How to comply with “Documentation” provisions on Transfer Pricing

1. GTP GlobalTransferPricing Business Solutions GmbH How to comply with “Documentation” provisions on Transfer Pricing 1. Globalization and the Multinational Firm Many economies around the world are built on the notion that international trade and cross- border business are beneficial for growth and wealth. Today, about two-thirds of that cross- border business is organized within the boundaries of multinational firms, i.e. business between transaction partners which belong to the same shareholders and/or decision-makers. This share may increase if one anticipates the future relevance of platform economies. For tax purposes, such transaction partners are defined as “related parties” and the criteria of the shareholder, management, or economic dependency are set in international tax law to determine whether a transaction party is “related” to another one. If no such “relatedness” can be assumed, the transaction party is a “third party” to the other partner of that given business transaction. 2. Transfer Pricing & Income Allocation Cross-border business between related parties of the same multinational group requests the taxpayers involved in a particular effort on complying with local tax provisions on income allocation and corporate taxation. The arm’s length principle is set by the OECD and many jurisdictions around the world as the fundamental guidance on the assessment of whether transfer prices were decided on as third parties would have done, or would do. In addition, tax compliance provisions determine the related-party taxpayers provide to tax authorities certain documents and fact evidence on the transfer pricing model of the multinational group to which the related-party taxpayer belongs to. Various stakeholders are involved in the big “transfer pricing game” and key players are the related-party taxpayers, customers & suppliers, governments, and external experts. The OECD has launched a comprehensive process of fostering and harmonizing such provisions. Among others, the so-called OECD BEPS Action Plan 13 recommends to nation-states the introduction of such harmonized documentation model which consists of: • Master File:Bird’s view on the multinational’s transfer pricing system • Local File: country-specific details on transfer pricing such as volumes, pricing models, arm’s length assessment GTP GlobalTransferPricing Business Solutions GmbH | Wertinger Strasse. 40, 86368 Gersthofen | + 49 08219998230

2. • Country-by-Country-Reporting (CbCR): quantitative and qualitative standard on global reporting for tax purposes for companies of larger than 750 million Euro. 3. Mid-sized Groups and Documentation Surprisingly, still as of today, some mid-sized groups have not yet started any structured documentation process which results in consistency across entities and efficiency of compliance work. Others, though having started, were not yet audited by tax authorities of the related-party locations. Luckily. Others were audited but the focus of the audit, actually, was not on transfer pricing in a very depth. They may feel lucky because other causes are known in which even “small taxpayer units” in the meaning of documentation provisions are not only faced with income adjustment on the domestic level, but with controversy, non-mitigation of the double tax effect (due to a lack of double tax treaty), and, interestingly, ended up in the Federal Tax Court (BFH Court case I R 54/19). The OECD BEPS project further elapses and quickly produces new recommendations to nation- states. Pillar I and Pillar II issues are in the middle of the discussion. Digitalization and digital business models have triggered this discussion, as traditional tax concepts miss catching the tax dollars. Tax compliance management and risk involved in potentially not being compliant increases. And transfer pricing documentation should be considered a by-product of a sound transfer pricing management system. GTP GlobalTransferPricing Business Solutions GmbH | Wertinger Strasse. 40, 86368 Gersthofen | + 49 08219998230

3. 4. Standardization and Simplification GTP® pledges for standardization and simplification of compliance work – in particular for the mid-sized groups. Nowadays, it is defined and almost clear what should be documented for tax purposes. Most nation-states have issued legal provisions with details and the OECD provides the OECD Country Profiles. A group-wide transfer pricing model like the compliance application of the GTP® Transfer Pricing Management concept is literally the most cost-effective insurance policy on tax risk related to transfer pricing and income allocation. With the GTP® model, transfer pricing becomes so easy and straightforward that big solutions often are not necessary. For information, visit www.GlobalTransferPricing.com GTP GlobalTransferPricing Business Solutions GmbH | Wertinger Strasse. 40, 86368 Gersthofen | + 49 08219998230