New article in the Tax Notes journal: updated German TP guidelines are a clear statement on economic substance

I'm delighted to announce that my colleague Rebecca Flanagan and I have written an article for the Tax Notes journal. You'll find it here.

In it we examine the German Ministry of Finance's Administrative Principles on Transfer Pricing, which were updated in June. These will require attention by any groups who operate in Germany. And there's a bigger picture too: a clear message for TP professionals around the world.

Let's start with the detail. As you'll know if you saw our guest blog post by the German-based TP professionals Oliver Treidler and Tom-Eric Kunz, or listened to our recent podcast on the subject, the updated Principles take a very clear position on how the arm's length principle should be applied. They explicitly state that the decisive point in time (“maßgebender Zeitpunkt”) is the “conclusion of the relevant agreement, not the time when the transaction is performed.”

The updated Principles also set standards for evidencing compliance. In our translation: "The taxpayer must therefore, e.g. when implementing an [intercompany] agreement with appropriate contractual provisions, ensure that he will have access to evidence to present it to the tax authorities.”

In the article we examine all of this in detail, and suggest five practical steps that MNEs and their advisers should take as a result.

Now the bigger picture. The 2023 German update may seem radical in its insistence on ex ante price setting and implementing ICAs in advance. But TP professionals globally already knew that this was the only way to create a strong foundation for operational TP, even if some were ignoring that fact. So the new German guidelines don't reflect a substantive change in approach. They are, however – to borrow Oliver and Tom-Eric's words – a 'last call' to address a key issue in the legal implementation of TP, namely the need to implement intercompany agreements in advance, rather than after the event.

You can read the article here. Please do share your thoughts on it.