International Tax Planning and Transfer Pricing Planning: Germany from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The high tax country Germany in the OECD context 2.3 Transfer pricing rules of Germany 2.3.1 Laws and rules 2.3.2 Arm's length principle 2.3.3 Transfer pricing methods 2.3.4 Reporting requirements 2.3.5 Documentation requirements 2.3.6 Cost sharing 2.3.7 Business restructuring 2.3.8 Interaction between customs valuation and transfer pricing 2.3.9 Dispute resolution 2.4 Calculation of the case studies in international tax planning between the Germany and the USA 2.4.1 Design of the tables 2.4.2 BEPS Project progress 2.4.3 The treaty Germany-USA in brief 2.4.4 Germany in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from the US to Germany 2.4.8 Case study 2: Intesests from the US to Germany 2.4.9 Case study 3: Royalties from the US to Germany 2.4.10 Case study 4: Management and technical service fees from the US to Germany 2.4.11 Case study 5: Dividends from Germany to the US 2.4.12 Case study 6: Interests from the Germany to the US 2.4.13 Case study 7: Royalties from the Germany to the US 2.4.14 Case study 8: Management and technical service fees from Germany to the US 2.4.15 Case study 9: Capital gains with the US as asset country and Germany as seller country 2.4.16 Case study 10: Capital gains with Germany as asset country and the US as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetory Fund^[1] Germany confirms in 2016 with a gross domestic product (GDP) of US$ 3,494,9004 million the fourth-highest GDP of the world. In the Germany the combined corporate income tax rate is 29.80% (average rate) and consists of the statutory corporate income tax rate of 15.00% on the – reduced by trade tax - income, the trade tax rate (average rate) of 10.70% on income and the solidarity surcharge rate of 5.50% on the income. Thus, Germany is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Germany has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD^[2] in Germany, economic growth is projected to remain solid, as a robust labor market, low interest rates and a mildly expansionary fiscal stance underpin consumption and residential investment. Demand from emerging market economies and euro area countries is expected to strengthen only slowly, holding back business investment. The unemployment rate will remain at historic lows. The current account surplus will fall somewhat but will remain high. Budgetary policy needs to provide even more support to counter subdued demand in the euro area and to address key structural weaknesses holding back inclusive growth. Reforms to remove barriers to entry and competition in professional services, in telecommunications, postal and rail transport services and crafts would strengthen entrepreneurship, productivity and investment. This chapter provides a survey on the actual tax law frame conditions in Germany and practical support in international tax planning and transfer pricing planning between the US and Germany based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Germany applies the arm’s length principle and the the following transfer pricing methods: the comparable uncontrolled price method, the resale price method, the cost plus method, the transactional net margin method, and the profit split method. The transactional net margin method and the profit split method may only be used if the other methods are not applicable. Briefly, companies are regarded as related when: a company holds directly or indirectly 25.00% of the capital of the other company; a company has the possibility to exercise control of the other company; a third company holds a substantial part of the capital of both companies involved in the transaction; and a third company has the possibility to exercise control of both companies involved in the transaction. There are no specific reporting requirements regarding transfer pricing. Companies are required to keep documentation on transactions with related companies. Cost sharing is allowed, with respect to business restructuring special rules apply, there is a conection between customs valuation and transfer pricing and with respect to dispute resolution advance pricing agreements are available.

Introduction

International tax planning and transfer pricing planning between Germany as a social market economy with a highly skilled labor force, a large capital stock, a low level of corruption, and a high level of innovation, the world's third largest exporter of goods, and the largest national economy in Europe and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2015 3rd place of the most populous countries in the world (4.4% of the world population). ^[3] Further, Germany is the most populous country in Europe (with 81 million inhabitants in 16th place and 1.1% of world population).

According to the International Monetory Fund^[4] Germany confirms in 2016 with a gross domestic product (GDP) of US$ 3,494,9004 million the fourth-highest GDP of the world. In the Germany the combined corporate income tax rate is 29.80% (average rate) ^[5] and consists of the statutory corporate income tax rate of 15.00% on the – reduced by trade tax - income, the trade tax rate (average rate) of 10.70% on income and the solidarity surcharge rate of 5.50% on the income. Thus, Germany is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Germany has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD^[6] in Germany, economic growth is projected to remain solid, as a robust labor market, low interest rates and a mildly expansionary fiscal stance underpin consumption and residential investment. Demand from emerging market economies and euro area countries is expected to strengthen only slowly, holding back business investment. The unemployment rate will remain at historic lows. The current account surplus will fall somewhat but will remain high. Budgetary policy needs to provide even more support to counter subdued demand in the euro area and to address key structural weaknesses holding back inclusive growth. Reforms to remove barriers to entry and competition in professional services, in telecommunications, postal and rail transport services and crafts would strengthen entrepreneurship, productivity and investment. More effective requirements for banks to separate investment from retail banking, and stricter leverage ratio requirements would reduce financial market risks. The structural budget deficit is projected to remain within the medium-term target and government debt will continue to fall. Higher spending on key education services and tax reform would boost inclusive and green growth. Training for immigrants and the supply of childcare and full-day primary schools need to improve. Social security contributions for low-pay workers should be reduced. Lowering the tax rate faced by second earners in a family would remove significant work and career barriers for women. Tax expenditures for activities that damage the environment should be phased out and more taxes on emissions of harmful air pollutants introduced. Real estate valuations for tax purposes should reflect market values, reduced VAT rates should be phased out and taxation of capital gains extended to residential real estate.

According to Orbitax^[7] (Daily Tax News Digest of 3rd June 2016) Germany's Ministry of Finance has reportedly issued draft legislation for the implementation of Country-by-Country (CbC) reporting requirements and other BEPS-related measures.

The CbC reporting requirements are in line with the guidelines developed under Action 13 of the OECD BEPS project, and the requirements included in the recently adopted EU directive for the exchange of CbC reports (previous coverage). Under the draft legislation, the CbC reporting requirement will apply for fiscal years beginning on or after 1 January 2016 for German-parented MNE groups meeting the standard consolidated group revenue threshold of EUR 750 million in the previous year. The draft legislation also provides for secondary reporting requirements, whereby a CbC report will need to be filed by a constituent entity in Germany or a surrogate parent entity, if Germany is unable to obtain a CbC report through exchange from the ultimate parent's jurisdiction of residence. However, such secondary reporting requirements will only apply for fiscal years beginning on or after 1 January 2017.

When required, the CbC report must be filed within 12 months following the end of the fiscal year concerned. In addition, German entities must indicate in their tax return for the year whether it is the ultimate parent of the group, has been designated as a surrogate parent, or is a domestic constituent entity of a group with a foreign parent. For domestic constituent entities, the entity must also indicate in its return which group entity will be filing the CbC report and in which jurisdiction. Failure to provide the information will result in mandatory local filing.

Failure to comply with the CbC reporting requirements will result in penalties of up to EUR 5,000.

The other main measures of the draft legislation include:

• Current transfer pricing documentation requirements are amended in line with the Master and Local file requirements developed under Action 13 for fiscal years beginning on or...