German Ministry of Finance regulations comment on Advance Mutual Agreements, including Advance Pricing Agreements

• The German Ministry of Finance has issued an updated administrative regulation dealing with bilateral and multilateral Advance Mutual Agreements.

• The updated regulation only partially clarifies the existing practical application issues, however.

Executive summary

On 26 June 2024, the German Ministry of Finance (MoF) issued an updated administrative regulation to the German Fiscal Code (AEAO). The update represents the first time that the MoF has formally commented on the new provision for bilateral and multilateral Advance Mutual Agreements (Sec. 89a German Fiscal Code).

Background

In 2021, the German legislature introduced a new legal basis in Germany for bilateral and multilateral Advance Mutual Agreements (Advance Pricing Agreements (APAs) and other Advance Agreements under a double tax treaty) under Sec. 89a German Fiscal Code. Accordingly, to avoid double taxation, the Federal Central Tax Office (BZSt) can, upon request of the party covered by the double tax treaty (referred to as the applicant), initiate an Advance Mutual Agreement procedure regarding the tax treatment of a precisely defined situation that has not yet been realized at the time of application.

The term of the Advance Mutual Agreement shall regularly not be more than five years. A roll-back period is possible. In a key change from the previous legal provision,1 it is possible for a taxpayer to apply for an Advance Mutual Agreement not only in the context of transfer pricing (under an APA)2 but also for all cross-border transactions that could give rise to double taxation, provided that Advance Mutual Agreement procedures are available in these cases under the law of other states involved.3

Numerous practical questions regarding the new regulation in Sec. 89a German Fiscal Code remained unanswered, and tax practitioners eagerly awaited the corresponding update, which the MoF ultimately issued on 26 June 2024.

The updated AEAO contains provisions on the opening of an Advance Mutual Agreement, the content and scope of the application, the conclusion and termination of the procedure, as well as provisions on the binding effect of the advance agreement, the period of validity and the fees involved. The updated AEAO largely corresponds to the previous administrative practice.

Detailed discussion

Unilateral binding tax ruling

The MoF maintains its position that unilateral binding tax rulings (Sec. 89 German Fiscal Code) should generally not be granted for transfer pricing issues in connection with business transactions between a German entity and a foreign entity that are covered by a double tax treaty. Binding tax commitments after a tax audit (Sec. 204 German Fiscal Code) do not seem to be covered by this position. Regardless, it seems doubtful that taxpayers can be referred to the fee-based APA procedure if they are actually entitled to a fee-free binding tax commitment (Sec. 204 German Fiscal Code) or a payroll tax ruling (Sec. 42e Income tax Act).

Fees

Since the adoption of Sec. 89a German Fiscal Code, it has been unclear whether and to what extent the fees to be paid under the section are to be determined in the same case if several German and/or foreign taxpayers are affected and therefore apply an Advance Mutual Agreement (referred to as cases of similar fact patterns). Before the adoption of Sec. 89a German Fiscal Code, the BZSt had assessed the corresponding application fees only once in fiscal unity cases with similar fact patterns. Although the wording of Sec. 89a Fiscal Code would also appear to allow a less-strict interpretation, the MoF now states in the new AEAO that the fees for the Advance Mutual Agreement must now be assessed multiple times in each case if the underlying facts cannot be assessed uniformly for tax purposes, even if the taxpayers maintain the same business relationships with a related person in the other state. A more accommodating position from the MoF would have been desirable here, as in practice such cases are often bundled, assessed and negotiated in a unified procedure, so that the BZSt does not necessarily incur higher administrative expenses.

In line with the wording of the law, but surprisingly rigorous given the cooperative nature of the procedure between the tax authority and the taxpayer, the MoF also points out the importance of a timely fee assessment for the opening of the procedure. If the taxpayer does not pay the fee within one month after receiving notification of the assessment, the advance procedure is usually rejected. Despite the rejection of an application, the unpaid fee must be paid. An extension of the deadline should be available in justified exceptional cases.

Procedural language

The AEAO provides that the application, especially in transfer pricing cases, may only be submitted in English if the common working language of the participating jurisdictions is not German. However, at any stage of the procedure, the tax authority may request, and the applicant is obliged to provide at his own expense, a translation of documents and correspondence (or parts thereof).

Information transparency

As part of the procedure, the MoF places special emphasis on information transparency between the participating jurisdictions. All information provided to one authority in the procedure should also be made available to the other competent authority. This also applies to information shared during the pre-filing meetings. It is also clarified once again that the conduct of an Advance Mutual Procedure does not hinder or restrict the simultaneous conduct of a tax audit. All information obtained within the realm of the advance procedure can be used by the tax authority in conducting a tax audit or in other legal areas.

Coordinated tax audits

The administrative regulation also includes comments regarding the interaction between advance mutual procedures and coordinated tax audits. This amendment seems to try to simplify the Advance Mutual Agreement procedure for the subsequent period of the tax audit if no significant change in the facts is to be expected for this period.

Conditions of validity

The MoF's comments on the conditions of validity of the Advance Mutual Agreement (critical assumptions) could also be significant. In practice, these often do not play a significant role for transfer pricing cases. It is often agreed that the advance ruling is only valid as long as the allocation of functions and risks underlying the agreement between the involved taxpayers does not change significantly. According to the MoF's view in the updated regulations, it might make sense to agree on further conditions of validity (e.g., with respect to comparable conditions in terms of market conditions, market shares, customs duties, or exchange rate ratios). The MoF also points out, that significant changes to the tax framework in the other jurisdiction (e.g., introduction or extension of preferential tax regimes) should also be included as a condition of validity, if necessary. The inclusion of strict conditions of validity contradicts the goal of the advance tax ruling to create legal certainty for taxpayers. In practice, at least currently, the BZSt seems to take a pragmatic approach to critical assumptions for transfer pricing cases.

Unresolved issues

Some practical relevant questions in connection with the advance procedure still remain unresolved (e.g., whether an application submitted in electronic form is sufficient or what taxpayers have to consider if the negotiations of the participating jurisdictions take a long time and even go beyond the requested period). Questions arise about the (subsequent) implementation of the advance agreement and its subsequent effects if the agreement deviates from the taxpayer's provisional handling (e.g., interest payments, withholding taxes). In this context, it is desirable that the implementation of the agreement should, in principle, take place in a tax-neutral manner in these cases, (e.g., by standard acceptance of an adjustment of the transfer prices in the last year of the agreement (so-called "Term Test") or by taking into account the opposing interest effects within the framework of the advance agreement with the other jurisdiction). After all, such aspects present double-taxation issues as well and should be considered as a factor in view of the considerable time such advance procedures can take in practice to move from application to conclusion.

Implications

The new AEAO applies for the first time — in accordance with the statutory application rule for Sec. 89a German Fiscal Code — to all Advance Mutual Agreement procedures and binding tax rulings for which applications were received after 8 June 2021. The memorandum for bilateral or multilateral APAs dated 5 October 2006 is repealed with immediate effect and applies solely to applications received up to 8 June 2021.