Current Survey on the Cost-Plus Method in the DACH-Region
Dr. Sven-Eric Bärsch, Dr. Xaver Ditz, and Dr. Sven Kluge from Flick Gocke Schaumburg together with Dr. Ralf Eberenz and Dr. Moritz Schröder from Horvath & Partners published about a transfer pricing (“TP”) survey of multinational enterprises (“MNEs”) in the German-speaking countries (“DACH-region”). The survey especially covers intra-group services (“IGS”). This reflects that these days this type of transaction is the focus of TP examinations as much as as classical tangible-goods transactions.
Intra-Group Service Provision
About 80 percent of the respondents use a centralized department for the provision of IGS. Such specialized departments help improving the transparency of the expenses for the services. This is a strategic factor, as the cost-basis of the IGS is the most frequent issue during a tax examination. From an economic perspective, the centralization also increases the efficiency of the services. Another important topic in tax examinations is the documentation of and evidence for the provided IGS.
Applied Transfer Pricing Methods
Regarding the transfer pricing method (“TPM”), the survey shows that for IGS, the cost-plus method (“CPM”) clearly dominates. The proportion is – with still 77 percent – lowest for R&D and marketing services. The CPM is also used in over 60 percent of controlled sales of intermediate products. For final and trade products, it is still mostly applied method, although closely followed by the transactional net-margin method (“TNMM”).
Importance of Tax Certainty
Another finding from the survey is the importance of tax certainty. This applies specifically for the charging of IGS. Nevertheless, the DACH-MNEs generally perceive TP as a tax certainty topic; over 80 percent of the respondents consider this important. On second place follows the profit calculation of the individual legal entities. However, only slightly less than 50 percent of respondents consider this important. Only about one fifth of respondents consider TP an important means of tax optimization in general. This is more extreme for IGS. Specifically, less than 10 percent consider the charging of IGS as important for tax optimization.
Our Views and Thoughts
In our view, the outcomes of the survey are largely not surprising. Nevertheless, they provide a valuable confirmation of general observations. IGS are traditionally a topic where detailed analyses are often disproportionate to the observed importance for tax purposes. Accordingly, simplified or pragmatic approaches are often requested by clients. This necessarily makes them a target for tax examiners, especially where the TP documentation is lacking. Without documented evidence, taxpayers often have serious difficulties handling challenges by the examiners.
Interesting is the degree to which MNEs in the DACH-region rely on the CPM for finished and trade goods. Nevertheless, it can be assumed that this will largely not be the CPM in the international understanding, thus on a gross profit basis. Rather, we assume that the respondents will often apply a cost-based TNMM. In this case, reconciling it with the more typical EBIT-margin-based pricing should be possible. For IGS, the high proportion of the CPM is not surprising and in line with observed international practices.
Finally, it is interesting to see how few respondents attribute TP an importance for tax optimization. It is completely in line with the concept of the arm’s-length principle but contrary to public perception. An example would be a report of the Tax Justice Network from 20 April 2019, which identified TP as a major tool of tax avoidance (see out respective news-post from 28 April 2019). In reality, it will be difficult to use TP for such purposes. While taxpayers may use areas of subjective judgement to reduce tax burden, a detailed analysis will typically limit this to a small degree.
Sources
The article of Bärsch, Ditz, Eberenz, Kluge, and Schröder was published on 20 June 2022 in “Der Betrieb” Nr. 25 on page 1473 through 1478.