BFH rules on interest on additional tax resulting from cross-border transfer pricing adjustments
Germany’s Federal Tax Court (BFH) has confirmed that a taxpayer is required to pay interest on additional taxes resulting from a cross-border transfer pricing adjustment even if the adjustment does not trigger a corresponding interest refund in the other country.
Under German tax law, interest on tax payments and refunds apply in certain cases. The interest rate prescribed by law is 6% per year or 0.5% per month. Due to the high interest rate compared to current market rates and the long periods that usually are open for tax audits on German companies, interest can give rise to an additional 20%-30% burden on the additional tax imposed under a tax audit. If a tax audit results in a tax refund, the taxpayer is entitled to an interest refund at the same rate.
The German tax authorities may be required to waive portions of the interest in certain cases, such as where the collection of the interest would be “obviously unreasonable.
In the case before the BFH, the German tax authorities had assessed additional tax on a German company following a tax audit. The additional tax was caused by a transfer pricing adjustment vis-à-vis an Austrian related party. The tax authorities imposed interest on the additional tax.
The German taxpayer applied for a waiver of a portion of the interest arguing that the collection of the interest was unreasonable because the tax refund received by the Austrian company as a result of the transfer pricing adjustment was not interest-bearing under Austrian law.
The BFH rejected the waiver application on the grounds that generally only the facts and circumstances at the level of the legal entity that must pay the interest are taken into account; the facts and circumstances at other legal entities/persons (in this case, the Austrian related party) are irrelevant.
The BFH did not rule on whether a waiver may have been required if the transfer pricing adjustment was made vis-à-vis an Austrian branch of the German company, i.e. if the same person was affected by the tax payment and the tax refund.
The BFH decision demonstrates the increasing importance of the interest regime in Germany given the widening gap between the statutory interest rate of 6% and current market rates (see also http://www.deloitte-tax-news.de/german-tax-legal-news/bfh-questions-constitutionality-of-interest-deduction-limitation-rule.html).