Transfer Pricing of a contract manufacturer

1. Transfer Pricing of a contract manufacturer Markus Volkmann Federal Central Tax Office Germany, Bonn Federal Audit Department OECD Transfer Pricing Case Studies WorkshopSan Jose, 31 March – 4 April 2014

2. Germany, a federation with16 federal states Consent tax law,but federal states are responsiblefor their own tax matters 16 views of one problem may exist.

3. German Tax Administration Federation 16Federal States Federal Ministryof Finance (Berlin) 16 Ministries of the States Federal Central Tax Office (Bonn) 11 RegionalRevenue Offices 42,100 employees 640Local Tax Offices 144,700 employees

4. International responsibilities for: tax refund information exchange Mutual Agreement Procedures Advance Pricing Agreements Federal Audit Department audit of LTP Federal Central Tax Office

5. 230 auditors cooperation with the local tax offices joint audit teams Audit of large taxpayers(turnover > 100 million Euro) Industry specialists Priority: transfer pricing Working on APA and MAP Federal Audit Department

6. 640 Local Tax Offices 13.200 auditors (2012) 19 bn Euro additional taxes (2012) Specialists for international tax issues Seminars at the Federal Finance Academy Basics / Transfer Pricing / BusinessRestructuring / Permanent Establishments International tax law / Use of databases Audit of TP in Germany

7. „Large Enterprise“ • Classification every three yearslast 01.01.2013

8. „Large Enterprise“

9. General Tax Audits Audit procedure: Notification / tax audit report / adjusted tax base Taxpayer: Obligation to co-operate Penalties for late submission of information and documents Audit (Transfer Pricing) More taxpayer obligations, if international tax issues (Sec. 90 (2) General Tax Code) TP documentation requirements since 2003 Penalties Regulations

10. Since 2003: Sec. 90 (3) General Tax Code Taxpayers with foreign connections Shareholder / participation: 25 % Exceptions: Small and medium sized enterprises Content of documentation Facts and details of the transaction ALP – Compliance Documentation requirements

11. Taxadministration: request to document No obligation to do it in advance Exception: business restructuring / permanent contracts* Time limit: 60 days (*30 days) Language: German (upon taxpayers request, any other living languages - english) Burden of proof depends on the documentation Documentation requirements

12. Non-Compliance with documentation requirements Late submission of documentation Failure to provide Applied rarely, only in cases of refusal Crucial, effort to cooperate with the taxadministration Penalties

13. Foreign Tax Law (AStG) Sec.1 AStG: arm‘s length principle Administration Guidelines Transfer Pricing (1983) Permanent establishments (1999) Documentations (2005) Business restructurings (2010) Double Taxation Agreements Other Regulations

14. Transfer Pricing Workshop P • Case: Contract manufacturer • Parent company: P • Subsidiary: P1 • Foundation: 2003 • P1 produces for P • No important tangibles or intangibles 100% P1

15. Tanks for machines since 2003 main work in Germany Material free of charge from P to P1 P1 assembles the parts P leak testing, completing, delivering to the customer Product 1

16. Tubes for machines since 2005 Material supply of material to P1 not free of charge production scrap remains P procurement and logistic services Product 2

17. Price per unit Cost plus method Expected production costs + 8% profit margin Material for product 2: material costs + 2% overhead + profit margin No Price adjustments Transfer Pricing System

18. Financial performance

19. Permanent losses - arm‘s length? P anticipates corrections of the foreign TA. What changes in the transfer pricing system are necessary? Problem / Question