Enhanced duties of documentation

Arm’s length documentation is no longer sufficient; a German taxpayer must
now fully document all aspects of its trading and other relations with foreign
related parties. This extends to the internal reasons for the decisions taken and
pricing policies followed and includes records of third-party comparisons as
well as any adjustments thereto in reflection of differing circumstances. Two
Finance Ministry decrees set out the official expectations in detail.

Failure to document adequately or, for unusual transactions, promptly will lead to serious
penalties. If weak documentation means that the tax auditors can determine
taxable income only within a range, they may base their finding on the end of
the range least favourable to the taxpayer. Any doubts go to his detriment.

This will almost guarantee a negative audit finding, opening the way to a fine of
between 5% and 10% of the income adjustment