O n October 5 2015, the OECD released its final report onAction 13, “Transfer Pricing Documentation and Country-by-Country Reporting”, of the BEPS Action Plan. This

final report was released in a package that included final reports onall 15 BEPS Actions.

Action 13 focuses on defining new TP documentation require-ments, which will require more detailed information to be provid-ed by multinational enterprises (MNEs) in the future, as thesignificant improvement of transparency for tax administrations hasbeen identified as one major objective of the BEPS measures. Suchdetailed information will offer useful indicators for risk assessmentand allow tax administrations to better focus their resources. Inparticular, the new rules on CbCR are recognised as an importanttool for international tax administrations to perform high level riskassessment of transfer pricing and other tax risks.

Accordingly, several other countries have already started toimplement CbC reporting rules into their national legislation,including Germany.

OverviewOn July 13 2016, the German Federal Ministry of Finance pub-lished a draft bill intended to implement the new three-tiered TPdocumentation approach as recommended by the OECD in Action13. The draft bill also includes the formal announcement of furtherlegislative changes in the area of transfer pricing in Germany, inparticular an ordinance providing details about the informationthat need to be provided, when the new TP documentation law isto be applied.

Although the final wording of the new law has not been releasedyet, the final version is expected to be published in a timely man-ner. Furthermore, it could be expected that the final version willnot include significant changes in relation to the current draft bill.

The preamble to the draft bill and the additional explanationsfundamentally confirm that Germany will follow the OECD rec-ommendations as delivered in the final BEPS Action 13 report.Accordingly, the German TP documentation requirements willconsist of a master file, a local file and a CbCR.

The draft foresees mandatory CbCR for fiscal years beginningafter 31 December 2015, whereas the preparation of a master andlocal file should become mandatory for fiscal years beginning afterDecember 31 2016.

The new three-tired TP documentation approach shall beimplemented into German law through amendments to the exist-ing documentation regulations in Sec. 90 Para. 3 of the GeneralTax Code (GTC) and by introducing a new Sec. 138a to the GTC.The details are summarised below.

Local fileEntities obliged to prepare the local file:All taxpayers conducting transactions with foreign related parties(≥25%) and/or conducting dealings with their foreign permanentestablishments (PEs) are obliged to prepare a local file. It is expect-ed that exceptions regarding TP documentation requirements forsmall entities will persist. Accordingly, entities with a transactionalvolume relating to sale/purchase of goods to/from related partiesof less than €5 million ($5.3 million) and a transactional volumerelating to other transactions of less than €500,000 will still not beobliged to prepare a formal comprehensive TP documentation (aslocal file) also after implementation of the new rules.

Submission requirements:According to the draft bill, there will be no changes to submissionrequirements for TP documentation, which means that taxpayersonly need to submit TP documentation upon request of the taxauthorities. This will regularly be the case when tax authoritiesintend to conduct a tax audit. Upon request, the TP documenta-tion must be submitted within 60 days (30 days for so-called“extraordinary business transactions”).

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Maik Heggmair and Tobias Faltlhauser of WTS summarise the new transfer pricing (TP) documentation rules to beimplemented in Germany and provide an example of new TP risk assessment possibilities based on new country-by-country reporting (CbCR), which may become relevant for MNEs in the near future.

New TP documentation rules:update and CbCR example

Germany will follow the OECDrecommendations as delivered in the finalBEPS Action 13 report.

LocalFile

CbCR

MasterFile

Figure 1: New three-tiered TP documentation

This is in contradiction to the OECD recommendations inBEPS Action 13 report, which suggests the provision of the localfile on a yearly basis in the course of the tax filing.

Content of the local file:The local file shall include the detailed description and analysis ofall business activities with affiliated entities and non-German PEs.This includes, inter alia, the analysis of functions and risks and thedescriptions of the value chain, which also includes a description ofthe local management structure.

According to the draft bill, the local file shall also include a rec-onciliation of the P&L statement and the underlying TP policies

applied. This means that taxpayers will be required to perform ananalysis of the annual net income of the company and provide anexplanation in case of discrepancies from the TP policies applied.

Master fileEntities obliged to prepare the master file:All entities, which are part of a multinational group have to preparea master file in case the consolidated turnover is above €100 mil-lion. In terms of the master file requirements, a multinationalgroup is defined as a group that consists of at least two related enti-ties in two different tax jurisdictions or one entity with at least onepermanent establishment (PE) in another tax jurisdiction.

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Tobias FaltlhauserWTS Germany

Tel: +49 69 1338456-341Email: tobias.faltlhauser@wts.de

After completing his degree in business economics, Tobias Faltlhauser joinedWTS in 2015 to start his professional career in the TP practice of the company.There, he is deeply involved in global projects regarding the TP documentationof MNEs.

As a TP specialist, Tobias is also engaged in various other TP projects such asvalue chain analyses and the valuation of business functions, as well as tan-gible and intangible assets in the course of restructurings.

Maik HeggmairPartner, Head of Global Transfer Pricing

WTS Germany

Tel: +49 89 28646-212Email: maik.heggmair@wts.de

Maik Heggmair started his professional career in the TP practice of a Big 4 firmin 2001 and has also worked for several years as an in-house TP manager fora large multinational IT company. There, he was responsible for a variety ofcomplex TP projects including business restructurings and an IP reorganisation.

He joined WTS in 2008 as a head of the transfer pricing department. With threepartners and a total of 20 TP experts, the company is one of the leadingGerman consultancies in this area. Additionally, Maik heads the global transferpricing service line of WTS Global, an international consulting network repre-sented in over 120 countries worldwide.

Master file and local file preparation are important considerations for MNEs

Submission requirements:The submission requirements are expected to be identical to thoseimplemented for the local file.

Content of the master file:The master file is intended to give an overview of the worldwideactivities of the whole group. Following the OECD recommenda-tion it should contain information on the TP system implementedin the group, but no detailed information on the determination ofthe transfer prices, which is covered by the local file.

The master file shall include, inter alia: • a chart illustrating the groups legal and ownership structure and

geographical location of operating entities • a description of the supply chain for the group’s five largest

products and or service offerings by turnover plus any otherproducts and/or services amounting to more than 5% of groupturnover

• a list and brief description of important service arrangementsbetween members of the MNE group, other than research anddevelopment (R&D) services, including a description of thecapabilities of the principal locations providing important serv-ices and TP policies for allocating services costs and determiningprices to be paid for intra-group services.

Penalties regarding local and master file If a taxpayer does not comply with the modified TP documenta-tion requirements to the extent outlined in Sec. 90 Para. 3 GTC,he can be penalised under the new Sec. 162 Para. 3 and 4 GTC. Incase of insufficient documentation the tax authorities are autho-rised to estimate the income of the taxpayer. This will regularly

increase the tax base and has to be proven wrong by the taxpayerhimself in the following discussions with the tax authorities (shiftof burden of proof). Furthermore, penalties based on the adjust-ment and a fine can be determined by the tax authorities for adelayed submission. Unlike the existing regulations constituted inSec. 162 Para. 3 and 4 GTC, these penalties can not solely beapplied to an entire TP documentation, but also to a single trans-action, which is not documented or documented insufficiently.

Country-by-country reportingThe core part of the draft bill is the implementation of the non-public CbC reporting standards, which should be introduced inthe new Sec. 138a GTC.

According to new Sec. 138a GTC, CbCR obligations shall applyto German-headquartered multinational groups with annual con-solidated group revenue of at least €750 million.

Additionally, a ‘secondary mechanism’ will be implemented fordomestic entities that are part of a MNE group that includes botha ‘secondary reporting local filing’ and ‘surrogate parent filing’.The secondary mechanism provides for the filing of the country-by-country report (CbC report) for financial years commencingafter December 31 2016 only. Non-compliance with the CbCRobligation may be subject to a penalty of up to €5,000, which doesnot constitute a large amount of money for MNEs. However,MNEs being non-compliant with CbCR rules of course could facesignificant other negative consequences including negative report-ing in public discussion etc.

CbC reports would have to be filed within 12 months, startingfrom the end of the fiscal year to which they relate. The reportwould be delivered automatically by the German tax authorities to

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Figure 2: Overview TP documentation requirements

Content Entities obliged Temporal requirements Regulation

Local file Local documentation of businesstransactions under the arm’s-lengthnature of the transfer prices

- Taxpayers with transactions withrelated parties (less than 25%) orforeign PEs

- Transactions related to goods over€5 million or other transactionsmore than €500,000.

- Submission 60 days upon request- Beginning for financial years (FYs) beginning

after December 31 2016

Sec. 90 Para 3 GTC

Masterfile Overview of the worldwide activitiesof the group the entity is part of

- Multinational groups with tworelated entities in different taxjurisdictions or one entity with a PEin another tax jurisdiction

- Consolidated revenues more than€100 million

- Submission 60 days upon request- Beginning for FYs beginning after December

31 2016

Sec. 90 Para 3 GTC

CbC Reporting Country-based figures for all entitiesof the group (e.g. revenues,employees, tangible assets etc.)

- German parent company of amultinational group

- German subsidiary with a foreigngroup parent (designates to prepareand file the CbC report)

- German subsidiary, in case is thetax authorities are not providedwith a CbC Report

- Consolidated revenue > €750million

- Submission on a yearly basis (electronic filingone year after FY)

- Beginning for FYs beginning after December31 2015

Sec. 138a GTC

foreign tax authorities through exchange of information channels.The automatic exchange with foreign countries would only takeplace on the basis of an underlying agreement with the foreigncountry, such as a double tax treaty.

The content of the mandated CbC report includes:• Aggregate information relating to the amount of revenue, profit

(loss) before income tax, income tax paid and accrued, numberof employees, stated capital, accumulated earnings and tangibleassets other than cash or cash equivalents in each jurisdiction inwhich the group operates.

• Identification of each constituent entity within the group,including the entity’s jurisdiction of tax residence (and the juris-diction under which the entity is organised, if different from itsjurisdiction of tax residence) and the nature of the entity’s mainbusiness activity or activities.

Summary of TP documentation requirementsFigure 2 provides an overview of the new TP documentation rulesincluded in the draft bill.

CbCR and TP risk assessmentIt could be expected that MNEs will face a challenge to complywith the new TP documentation rules, especially the CbCRrequirements. The CbCR template will require MNEs to provideannually, and for each jurisdiction in which they do business,aggregate information relating to the global allocation of the theirincome and taxes paid, together with certain indicators of the loca-tion of economic activity within the MNE group, as well as infor-

mation about which entities do business in a particular jurisdictionand the business activities in which each entity engages.

Accordingly, MNEs would be well advised to keep the controlof their data and financial information provided to tax administra-tions globally, especially through the CbC reports. In addition,many MNEs are in the process of evaluating the possibilities of IT-based software solutions to comply with tightened documentationand reporting requirements.

As outlined by the OECD, the CbCR is a tool that is intendedto allow tax administrations to perform high-level TP risk assess-ments, or to evaluate other BEPS-related risks.

Accordingly, it seems to be advisable for MNEs to also performan internal TP risk assessment based on the information includedin their CbC report before it is provided to the tax administrations.

Key performance indicators (KPIs)Companies usually use KPIs to measure how effectively key busi-ness objectives are achieved and to evaluate their success at reach-ing targets. It could be expected that tax administrations will alsouse certain KPIs for their future TP risk assessment of MNEs fromtheir fiscal point of view.

Based on the figures provided through the CbC report, variousKPIs could be calculated, which may be applied by tax authoritiesfor the future TP risk assessment of MNEs.

For example the ‘EBT per employee’ KPI could be applied as anindicator to identify companies in countries with low tax rates andconsidering economic substance of companies involved in thevalue-chain on the basis of headcount (see Figure 3).

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Figure 3: EBT per employee