Germany introduced Draft Taxation Act 2013

Germany’s Federal Ministry of Finance issued a draft Taxation Act 2013 bill on 6 March 2013 that includes a number of changes to German tax law, and which, if adopted, will have an impact on transfer pricing

The draft tax act broadly adopts the authorized OECD approach (AOA) to the taxation of German permanent establishments (PEs) and includes provisions on the enhanced cooperation of the German and foreign tax authorities.

According to the technical explanations included in the draft, proposed amendments to the Foreign Tax Act would standardize the German tax consequences regardless of the legal form of the investment (i.e. whether a subsidiary, partnership or branch). This would require, in particular, the alignment of the tax treatment of a PE to a greater extent with that of subsidiaries. The draft proposes changes so that German law would be in line with the AOA regarding the treatment of a PE. Under this approach, a PE would be treated like a separate and independent enterprise from a tax perspective, thus transposing new article 7 of the OECD model treaty into German domestic law. If the measure becomes effective as proposed, the functionally separate legal entity approach would be nearly fully adopted, with only minor differences remaining.

The draft tax act also would implement into domestic law the EU directive on administrative cooperation in the field of taxation, which should result in improved cooperation of the German tax authorities with their foreign counterparts. This move could mean that more information on foreign entities (including transfer pricing information) would be made available to the German tax authorities, so it would become more important that transfer pricing arrangements comply with the arm’s length principle and be consistent at the group level.