Transfer Pricing: European Rules and Practice , contains detailed explanations of the transfer pricing rules and practice in France, the United Kingdom and Germany. This in-depth analysis makes up Chapters 21, 22 and 23 of Bloomberg BNA’s Tax Management Transfer Pricing Portfolio Series.
This Portfolio boasts an extensive list of expert authors: Bruno Gouthière, Partner CMS Bureau Françis Lefebvre in France; Steve Edge, Tony Beare, Bob Ramage, Graham Earles, Tax Specialists at Slaughter & May in London, England, Dr. Klaus Sieker, Partner at Flick Gocke Schaumburg in Frankfurt, Germany.
Chapter 21, Transfer Pricing Rules and Practice in France, examines the primary legal basis for French transfer pricing adjustments, Section 57 of the General Tax Code, as well as the alternative legal bases (the act of mismanagement concept, the abuse of law theory, excessive payments to tax havens, and recapture of profits shifted to tax havens). This chapter describes the approach of the French revenue authorities in determining transfer prices, the practical considerations in transfer pricing investigations, and the role of double taxation agreements in the transfer pricing context.
Chapter 22, Transfer Pricing Rules and Practice in the United Kingdom, analyzes the United Kingdom's transfer pricing legislation introduced in 1998 (now found in Schedule 28AA to ICTA 1988), and the theory of disallowance of trading expenses. The procedure for seeking advance pricing agreements (introduced in 1999) is summarized. This chapter also describes the course of a transfer pricing inquiry and examines the practical aspects of defending the taxpayer's position with the Revenue & Customs (Inland Revenue before its consolidation with Customs & Excise). In addition, the methods of determining the arm's length price that are accepted by Revenue & Customs are discussed, as are related issues such as the former relationship between the Inland Revenue and HM Customs & Excise.
Chapter 23, Transfer Pricing Rules and Practice in Germany, begins with a discussion of the relevance of transfer pricing in Germany and the role of transfer pricing in the German tax system. This chapter then analyzes the German transfer pricing rules and describes the application of those rules to specific types of transactions, including transfers of tangible and intangible property, interest and similar remuneration, services, and cost sharing arrangements. The chapter also discusses the consequences of a transfer pricing adjustment, compliance and litigation, administrative rules, and the coordination of transfer prices with German customs and value added tax declarations.
Transfer Pricing: European Rules and Practice allows you to benefit from:
This Portfolio is part of the Foreign Income Portfolios Library, a comprehensive series containing more than 90 Portfolios, which covers critical transactions and issues in international taxation. This highly-regarded resource service offers commentary on a wide range of foreign income topics including: Foreign Tax Credit, Business Operations in more than 40 foreign countries, Branch ProfitsTax, Source of Income Rules, Subpart F (Controlled Foreign Corporations), Foreign Partnerships and Partners, Transfer Pricing, and more.
Detailed Analysis
CHAPTER 21: TRANSFER PRICING RULES AND PRACTICE IN FRANCE by Bruno Gouthière, Partner CMS Bureau Françis Lefebvre France
21:I. Introduction
A. Overview of the French Attitude Vis-Ã-Vis Transfer Pricing
B. Transfer Pricing Within the Context of the French Taxation Principles Governing Companies or Enterprises
1. Overview of the French Territoriality Principle and Its Consequences in the Field of Transfer Pricing
2. The General Principle of Nonrecognition of Groups for Tax Purposes
a. Consolidated Reporting Permitted by Ruling
b. Ability to Take into Account Foreign Losses Under Case Law
21:II. The Predominant Legal Basis for Transfer Pricing Adjustments: Section 57 of the French General Tax Code
A. Overview
B. Conditions for the Application of Section 57
1. Scope of the Provision
a. Broad Interpretation by Regulations and Courts
b. Coordination with Treaty Provisions
2. The Dependence Test: Applicability to Related Companies
a. Legal Dependence
(1) Under Regulations
(2) Under the Case Law
b. De Facto Dependence
c. The Particular Situation of Tax Havens
3. The Transfer of Profits Test: Definition of Transactions Subject to Transfer Pricing Investigation, in General
C. Procedural Matters
1. Overview of the Audit Process
a. Background
b. Discussion with the Taxpayer - The Role of the "Commission Dèpartementale des Impôts"
c. Statute of Limitations
2. Burden of Proof Under Section 57
a. Burden on the Revenue Authorities
b. Burden on the Taxpayer
3. Overview of the Litigation Process
D. Consequences of a Transfer Pricing Adjustment Under Section 57
1. Corporation Tax Consequences
a. The Predominant Method: Direct Evaluation
b. The Secondary and Rarely Used Alternative Method: Comparison of Profits
2. Distributed Income and Withholding Tax Problems
a. Determination of the Applicable Rate
b. Solutions Under Double Taxation Agreements
(1) Treaties Which Follow the Traditional OECD Treaty Wording
(2) Treaties Which Expansively Define Dividends
(3) Treaties Which Refer to Income from Corporate Rights and Assimilated Income
c. Practical Solution to Avoid Withholding Tax
3. Penalties
a. Good Faith ("Absence of Willful Breach")
b. Bad Faith ("Willful Breach")
c. Tax Evasion
d. Avoidance of Penalties
e. Transfer Pricing Documentation Penalty
21:III. Alternative Legal Basis for Transfer Pricing Adjustments
Introductory Material
A. The Act of Mismanagement Concept
1. In General
2. Application to Transfer Pricing Issues
3. Consequences of a Transfer Pricing Adjustment Based on the Act of Mismanagement Concept
B. The Abuse of Law Theory
2. Application of the Abuse of Law Theory in an International Context and in Transfer Pricing Issues
3. Consequences of an Adjustment Under the Abuse of Law Theory
C. Section 238 A: Excessive Payments to "Tax Havens"
1. Conditions Under Which Section 238 A May Be Applicable
2. Consequences of the Application of Section 238 A
3. Ways of Avoiding Section 238 A
D. Section 209 B: Recapture by France of Profits Shifted to "Tax Havens"
1. Situations Under Which Section 209 B Is Applicable
2. Exceptions to the Application of Section 209 B
3. Consequences of the Application of Section 209 B
4. An Illustration of the Application of Section 209 B to Transfer Pricing Issues
5. Ways of Avoiding Section 209 B
21:IV. Tentative Approach of the French Method for Determining Transfer Pricing
A. In General
1. The OECD Commentaries as the French Basic Reference
2. French Perspectives on U.S. Transfer Pricing Policy
a. Increased Risk of Double Taxation: The Commensurate with Income Principle and the Comparable Profits Method
b. Difficulties Concerning Discrimination Problems and Reporting Requirements
B. Transfer Pricing Issues in the Case of Tangible Goods
1. Methods
2. Practical Examples
C. Transfer Pricing Issues in the Case of Intangibles
2. Particular Considerations with Respect to Valuation of Patents in France
3. Practical Examples
D. Transfer Pricing Issues in the Case of Services
1. Administrative Services in General
2. Particular Considerations in the Case of Research and Development Costs
a. Possible Existence of a Partnership Agreement
b. Existence of Services Rendered
c. Amount of Compensation
d. Withholding Tax Issues
E. Loans and Financial Services in General
1. The Level of Interest
a. In General
b. Practical Examples
2. Thin Capitalization Problems
3. Forgiveness of Debt Claims and General Issue of Subsidies Between Related Companies
a. Subsidies of a Commercial Nature
b. Financial Subsidies
c. Illustration of the Above Principles in Case of Guarantee Fees
F. Start-Up and Market Penetration Expenses
G. The Particular Issue of Transfer Pricing in the Presence of a Permanent Establishment
1. Permanent Establishments in General
a. Proportional Allocation
b. Comparative Method
2. Allocation of Profits
3. Allocation of Expenses
21:V. Further Practical Considerations in Transfer Pricing Investigations
A. How Can the DGI Establish a Transfer of Profits?
1. The Right of Communication: Compulsory Disclosure and Visitorial Power
2. Exchange of Information with Treaty Partners
B. How Can the Taxpayer Prepare to Resist Transfer Pricing Adjustments?
2. Overview of the APA Process
3. Discussion of the Regulations
b. Administrative Process
c. Agreement Between the Taxpayer and the Administration
d. Legal Guarantee Given to the Taxpayer
e. Further Obligations of the Taxpayer
f. Administrative Office in Charge
4. The Possibility of Getting a Unilateral APA
5. The Specific Case of a Unilateral APA in the Area of Research and Development
21:VI. Elimination of Double Taxation Resulting from Transfer Pricing Adjustments
1. Determination of the Taxpayer Concerned
2. Procedural Aspects
3. General Remarks on the Outcome of the Procedure
B. The Issue of Corresponding Adjustments
1. Corresponding Adjustments in the Absence of a Distribution of Income
2. Corresponding Adjustments Where There Has Been a Distribution of Income
Chapter 22: TRANSFER PRICING RULES AND PRACTICE IN THE UNITED KINGDOM, A revision by Jenny Cottrell Stephenson Harwood London, England of a previous version by Steve Edge, Tax Specialist Tony Beare, Tax Specialist Bob Ramage, Tax Specialist Graham Earles, Tax Specialist Slaughter & May London, England
22:I. Introduction
22:II. Background: U.K. Corporation Tax
A. Scope
B. Profits of U.K. Resident Companies
1. Income
2. Capital Gains
3. Computational Rules
a. Rules Applying Only to Trading Companies
b. Rules Applying to Both Trading and Investment Companies
C. Profits of Non-U.K. Resident Companies
D. Other Important Features of the U.K. Company Taxation System
1. Assessment Periods and Rate
2. Groups
a. Group Relief
b. Capital Losses
c. Group Income
3. Taxation of Dividends
a. The Former Imputation Rules
b. The April 1999 Changes
c. Shadow ACT
4. Controlled Foreign Companies
5. Administration
a. Corporation Tax Self-Assessment ("CTSA")
b. Payment of Corporation Tax by Installments (Large Companies)
6. Inland Revenue Powers
7. Branches
22:III. Overview of U.K. Transfer Pricing Law
A. The Transfer Pricing Regime Prior to 1999/2000
B. The Current Regime - An Overview
1. Significant Features
2. Features Not Included in the Current Regime
C. Basic Rules of the Current Regime
D. Meaning of Certain Terms in the Current Regime
1. OECD Principles
2. Transaction and Series of Transactions
3. Participation in the Management, Control or Capital of a Person
a. Direct Participation
b. Indirect Participation
4. Advantage in Relation to U.K. Taxation
a. General Position
b. U.K.-to-U.K. Exception
E. Elimination of Double Counting
F. Branches
G. Nonresident Landlords
H. Capital Allowances, Capital Gains, Foreign Exchange, Financial Instruments
I. Special Rules for Petroleum Companies
J. Exemption for Small and Medium-Sized Enterprises
K. Transfer Pricing Examinations for Large Businesses
22:IV. Disallowance of Trading Expenses
22:V. Sharkey v. Wernher and Associated Cases
22:VI. Double Taxation Treaty Provisions
A. Adjustment Provisions
B. Economic Double Taxation
22:VII. The Course of a Transfer Pricing Inquiry
A. Record Keeping Requirements
B. Penalties
C. Practical Considerations and the Working of Cases
D. Section 20 TMA 1970
E. Competent Authority
22:VIII. The Arm's Length Price
A. The Affirmation of the Arm's Length Principle
B. Transaction-Based Methods
C. Profit Methods
D. Practical Considerations
22:IX. Loans and Thin Capitalization
22:X. Advance Pricing Agreements
22:XI. Other Provisions
A. Adjustment of Capital Allowances
1. Background
2. Regulation of Allowances
a. Machinery and Plant
b. Other Capital Expenditures
B. Imputation of Market Value Under TCGA 1992
C. HM Customs & Excise
Chapter 23: TRANSFER PRICING RULES AND PRACTICE IN GERMANY by Dr. Klaus Sieker, Partner Flick Gocke Schaumburg Frankfurt, Germany
23:I. Introduction
A. Relevance of Transfer Pricing in Germany
1. Corporate Law
2. Customs Law
3. Evaluation of Management Performance
4. Income Taxes
B. Relationship Between the German Tax System and Transfer Pricing
1. Overview of the Income Taxation of German Companies
a. Federal and Municipal Tax Rates
b. The Half-Income System
c. Computation of Taxable Income
d. Consolidation
e. Contributions to Capital
f. Distributions
g. Losses
h. Income from Cross-Border Transactions
i. Current Inclusion of Low-Taxed Passive Income of Controlled Foreign Corporations
j. Rules Against Tax Avoidance
2. Taxation of Foreign Multinationals with German Operations
a. Export of Goods and Services
b. Permanent Establishment
c. Partnerships
d. Subsidiaries
3. Tax Planning and Transfer Pricing
4. Assessment of Income Taxes
5. Audit Procedures
6. Administrative and Judicial Appeals
23:II. Basic German Transfer Pricing Rules
A. Transactions Between Related Parties Subject to German Transfer Pricing Rules
B. Parties Subject to Transfer Pricing Reallocation Rules
C. Transfer Pricing Standards
1. Statutes
a. Article 9 (1) OECD Model Income Tax Treaty/ U.S.-Germany Income Tax Treaty
b. Section 8(3) of the Corporation Income Tax Act
c. Section 8(1) of the Corporation Income Tax
d. Section 1(1) of the Foreign Tax Act
e. Section 1(3) of the Foreign Tax Act
f. Section 8a of the Corporation Income Tax Act
g. EU Arbitration Convention
h. Burden of Proof
2. Administrative Interpretations
a. Administrative Guidelines
b. OECD Commentary to Art. 9 and the OECD Transfer Pricing Guidelines
3. Rules for Applying the Arm's Length Principle
4. Available Transfer Pricing Methods
a. Traditional Transactional Methods
b. Profit Methods
c. Other Methods
d. Use of Transfer Pricing Methods
5. German Transfer Pricing Rules Compared with the U.S. and OECD Rules
a. Comparison with the U.S. Rules
b. Comparison with the OECD Rules
23:III. Specific Transfer Pricing Rules for Certain Transactions
A. Arm's Length Transfer Price for Tangible Property
2. Transfer of Tangible Property in Connection with Other Intercompany Transactions
3. Contract Manufacturing
4. Market Penetration and Market Maintenance Costs
5. Marketing Expenses
6. Continuing Losses
7. Acceptance of Below-Cost Prices
8. Currency Exchange Rate Fluctuations
B. Arm's Length Transfer Price for Intangible Property
2. Database on Royalty Rates
3. Adjustments over Time
4. Coordination with Tangible Property Rules
5. Marketing Intangibles
6. Blocked Payments
C. Interest and Similar Remunerations
1. Compensation for Borrowed Funds Treated as Hidden Profit Distribution
2. Appropriate Compensation Level
3. Effect of Foreign Legal Restrictions Against Equity Financing
4. Adjustment of Interest Rates over Time
5. Guarantees and Similar Arrangements
6. Interest-Free Loans
D. Services
2. Services Connected with Other Transactions
3. Marketing Services
4. Financial Services
5. Administrative Services
6. Contract Research
E. Employee Secondments
F. Cost Sharing Arrangements
2. Scope
3. Eligible Participants
4. Allocable Costs
5. Determination of the Cost Share
6. Buy-In / Buy-Out Payments
7. Documentation
8. Consequences of Deficient Cost Sharing Arrangements
9. Miscellaneous
G. Set-Offs
23:IV. Consequences of a Transfer Pricing Adjustment
A. Primary Adjustments Relating to Transactions Between a Parent and Subsidiary
1. Upward Adjustment - Hidden Profit Distribution
2. Upward Adjustment - Hidden Capital Contribution
3. Upward Adjustment - Section 1 of the Foreign Tax Act
4. Downward Adjustment - Hidden Profit Distribution
5. Downward Adjustment - Hidden Capital Contribution
B. Primary Adjustments Relating to Transactions Between Sister Companies
C. Corresponding Adjustments
D. Correlative Adjustments
E. Compensating Adjustments
F. Secondary Adjustments
G. Conforming Adjustments
H. Rescission of Hidden Profit Distributions
I. Interest on Deficiencies and Overpayments
J. Penalties
2. Transfer Pricing Penalties
23:V. Compliance and Litigation
A. Information Reporting and Record Keeping
1. General Remarks
a. Reports on Foreign Investments
b. Tax Returns and Financial Statements
B. Transfer Pricing Audits
2. Audit Approach
3. Justification of Transfer Prices by a Taxpayer
4. Simultaneous Tax Examinations
5. Information Demands of the Tax Authorities
6. Information Sources of the Tax Authorities
C. Administrative Appeals
D. Judicial Appeals
23:VI. Administrative Rules
A. Competent Authority Proceedings
2. Application for German Competent Authority Assistance
3. Carrying Out a Mutual Agreement Procedure
4. Involvement of Taxpayer
5. Implementing the Mutual Agreement
6. Practical Experience
B. Advance Rulings
2. Rulings Requested Subsequent to a Tax Examination
3. Rulings Requested Under the Circular
4. Transfer Pricing Rulings
C. German Participation in U.S. APA Process
D. Arbitration
1. EU Arbitration Convention
2. U.S.-Germany Arbitration Proceedings
3. Arbitration Under Other German Tax Treaties
23:VII. Coordination of Transfer Prices with German Customs and Value Added Tax Declarations
Working Papers
Table of Worksheets
Worksheet 1 Code Général des Impôts - Provisions Relating to Transfer Pricing
Worksheet 2 Livre des Procédures Fiscales - Provisions Relating to Transfer Pricing
Worksheet 3 Ministry of Finance Guidelines on APAs, Administrative Regulation 4 A-8-99 n° 17
Worksheet 4 French Ministry of Finance's Unilateral APA Guidelines [Issued 6/24/2005; translated by Landwell & Associès, Neuilly sur Seine]
Worksheet 11 Index of Abbreviations of U.K. Statutes
Worksheet 12 Statement of Practice SP 1/90
Worksheet 13 Section 770A of the ICTA 1988, as introduced in FA 1998
Worksheet 14 Schedule 28AA as introduced in FA 1998
Worksheet 15 The New Transfer Pricing Legislation
Worksheet 16 Penalties and the New Transfer Pricing Legislation
Worksheet 17 Advance Pricing Agreements: The Inland Revenue's Experience and Expectation of the Bilateral Process for Guidance to Its Taxpayers
Worksheet 18 Advance Pricing Agreements (APAs)
Worksheet 19 Sections 20 and 20A, TMA 1970
Worksheet 20 Inland Revenue Summary Organization Chart
Worksheet 21 Article 9 of the U.S.-Germany Tax Treaty of August 29, 1989.
Worksheet 22 Provision 7 of the Protocol to the U.S.-Germany Tax Treaty of August 29, 1989.
Worksheet 23 Sections 8 and 8a of the German Corporation Tax Act
Worksheet 24 Section 1 of the German Foreign Tax Act
Worksheet 25 German Federal Tax Office's Model Questionnaire for Use in Transfer Pricing Audits
Bibliography
OFFICIAL
Statutes:
(Chapter 21: France):
(Chapter 22: United Kingdom):
Cases:
(Chapter 21: France)
(Chapter 22: United Kingdom)
Cases (Chapter 23: Germany):
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