Lisa Barningham, European tax director at LaSalle Investment Management, has highlighted that German tax authorities are adopting a more aggressive stance when scrutinizing inter-company finance and transactions. Speaking at the ITR Global Transfer Pricing Forum Europe conference in London, she noted a significant increase in transfer pricing cases reaching the supreme tax court in Germany in recent years.
Barningham suggested several factors contributing to this shift, including the German government's need for additional revenue, an influx of auditors with a background in audits seeking non-arm's-length arrangements, and a perception of Germany becoming less business-friendly in the international real estate investment sector.
Her remarks focused on real estate transactions in Germany, particularly those involving third-party debt and shareholder loans from parent companies. German auditors are reportedly questioning whether these loans should be classified as equity, challenging companies' ability to choose their financing methods.
"The German government needs more money – so they’ve got to find that from somewhere," noted Barningham. "I understand there’s been a lot more recruits into the German tax authority – people from an audit background have been coming in, looking to make a name for themselves, trying to find non-arm’s-length arrangements and looking for the big adjustments on those particular transactions."
The crux of the issue lies in the German tax authority's argument that funds injected by shareholders into subsidiaries should be treated as equity, disregarding the flexibility of financing with both debt and equity. Even if authorities recognize debt financing, they propose interest rates of 0.5% to 1.5%, significantly lower than market rates, which typically aggregate around 5%.
Barningham emphasized that transactions she has examined are supported by transfer pricing studies from reputable advisory firms. However, she noted that German tax authorities have expressed disinterest in reviewing these studies, stating that they have already seen and disagree with them, effectively disregarding third-party advice.
"They actually tell us: ‘We’ve seen these before, we’ve read them, we don’t agree with them, we’re not interested,'" claimed Barningham.
In conclusion, Barningham accused German tax authorities of starting from "aggressive and extreme" positions in their assessments of transfer pricing arrangements. This development underscores the evolving challenges that companies face in navigating transfer pricing regulations in Germany.
By fLEXI tEAM