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Germany: Transfer Pricing

European countries are increasingly being confronted with the problem of double taxation of profits resulting from business relations with their associated enterprises based in so-called BRICS countries (Brazil, Russia, India, China, South Africa). This is because the BRICS countries agree in principle about the amount of transfer prices for business relations between local enterprises and their foreign group companies.

According to their vision, transfer prices between these enterprises should lead to significantly higher profit margins for the local enterprise than comparable transactions between group companies in developed countries. They cite special cost benefits and specific market conditions in BRICS as justification for that argument.

This leads, in many cases, to massive profit increases in the local subsidiaries during tax audits by the BRICS countries and then to a double taxation of such profits. In order to reduce these risks, the United Nations published the 'Practical Manual on Transfer Pricing for Developing Countries' (Practical Manual) in June 2013 with the aim of providing guidance to policy makers and tax administrations in developing countries on the interpretation and application of the 'arm’s length' standard.

BRICS are of the opinion that even the access to their markets as well as the locational advantage associated with them (lower wage costs, qualified employees, high demand) should be subject to charge. Such charge might come in the form of royalties or transfer prices which result in a higher profit margin for the local enterprise than would be justified according to a European understanding. So, the problem is to agree on transfer prices which both correspond to the approach of the BRICS countries, and are still reasonable according to the understanding of European countries.

The special characteristics of the market shall be included in the determination of the transfer prices. OECD also dealt with this subject in its draft paper of 11 March 2014 (Transfer Pricing Comparability Data and Developing Countries) and introduces problem-solving approaches to determine transfer prices at arm’s length even though no data on local comparable actions are available in the emerging or developing countries.

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