Principles for the Transfer of Functions

It is necessary to document the legal and commercial bases of
transfer price arrangements and any other business relationships
subject to the arm’s length principle. At the request of the tax
authorities, documentation must be presented within 60 days.
Although a request will generally be made only in the context of
a tax audit, requests in other circumstances are possible. If no
documentation is presented, the tax authorities are entitled by
law to assume that the profts of the German entity have been
reduced because of inappropriate transfer prices, and can as a
result make appropriate adjustments to taxable income by way
of an estimate. Furthermore, the tax authorities have the option
of levying additional payments and reversing the burden of proof,
placing it on the taxpayer. The taxpayer may avoid such sanc-
tions by fling proper transfer pricing documentation in a timely
manner and by basing its transfer pricing arrangements on the
relevant parameters.

With regard to extraordinary business events (such as reorgan-
izations, signifcant changes in functions and risks, relevant
changes to business strategies, the conclusion or modifcation
of major long-term contracts), documentation must be created
within six months of the event (contemporaneous documenta-
tion).