Possibilities for improving transfer pricing procedures

Abstract

In view of the indeterminacy of the arm's length principle, the fulfillment of tax obligations in the area of transfer pricing is dependent on efficient taxation procedures. This study examines the question of where possible deficits in compliance with tax regulations lie in the area of tax transfer pricing, what the reasons for these are and whether tax compliance can be strengthened through trust in appropriate administrative action. It is based on semi-structured interviews with German representatives of companies, their advisors and members of the tax authorities. Our analysis of transfer pricing procedures in Germany shows a discernible build-up of competence and resources, particularly at the level of the federal authorities, as well as the development of cooperative dispute prevention and resolution programs. Nevertheless, there are still shortcomings in all phases of transfer pricing procedures: in particular, cost-intensive reporting obligations and the continuing pressure to reach an agreement in the tax audit phase have a counterproductive effect. An improved focus of administrative action on early tax certainty and greater effectiveness of intergovernmental procedures (compliance programs, joint audits and mutual agreement procedures) would be helpful. The greater use of procedural law to implement transfer pricing for taxpayers with cross-border activities is proportionate if there is a mirror image of relief for these taxpayers through instruments to protect confidence and disposition.

Keywords: tax transfer pricing, tax compliance, uncertainty, tax procedures

JEL Classification: H25, H26, J52, K34