Germany: 051c. Transfer Pricing - Where We Stand - The 1995 OECD Guidelines

Last Updated: 31 July 1996
KPMG Germany Webpage
Click on the above link to visit the KPMG Germany webpage on the Mondaq website
For disclaimer and copyright see end of this article.


1.1 OECD: Confrontation And Compromise
1.2 OECD: Selected Issues
    General Tenor
    Transactional Profit Methods
    Arm's Length Principle
    Choice Of Method
    Transfer Price Methods
    Arm's Length Range
    Market Entry, Defence, And Expansion Strategies
    Intangible Assets
    Intra-Group Services
    Procedural Matters


1.1 OECD: Confrontation And Compromise

The deliberations leading up to publication of the first five chapters of the OECD Guidelines in July 1995 were difficult and at times heated. They centred around the issues posed by the new American transfer pricing concepts discussed above. The most contentious points were the two new profit-oriented transfer pricing methods introduced in the U.S. regulations under section 482 IRC. Certain countries, notably Germany, France, Sweden, Belgium, Switzerland, and Austria, wished to exclude these methods from the report, whereas Great Britain, Australia, the United States and Japan wished to see the methods officially sanctioned. In particular the United States threatened to walk out of the talks if the profit-oriented methods were rejected and even intimated that it would consider adoption of a unitary tax system if operation of its new transfer pricing system was blocked by a majority of OECD nations. Another bone of contention was the no-fault penalty system of the United States under section 6662 IRC. Here again the United States blocked a general statement rejecting no-fault penalties. However, its delegates did indicate that the penalty system would be revised in some way to make it less objectionable to the majority of the OECD member states. (The final regulations under section 6662 (e) IRC issued in February 1996 are, however, not substantially different from the previous temporary regulations.)

The end result of the OECD talks is a voluminous paper in which there is something for everybody. The preferred interpretation in Germany at least is that the OECD has, while avoiding an open break with the U.S. transfer pricing philosophy, produced a set of guidelines which are more taxpayer-oriented than is the harsh U.S. regime. Fundamentally, a majority of OECD nations, especially the European members, see no need for major departures from the basic principles under which they now operate. They accordingly sought to insert language in the Guidelines which recalls these basic principles and admonishes both taxpayers and tax administrations (especially the IRS) to avoid extreme positions on transfer pricing.

In view of the development in the U.S. position in the course of the deliberations and also the changes made in certain aspects of the U.S. regulations in response inter alia to the report published by the OECD Committee on Fiscal Affairs in December 1992, it would be going too far to say that the European protest has fallen on deaf ears. Still, the OECD Guidelines skirt direct conflict with the U.S. principles and, to the extent the Guidelines are nuanced so as to indicate a more liberal approach to transfer pricing, it must be recalled that the Guidelines are binding on no one. The most that can be said for them is that they are a sort of official commentary on the transfer pricing article (Article 9) of the OECD Model Treaty and as such must be given weight in interpreting this article. Even this argument applies best to treaties concluded in the future, where failure to take exception to the Guidelines may be construed as assent thereto.

A more pessimistic view of the OECD Guidelines is that the United States made concessions largely of form, not of substance, and ensured that the language of the Guidelines was vague or contradictory enough to be arguably in agreement with the American position. And where this may prove not to be the case, the United States may well just ignore the Guidelines.

The consensus is that, while the OECD Guidelines adequately reflect the European middle-of-the-road approach to transfer pricing and show sufficient regard for the legitimate interests of international businesses, it remains to be seen whether countries such as the United States will accept the guidance offered or force a major international transfer pricing confrontation by making adjustments to the U.S. income of European businesses which are unjustified in the view of the European tax administrations and therefore not qualified for corresponding adjustments.

At least in the literature there is considerable enthusiasm for avoiding such a showdown by timely implementation of a binding arbitration system similar to that which went into effect in the European Union at the start of 1995. Prospects for this appear slight, however. More realistic is the hope that a major clash can be avoided at the latest in a mutual agreement procedure. It is noted that, at least between Germany and the United States, mutual agreement procedures have almost always led to a settlement in the past. Obviously, mutual agreement procedures, with or without binding arbitration, are an expensive solution at best.

1.2 OECD: Selected Issues

General Tenor
The Guidelines are conciliatory in general tenor and seek to foster understanding on the part of taxpayer and tax administration for the difficulties each faces. Of the two, the authors of the Guidelines appear to think that it is the tax administration which most needs counselling on this subject. "Tax administrations should not automatically assume that associated enterprises have sought to manipulate their profits", the Guidelines explain at their outset (par. 1.2). "Transfer pricing is not an exact science." "Even the best intentioned taxpayer can make an honest mistake". The tax authorities should "not demand from taxpayers in their transfer pricing a precision which is unrealistic under all the facts and circumstances" (Guidelines par. 4.8, 4.9). "Tax administrators should hesitate from making minor or marginal adjustments" (par. 1.68).

Transactional Profit Methods

The OECD Guidelines distinguish between the three traditional "transactional" methods (comparable uncontrolled price, resale price, and cost-plus methods) and two "transactional profit methods", called the "transactional net margin method" and the "profit split method". The Guidelines (par. 3.49 ff.) state that the traditional methods have "to date" been adequate to solving most transfer pricing problems and that they are to be preferred to the profit methods. However, in certain cases of "last resort," recourse can be had to the profit methods. Situations in which sufficient information for application of the traditional methods is lacking are mentioned as perhaps appropriate for a profit method. Of the two, a weak preference is expressed for the profit split method. The transactional net margin method resembles the controversial American comparable profits method. The new name was apparently chosen to emphasise the need to compare profit from like transactions, as opposed to making a loose comparison of profit in two similar enterprises, but it is unclear how different the OECD method really is from its American counterpart.

Arm's Length Principle

The Guidelines are firm in their defence of the arm's length principle. Paragraph 1.10 contains, however, the interesting observation that related parties sometimes engage in transactions from which independent parties would refrain altogether, hence making it "difficult" to apply the arm's length principle. But it has, the Guidelines state, worked effectively "in the vast majority of cases" (par. 1.8). The arm's length principle is the basis of the current international consensus and, the Guidelines imply, cannot be abandoned without threatening this consensus (par. 1.13). Global formulary apportionment ("unitary taxation") is discussed at length but rejected as a possible alternative to the arm's length method (par. 3.58 ff.).

Choice Of Method

As explained above, the traditional methods enjoy preference over the profit-oriented methods when sufficient data exist to apply the traditional methods. The expectation of the Guidelines is that this will usually be the case. While there is no clear statement in the Guidelines that the taxpayer's choice of method is to be respected if reasonable, there is no "best method" rule either. Par. 1.36 implies that the taxpayer's choice of method is generally to be respected when it says that the methods applied by the taxpayer are to be used in examining the transaction "insofar as these are consistent with the methods described in Chapters II and III". It is also said that neither the taxpayer nor the tax examiner is required to perform analyses under more than one method, although this may not apply "when no one approach is conclusive" (par. 1.69). Tax examiners should "begin their analyses ... from the perspective of the method that the taxpayer has chosen" (par. 4.9). Transactions are to be analysed prospectively avoiding the use of hindsight based on the facts and circumstances known or knowable at the time of the transaction (p.1.51), the terms of the actual contractual arrangement (p. 1.28, 1.36), and the actual allocation of risks and functions (par. 1.20 ff.). Recharacterisation of a transaction by the tax authorities is permitted, however, in certain vaguely defined circumstances (par. 1.37).

Transfer Price Methods

The Guidelines in essence recognise the same methods as the U.S. regulations.

Arm's Length Range

The Guidelines accept the concept of an arm's length range, but the emphasis seems to be more on urging the tax authorities to accept transfer prices which fall within this range than on an overly precise determination of exactly what the range is (par. 1.45 ff.).

Market entry, defence, and expansion strategies

The Guidelines regard such strategies as legitimate factors influencing transfer pricing (par. 1.31 ff.) and also explicitly note that the fact that a strategy has failed does not in and of itself justify disregarding the strategy from the start for tax purposes (par. 1.35).

Intangible Assets

Chapter VI on intangible assets was issued in March 1996. The Guidelines make clear that automatic adjustment of royalties to be commensurate with income is incompatible with the arm's length standard and constitutes an impermissible use of hindsight (par. 6.32, 6.35). However, it is stated that, where reasonable businesspersons would themselves have included some royalty adjustment clause in the license contract, adjustment by the tax authorities is also permitted based on a hypothetical clause to this effect (par. 6.34).

Intra-Group Services

The guidance on this subject is contained in Chapter VII, also published in March 1996. Noteworthy is the opening statement that "nearly every [multinational] group must arrange for a wide scope of services" for its members (par 7.2). This observation is directed at tax administrations which tend to view intra-group services as a device for shifting income to low-tax jurisdictions. While the Guidelines give preference to direct methods of invoicing intra-group services, indirect charge methods are permitted where necessary as a practical matter (par. 7.22, 7,23).

Procedural Matters

The Guidelines tread softly on procedural matters.

An entire chapter is devoted to the subject of documentation. With regard to materials which, absent tax considerations, would not normally be generated, "the tax administration should take great care to balance its need for the documents against the cost and administrative burden to the taxpayer" (par. 5.6). "Tax administrations should limit the amount of information that is requested at the stage of filing the tax return" (par. 5.15). The chapter contains many similar statements, which may be regarded as polite requests to the United States to relax its requirements.

Concerning the burden of proof (par. 4.11 ff.), it is noted that "divergent rules on burden of proof among OECD countries" may "present serious problems" and, if exploited by jurisdictions in which the burden is on the taxpayer, "set the stage for significant conflict as well as double taxation" (par. 4.14). In mutual agreement proceedings, the Guidelines provide that the State seeking to make an adjustment "must bear the burden of demonstrating to the other State that the adjustment is justified both in principle and as regards the amount" (par. 4.17). The non-binding nature of virtually all mutual agreement procedures of course diminishes the significance of this pronouncement.

Penalties are also discussed at some length (par. 4.18 - 4.28). The "imposition of a sizeable 'no-fault' penalty based on the mere existence of an understatement of a certain amount would be unduly harsh when it is attributable to a good faith error rather than negligence or an actual intent to avoid tax.... [It] would be unfair to impose sizeable penalties on taxpayers that made a reasonable effort in good faith to set the terms of their transactions with related parties in a manner consistent with the arm's length principle" (par. 4.28).

The Guidelines recommend considering "the overall tax system" in each country (par. 4.19). There is considerable sentiment in the German literature that the U.S. tax system, as relates to transfer pricing, is, taken as a whole, unfair because of the combined weight of burden of proof allocation, documentation obligations, no-fault penalties, and an aggressive basic transfer pricing philosophy.

Disclaimer and 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. We in particular insist 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 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 our articles are carefully reviewed, we can accept no responsibility in the event of any inaccuracy or omission. Please note the date of each article and that subsequent related developments are not necessarily reported on in later articles. Any claims nevertheless raised 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 Deutsche Treuhand-Gesellschaft AG (KPMG Germany). Distribution to third persons is prohibited without our express written consent in advance.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

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”

Related Topics
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions