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To perform tax work efficiently, one must be aware of developments in the tax world, as well as the external factors that come into play. According to the OECD, COVID-19 significantly affects the tax world. However, what is the situation during and after the pandemic? How do you efficiently work on the BEPS-analysis, design a TP-model, make the correct situation analysis, and implement an appropriate implementation strategy?

COVID-19

On the 18^th of December 2020, the OECD published their guidance on the transfer pricing implications of the COVID-19 pandemic. The guidance states the need for the analysis of industries and the competitive situation. However, the current situation cannot be compared to the financial crisis of 2008. Therefore, you should pay attention to the differentiated benchmarking, based on the outcome tests and the allocation of extraordinary costs, according to the distribution of functions and risks. ‘Force majeure’ is an exception. State aid is granted according to general TP principles. Besides, always stay alert to changes and assume that you have to make adjustments once the pandemic is over.

BEPS-analysis (Base Erosion and Profit Shifting)

Base Erosion and Profit Shifting (BEPS) refers to tax planning strategies of multinational corporations that exploit gaps and discrepancies of tax rules to avoid tax. The BEPS-package provides governments with 15 actions with (inter)national instruments to tackle tax evasion. The tools give businesses greater certainty by reducing disputes over the application of international tax rules and standardizing compliance requirements.

Recognizing the characteristics and risks of tax evasion, as well as safeguarding the assets and other value drivers, is useful for companies. A DEMPE-analysis (Development, Enhancement, Maintenance, Protection & Exploitation) is convenient for intangible assets.

TP-model (Transfer Pricing Model)

The aftermath of COVID-19 has caused changes in TP-models for multinationals. Multinational corporations must evaluate specific steps in their transfer pricing policies for protection and support during the pandemic.

In addition, a suitability analysis – e.g., benchmarking, TNMM and/or profit distribution – can help you with the design of a TP-model. A transaction structure, such as the extraction of permits, can play a significant role in the TP-model format.

The requirements fora n efficient TP-model are:

Be holistic. Take all tax aspects into account and make use of the operational management concept.
Be flexible. Respond flexibly to operational developments and take economic cycles into account.
Be alert. Active management of profit distribution by function and risk distribution is possible, so make sure you keep an eye on this. In addition, ensure sufficient availability and integrity of data.
Be compatible. Always work according to the correct specifications, work globally and consistently and ensure that you sufficiently document and declare.

Tax situation analysis

When analyzing the tax situation, pay attention to the following:

The BP history
The tax attributes, in particular, loss compensation
The tax rulings
The tax incentives
The extra tax aspects

Implementation strategy

Consider the following points in the implementation strategy:

The advance uni- or bilateral price agreements
The rollbacks
Joint audits of tax audits

Crisis-related adjustments to the TP-model concerning compliance and tax efficiency may be necessary. In principle, the situation regarding COVID-19 does not allow for unique TP routes; however, there are planning options. BEPS sets new requirements for the TP-model but also offers the possibility to check the efficiency of this model. The Base Erosion and Profit Shifting often suggest the analysis of margin-based TP-models with central strategy carriers. International mutual agreement procedures can be part of the tax strategy.

If you have any inquiries, feel free to talk to us, so we can work together to see how you can move forward with your company. You can find information about tax matters on the websites of the OECD and KPMG as well.

Related GCA articles:

Transfer Pricing Agenda 2021: Tax Innovation

Transfer Pricing Agenda 2021: Tax Certainty

Transfer Pricing Guidance on Financial Transactions by OECD

More Global Transparency on Assets and Less Tax Havens on the List

Certainty in Global Tax Issues Expected to Increase

Sources

OECD – KPMG – KPMG Germany

Tax security is a high priority for tax authorities. The most critical influences on investment and location decisions are uncertainties in corporate tax and the VAT system. It is crucial to ensure financial security, which is also the case with digital business models in Germany.

To have Tax Certainty, you need Compliance and Controversy. You have obligations to cooperate with the tax audit, and you need to record your work before and during this audit. Are there tax disputes? Then you can use dispute settlement instruments.

Verwaltungsgrundsätze 2020

The recently applied administrative principles of the tax auditing practice in Germany are:

Increased duty of cooperation, according to Section 90 (2) AO. The relevance of documents and data of foreign persons, such as e-mails, Messenger messages, and electronic media, is necessary. If necessary, you can contractually guarantee the internal group relationship.
Increased obligation to cooperate in accordance with Section 90 (3) AO. You must provide evidence for data or documents as a basis for testing by using different methods.
Suitability documentation. With the introduction of the “Best Method”-rule, you can leverage third-party comparison data for budget calculations and sensitivity analysis for valuation.
Estimates, according to Section 162 (3) and (4) AO. Please refer to this Section if your documentation cannot be used, even if the content differs from the tax authorities’ view.

ATAD implementation law (Anti-Tax Avoidance Directive)

Little change has taken place in ATAD. If you wish to read about this law, the European Commission is consistent in releasing ATAD information.

Tax CMS: Accounting obligations and tax audits in Germany

“For tax evasion of the various forms of intent, conditional intent is already sufficient.” Legal Framework – Decision Implementing Section 143 AO.

If the taxpayer has set up an internal control system (ICS) to meet tax obligations, this may be an indication against intent or recklessness. However, this does not exclude an investigation of the concerned individual case.

Verbandssanktionengesets/Association Sanctions Act (VerSanG):

The basis of the association sanction is a so-called association law. This includes tax evasion. Association acts can be punished with hefty fines; the amount of the fine depends on the company’s size. If there are sufficient factual indications, public prosecutors are obliged to conduct an investigation (principle of legality). It is explicitly stated that (fiscal) CMS measures can have a mitigating effect as part of the sanction.

Transfer Pricing Life Cycle

Even errors down to the smallest details can cause issues. You can use the Transfer Pricing Life Cycle to determine where attention is necessary.

Identification: Provide continuous identification of transfer pricing issues.
Tax Assessment: Provide a tax analysis of the identified transfer pricing issues based on provided calculations.
Contract and Action Instructions: Ensure documented formalization of transfer pricing models in written agreements and instructions.
Methodology and Actual Implementation: Ensure uniform application of transfer pricing methods for comparable transactions.
Data Delivery and Calculation: Provide a consistent calculation of transfer prices according to the defined methodology.
Booking: Provide the accounting mapping of transfer prices in an understandable and uniform form. Monitoring: Provide regular monitoring of compliance with transfer pricing models throughout the year.
Archiving: Provide audit-proof storage of the data in an understandable form.
Process Monitoring and Escalation: Provide monitoring of processes and escalations.
TP Documentation: Secure the documentation content for so-called local files.
Tax audit: Ensure implementation of tax audit findings in subsequent years.

If you need further information, or if you have any questions, feel free to contact us. You can find the necessary information on this topic on the OECD (Organisation for Economic Cooperation and Development), the BMF (Federal Ministry of Finance of Germany), the European Commission, and KPMG Germany websites.

Related GCA articles:

Transfer Pricing Agenda 2021: Tax Efficiency

Transfer Pricing Agenda 2021: Tax Certainty

Transfer Pricing Guidance on Financial Transactions by OECD

Base Erosion and Profit Shifting

Transfer Pricing Focus of International Tax Authorities

Country by Country Reporting

Sources:

Organisation for Economic Cooperation and Development – Federal Ministry of Finance (Germany) – European Commission – KPMG Germany