Transfer Pricing in the crisisTransfer Pricing in the crisisMilan, October 2009Milan, October 2009

Agenda

I. Current tax audit practice in Germany

II. The impact of the crisis

III. Outlook

I. Current tax audit practice in Germany (1)

• Focus on the period 2003/4 – 2006/7• Tax auditor plus TP specialist• Main goals beside collecting tax revenue

– Receive a TP documentation in writing– Fix a mutual understanding between tax office and client

about allocation of risks / functions andmajor transactions, e. g. intercompany charges

– Use this as basis for the next audit– Enforce information sharing cross-boarder

I. Current tax audit practice in Germany (2)

• Makes deals more difficult as the audit TP specialists needs to give his approval for the TP issues first (he is not involved nor interested in the national issues)

• Requires a defense team = Tax advisor plus TP specialist and close co-ordination in order to get the deal

• Deals are often driven by lack of documentation, especially for cost allocation schemes

II. The impact of the crisis

• Restructuring costs• Adjustment payments• FX risks

1. Restructuring costs

• No specific guidance available• Standard principles shall be followed• Functional analyses decisive

T1-Corp T2-Corp

M-Corp

Toll manufacturer

Redundancy costs shall be born by M-Corp

Example

Contract manufacturer

Redundancy costs shall be splitted

Q – Payment for Intangibles at the start-up?

Cost +

Cost ++

Capacity redundancy

2. Adjustment payments

• More frequent = higher risk• Set-offs only recognized by German tax authority

if agreed upfront and in writing• Waiver = generates taxable income• Any modification shall be supported by a business

case and economic substance

3. FX risks

• Area of uncertainty due to lack of instructions• Discussion with German tax authorities highlights

importance of availability of a contract in writing including section regarding foreign exchange risk

• Agreement shall be overruled only in case of a permanent loss position for one of the parties

III. Outlook (1)

TP audit = key element for collecting tax revenue

• Support for the client ensuring ongoing documentation process is crucial

• Focus on non-ordinary transactions, e. g.– driven by change of strategy

– market circumstances

III. Outlook (2)

Intercompany cost allocation scheme

• Detailed documentation becomes more crucial

• Benchmarking analyses less important

• Focus on:– Specific benefits

– Involved resources

– Allocation keys

III. Outlook (3)

Counter-correction process becomes important

• Avoid stand-alone solutions, which won't be accepted by the other countries tax authority

• Focus on tax audit reports with a detailed explanation of the circumstances underlying the tax correction

Thanks for your attention

Sten Günsel Professional background:

University of Halle/Wittenberg School of Law, Mandatory Legal Clerkship – Focus on Tax LawFrom 1995 – 2000 PwC Hanover, 1999 qualification as tax advisoraccording to German lawFrom 2000 – 2005 PwC Czech Republic, Brno/Prague, Leader of the German tax deskFrom 2005 – 2006 Leitner & Leitner, Czech Republic, PartnerSince 2006 Ebner Stolz Mönning Bachem, Stuttgart – works in his capacity as tax advisor and attorney

Main Areas of Focus:International taxation, Expatriate taxation, Tax structuring, Transfer pricing, Central and Eastern Europe

Business Sectors:Investment - Service - Distribution – Manufacturer - Automotive

German Tax advisor – Attorney at Law –

Certified Expert for International Tax

sten.guensel@ebnerstolz.dePhone +49 711 2049 1258Fax +49 711 2049 3258

Ebner Stolz Mönning Bachem locations in Germany, over 700 employees

Kiel *)

Hamburg *)

HannoverBerlin

München

Leipzig

Stuttgart

Frankfurt

SolingenKöln

Düsseldorf

Kiel *)

Hamburg *)

HannoverBerlin

München

Leipzig

Stuttgart

Frankfurt

Kiel

Hamburg

HannoverBerlin

München

Leipzig

Stuttgart

Reutlingen

Frankfurt

SolingenKöln

Düsseldorf

Bonn

Kiel *)

Hamburg *)

HannoverBerlin

München

Leipzig

Stuttgart

Frankfurt

SolingenKöln

Düsseldorf

Kiel *)

Hamburg *)

HannoverBerlin

München

Leipzig

Stuttgart

Frankfurt

Kiel

Hamburg

HannoverBerlin

München

Leipzig

Stuttgart

Reutlingen

Frankfurt

SolingenKöln

Düsseldorf

Bonn