Transfer pricing is the top focus area in group audits. Those who cannot provide audit-proof documentation risk estimation — usually to their detriment. When documentation is mandatory and what it must contain.
What transfer prices are
Transfer prices are the prices at which affiliated companies perform services or deliver goods to each other. Classic cases:
- Holding GmbH advises operational subsidiary GmbH for a fee
- German parent supplies components to foreign subsidiary
- Sister companies share IT infrastructure and allocate costs
- Intra-group loan with interest
- Royalties for group-owned IP
These prices must comply with the arm's length principle They must be calculated as they would be among independent third parties. Those who set prices too high or too low shift profits — and that is exactly what the tax office checks.
When documentation is mandatory
Obligation under § 90 para. 3 AO in conjunction with GAufzV
Documentation is mandatory when:
- Cross-border business relationships exist with related parties
- Total services > €6 million (goods) or > €600,000 (other services) per year
Master File & Local File (CbCR)
For larger groups (group revenue > €750 million), the following also applies:
- Master File: Overview of global group structure, value chain, and transfer pricing policy
- Local File: Detailed documentation of significant transactions per country
- Country-by-Country Reporting: Annual reporting of group key figures per country
What the documentation must contain
Description of the facts
- Group organizational chart and ownership structures
- Description of the individual companies and their functions
- Value creation contribution of each company
- Significant intangible assets (brands, patents, know-how)
- List of cross-border business relationships
Appropriateness analysis
- Function and risk analysis per transaction
- Transfer pricing method (comparable uncontrolled price method, resale price method, cost-plus method, profit split method, residual profit method)
- Justification of the method choice
- Benchmark study with comparative data
- Result and conclusion
In the event of a tax audit, the transfer pricing documentation must be submitted within 30 days to be submitted. Those who fail to do so are considered delinquent. For exceptional business transactions (restructurings, IP transfers), the deadline is even shortened to 30 days after the transaction.
Sanctions for violations
- Estimation to the detriment of the taxpayer: In case of missing or inadequate documentation, the tax office exercises estimation authority. Estimates are typically 20–50% above the self-reported amounts.
- Surcharge: In case of late submission, 5–10% of the correction amount, at least €5,000.
- Fine: In case of incomplete documentation, up to €10,000 per violation.
What we do at TABAK
For each client with cross-border interconnections, we create the transfer pricing documentation audit-proof and up-to-date. We coordinate with foreign partner law firms, conduct benchmark studies using databases such as TP-Catalyst or RoyaltyStat, and provide the master file/local file structure in the format recommended by the OECD.
Review transfer pricing documentation.
We analyze your current documentation for audit-proof quality and close the gaps before the next audit.
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