16.07.2024Ministry of Finance issues new administrative guidance on advance pricing agreements
The new guidance has been highly anticipated since the introduction in 2021 of the legal basis for filing an advance pricing agreement request.
On 26 June 2024, the German Ministry of Finance published new administrative guidance regarding advance pricing agreements (APAs). The new administrative guidance has been highly anticipated, as the legal basis for filing APA requests was introduced in 2021 under section 89a of the Fiscal Code (AO) and the former administrative guidance on APAs was published in 2006.
As transfer pricing rules in different jurisdictions are becoming more complex for multinationals to comply with and, as a consequence, tax controversy matters (including the resolution of double taxation) are on the rise, the APA is one of the few instruments that aims to achieve legal certainty to proactively prevent double taxation.
Comparing the new guidance to the former guidance, the following key points should be noted:
- In cross-border transactions subject to a double tax treaty, the APA takes precedence over other unilateral binding instruments. For example, certain ongoing procedures must be postponed until an APA procedure has been completed and may even be precluded if there is an opportunity to pursue an APA procedure.
- Only business transactions that have not yet been finalized can be the subject of an APA. In the case of an ongoing business transaction, the APA will only cover transactions as from the beginning of the fiscal year in which an APA request is submitted. It is no longer possible to agree on an earlier start date. However, a rollback can be requested if the necessary requirements are met.
- The reasons for a rejection are defined for various circumstances, e.g., if the APA targets an unjustified tax advantage, such as the use of a preferential tax regime, or if the obligation to cooperate under section 90 AO is not fully or timely fulfilled. There are also stricter deadlines, e.g., for acceptance (generally two months) or providing the compliance report.
- For tax groups, a controlling company is usually not eligible for double tax treaty benefits in regard to attributed income of a controlled company; nevertheless, the controlling company still has to declare that it waives the right to legal remedies.
- In line with the entry into force of section 89a AO, the new guidance is applicable to APA requests received as from 9 June 2021.
Furthermore, the new guidance includes the following points:
- Although documents generally are to be submitted in German, the new guidance states that the APA request may be submitted in English if this is the common working language of the involved competent authorities, which is usually the case.
- In general, the APA will apply to the legal successor of one of the involved parties, given certain other requirements are fulfilled.
- The APA procedure can be expedited, if the parties attach the result protocol of a joint audit covering the relevant transaction to the APA request.
Provisions contained in the former guidance focusing on specific transfer pricing cases (e.g., cost sharing agreements) and relief for small and medium-sized enterprises, as well as the annexes, have not been included in the new guidance.
The new guidance provides valuable insight into the application of section 89a AO on APAs in practice. Given its entry into force date, the new guidance is immediately relevant for ongoing negotiations and APA requests filed after its entry into force.
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