Germany: 221. Transfer Pricing: Documentation Regs. Derailed By FTC Decision?

Last Updated: 20 July 2001
Article by Alexander Vögele
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website

A slightly condensed version of this article will appear in the July/August edition of International Tax Review.

For editorial cut-off date, disclaimer, and notice of copyright see end of this article.

1. Surprise Decision By FTC

A decision handed down in early May 2001 by the Federal Tax Court (FTC) indicates that key provisions of Germany's proposed regulations on transfer pricing documentation requirements are devoid of legal foundation and therefore invalid (ruling of 10 May 2001 - I S 3/01 - DStR 2001, 985). Further delay in issuing final documentation regulations may now be expected as the Federal Ministry of Finance strives to assess the impact of the FTC decision on its transfer pricing policies.

Article no. 216 reported on the proposed transfer pricing documentation regulations that the Federal Ministry of Finance first issued in August 2000 and then revised in a confidential March 2001 version, which has still not been made public. The August 2000 version of the proposed regulations is the subject of this author's articles in the January and February 2001 issues of International Tax Review (pp. 38 and 17 respectively).

2. Context Of The May 2001 Ruling

The new FTC decision is a summary interlocutory ruling on a motion to stay the collection of tax assessments, not a judgement on the merits. Furthermore, the ruling was handed down by the chief justice of the 1st Chamber of the FTC acting alone pursuant to statutory authority to decide requests for interim relief where the full chamber is not able to act with appropriate speed. Summary rulings do not carry the same weight as judgements on the merits, nor do rulings by a single justice have the same value as decisions by a full chamber of justices. This being said, the May 2001 ruling still sends a strong signal to the Federal Ministry of Finance that it needs to rethink its transfer pricing documentation strategy.

The case giving rise to the May 2001 ruling was reported on at the lower court level by the same author in article no. 177. The case poses a variety of interesting transfer pricing issues, including the permissibility of comparable profits methods or transactional net margin methods under German tax law and the admissibility of so-called "secret comparables" as evidence in transfer pricing litigation. As expected, the Federal Tax Court agreed to hear an appeal of this case. As an offshoot from the pending appeal, the taxpayer asked the FTC to block collection of tax based on the original assessment notices after the tax authorities ran out of patience and took steps to collect the tax, or at least to force the taxpayer to post bond for the full amount owing.

German law gives the taxpayer the right to have collection of tax stayed where there is "serious doubt" as to the legality of the assessment in question. The parties appear to have agreed that "serious doubt" was presented by the case in question. The tax authorities argued , however, that the taxpayer had itself caused the doubt by violating its compliance responsibilities under German tax law and was therefore not entitled to profit from its own wrongdoing. The court agreed with the tax authorities in principle, but held that the taxpayer had not breached any duties of cooperation because there was no legal basis for the compliance obligations alleged by the tax authorities. Hence, the FTC granted the requested stay of collection.

3. Highlights Of The FTC Ruling

The crux of the FTC's May 2001 decision is its holding that the compliance obligations alleged by the tax authorities in fact do not exist. Specifically:

  • The recordkeeping requirements applicable to German taxpayers are exhaustively stated by §§ 140 ff. of the Tax Procedure Act and §§ 238 ff. of the Commercial Code. Hence, the taxpayer's failure to produce any documentation in support of the prices paid on purchases from controlled parties breaches no duty of cooperation because the statutory provisions contain no special documentation requirements for transfer prices or constructive dividends.
  • Under existing recordkeeping law, taxpayers are required merely to produce upon request whatever books and records actually exist. They are not required to create documentation specifically for transfer pricing purposes.
  • The court's holding that taxpayers are not required to create documentation for transfer pricing purposes would appear to apply as well to taxpayer explanations of the method used in arriving at its transfer prices and to profit forecasts as to when taxpayers will turn an overall profit on their dealings with controlled parties.
  • The court-developed doctrine of Beweisvorsorge ("ensuring the future availability of evidence") – one of the pillars supporting the proposed transfer pricing documentation regulations – requires only the preservation of existent evidence, not the creation of special documentation for transfer pricing purposes.
  • A domestic subsidiary is generally not required to produce documentation showing how its foreign parent company calculated the prices charged to the subsidiary. Subsidiaries have no company law rights to parent company documents. While they can in theory bargain for a contractual right to such documentation, this is not the common practice of parties dealing with each other at arm's length, hence it may not be required of a controlled subsidiary. Access in fact to parent company documents likewise generally does not exist.
  • In a passage which on first impression is difficult to understand, the court seems to say that taxpayers at most have an obligation to prepare documentation showing that payments made to related parties are in principle motivated by arm's length considerations, but that taxpayers are not required to assemble more detailed documentation defending the precise amount of such payments. When the court speaks of documents showing that related party dealings are motivated by arm's length considerations, one may conjecture that it is thinking of documents proving that exchanges of goods and services occur pursuant to clear agreements entered into in advance of the transactions to which they relate, hence to documentation of the contractual basis of such exchanges.
  • Taxpayer failure to prepare special transfer pricing documentation in advance of a tax audit or upon request in a tax audit does not relieve the tax authorities of their burden of proof on the issue of what transfer prices are in fact appropriate, nor does it facilitate the assessment of tax on an estimated basis. While the court agrees that something akin to a reversal of the burden of proof can occur when the taxpayer breaches compliance obligations, the failure to prepare transfer pricing documentation does not constitute such a violation under the court's reading of current law.

4. Concluding Remarks

Analysis of the impact that the May 2001 FTC ruling will have on Germany's proposed transfer pricing documentation regulations will be the subject of a later article. One should note, however, that § 147 (1) AO requires taxpayers to retain all documents having tax significance, and that the decision by the Münster Tax Court described in article no. 223 (judgement of 22 August 2000) indicates that the tax courts may be willing to require production for tax audit purposes of any potentially relevant documents that a taxpayer possesses in fact. Furthermore, the new electronic audit provisions will greatly facilitate tax authority access to such documents as a practical matter (see article no. 213 by same author). Moreover, a legislative reaction to the decision here reported on cannot be ruled out.

Editorial cut-off date: 25 June 2001

Disclaimer And Notice Of Copyright

This article treats the subjects covered in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. Specialist advice must be sought with respect to your individual circumstances. KPMG Germany in particular insists that the tax law and other sources on which the article is based be consulted in the original, whether or not such sources are named in the article. Please note that the article is current only through its editorial cut-off date shown immediately above (not to be confused with the later date as of which the article was placed online – the date appearing at the article's outset). Related developments subsequent to the editorial cut-off are not necessarily reported on in later articles. Please note as well that later versions of this article or other articles on related topics may have since appeared on this database or elsewhere and should also be searched for and consulted. While KPMG Germany's articles are carefully reviewed, it can accept no responsibility in the event of any inaccuracy or omission. Any claims nevertheless raised against KPMG Germany on the basis of this article are subject to German substantive law and, to the extent permissible thereunder, to the exclusive jurisdiction of the courts in Frankfurt am Main, Germany. This article is the intellectual property of KPMG Germany (KPMG Deutsche Treuhand-Gesellschaft AG). No use of or quotation from the article is permitted without full attribution to KPMG Germany and the article's stated author(s), if any. Distribution to third persons is prohibited without the express written consent of KPMG Germany in advance.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.