement that will, more likely than not, be an actual relief for taxpayers only in rare cases. This applies all the more as the tax authorities can request the submission of transfer pricing documentation at any time (i.e., also outside of tax audits) (e.g., as part of an application for an advance pricing agreement).

Either way, companies should prepare for the new requirements now. If you have any transfer pricing related questions, please feel free to contact us at any time.