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The German tax administration recognises that foreign tax authorities are making increased use of advance transfer pricing agreements (APA's). This is in particular true of the U.S. Internal Revenue Service. An APA can relate either to a foreign company with operations in the taxing jurisdiction or domestic companies doing business abroad.

Directives recently issued by the Ministries of Finance of Baden-Wurttemberg and Bavaria (dated 28 Nov. 1994 and 9 Jan. 1995 respectively) state that the German tax authorities can likewise enter into advance pricing agreements and cooperate in connection with APA proceedings pending before a foreign tax administration. This represents a significant change in the attitude of the German tax authorities in that they previously refused to make transfer pricing the subject of advance rulings.

The two directives are similar in content and may be summarised as follows:

1. Rulings equivalent to an APA are available. Germany is also willing to join in a foreign APA proceeding.

2. When cooperating in a foreign APA proceeding, Germany will probably either insist that all information supplied to the foreign tax authorities be made available to it as well or else be very cautious in accepting the results of the foreign APA.

3. Because of staff shortages, Germany will only become involved in APA proceedings in exceptional cases. The directives do not indicate what cases will be considered exceptional. The fact that a foreign APA proceeding is pending will, however, apparently not constitute an automatic exception.

4. An APA issued by a foreign taxing authority will not bind Germany.

5. German tax auditors will routinely inquire whether a company under audit has concluded any APA's with other countries and review these so as to make sure that German tax revenue has not been diminished in a manner inconsistent with the arm's length rule as articulated in the German 1983 transfer pricing guidelines.

German tax officials have made remarks in public to the effect that German disagreement with a foreign APA secured without German participation may cause the German tax authorities to deny support to the taxpayer in any mutual agreement proceeding initiated to avoid double taxation.

As a procedural matter, authority to issue an APA, either unilaterally or in conjunction with a foreign APA, rests with the local tax office with jurisdiction over the taxpayer, not with a central national office. The directives, however, instruct local offices to consult regional and national offices in suitable cases and to by all means ensure that the local audit personnel is involved.

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