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An eminent authority on German taxes, Prof. Dr. Albert J. Raedler, has published a brief report on the conference of the National Foreign Trade Council Foundation on transfer pricing, which Professor Raedler attended in Washington, D.C., on 28/29 October 1997. The following are selective excerpts from his report (IStR 1997 issue 23 p. XIV).

  • The opinion was voiced that Germany and other European countries appear to be reluctant to participate in advance pricing agreements. In the case of Germany, it was suggested that its high tax rates made the tax authorities apprehensive that companies would try to use APAs to shift as much income as possible away from Germany.
  • In response to the question whether Germany was prepared to recognise profit-oriented transfer pricing methods, representatives of the German tax authorities stated that Germany was opposed to these methods as a basic matter and objected in particular to placing them on an equal footing with the standard methods. They were prepared, however, to accept a transaction-based profit split as a cross-check on the results obtained by another method. Professor Raedler stated that the profit split method had a foundation in the present German transfer pricing guidelines (item 2.4.5 thereof) and that this method in practice often provided the solution for complicated situations.
  • The representatives of other countries appeared to have no difficulties in accepting the profit split method. However, there was general agreement on the rejection of more radical profit-based methods such as the Comparable Profit Method (CPM) and the Transactional Net Margin Method (TNMM). Such methods were criticised for cancelling out the effect of good or bad management on profits by relying on average gross or net profit figures in a particular industry.
  • Professor Berndt R. Runge, a senior official in the German Federal Ministry of Finance, stated that the present German transfer pricing guidelines would be revised as soon as work had been completed on the new guidelines on the taxation of permanent establishments. Participants at the conference praised the current German guidelines, which have been in force since 1983, as a practical and flexible transfer pricing framework.
  • Participants reported that German tax auditors had begun requesting that the German subsidiaries of U.S. parents provide them with a copy of the report delivered by the U.S. parent to the IRS on its transfer pricing system.
  • Criticism was levelled at the decision of the Federal Tax Court of 17 February 1993 on the profit expected of a German marketing subsidiary (see report on this case in German News no. 2/1996 at p. 11).

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