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news: experience with functional warehousing in audits: bzst's opinions and practical values

Posted by truschel at 2020-03-28


The Federal Ministry of Finance, in agreement with the top financial authorities of the countries, has commissioned the Federal Central Tax Office (BZSt) to evaluate the regulations of the layoffs of functions. The report was published in February 2016 (cf. also for the following statements BZSt (2016), evaluation of experience with functional storage, findings from audit cases, pressure bag 153/16. The background was a request from the Federal Council to the Federal Government to evaluate the experience of the companies and the financial administration with the regulations of the decommissioning of functions. Originally this request was for the year 2013, i.e. five years after the inclusion of the Functional Storage Tax in the AStG (cf. One Abbs. 3-sentence 9ff AStG) as well as the adoption of the administrative instruction (BMF v. 13.10.2010 - IV B 5 - S 1341/08/10003 BStBl 2010 I S. 774, Administrative Principles Functional Storage). Due to lack of experience in 2013, the evaluation was postponed to 2015.

This newsletter summarises the main findings of the final report of this evaluation and also gives an overview of our experience in audits with the facts of functional storage, thus supplementing the advisory overview. Finally, an up-to-date publication of a Collective Association is mentioned.

The adaptation of paragraph 1(1). 3 AStG introduced the concept of functional storage. Unless at least comparable transactions (actual foreign comparison) or an escape clause, i.e. an individual settlement price assessment, are relevant, the relevant transfer package shall regularly be subject to the hypothetical foreign exchange comparison. The minimum price of the end of the period and the maximum price of the recipient must be determined (cf. One Abbs. 3 Satz 9 i. V. m. Satz 5 AStG).

Summary of opinions

The following section gives an overview of the main findings of the opinion. For details and as a source please refer to the report. In the BZSt evaluation questionnaires on 119 audit cases with total 133 functional mismatches between related companies were evaluated. The questionnaires were replied to by the audit bodies. Questionnaires up to thirty were taken into account. June 2015 at BZSt.

73 of the reported functional displacements recorded within the EU. Functional storage is most frequently observed in production and then in sales. In 55 of all cases, the valuation is based on a single settlement price analysis, i.e. no transfer package as a whole could be assessed because at least one escape clause has been applied. In this case, the analysis of individual invoicing prices is predominant due to the absence of intangible economic goods. other advantages (Escape clause 1) or because the essential intangible economic goods have been precisely named (Escape clause 3) (cf. One Abbs. 3 sentence 10 AStG).

Almost 85% of the transfer package evaluations (cf. 57) were made by the hypothetical foreign comparison. The remaining cases were assessed by reference to limited or fully comparable transactions. In the case of transfer package evaluations, the analysis is usually presented by the company with approximately 50% of the analyses made by external experts. A relatively high number of transfer package assessments (22 of 57) identified deficiencies, mostly due to incompleteness or incorrect assumptions. Incomprehensibility has been monitored six times by audit bodies. Deficiencies in both the individual and the transfer package assessment as well as lack of analysis led to an estimate in 42 of the 133 cases.

As a result, the value of functional storage in 77 cases was increased by the audit and reduced only in four cases. The following graphics (cf. Graph 6 of the report) shows the increases. Although often amounts up to 1 million. The average value of the euro is 4.2 million. Euro well above. This shows a high dispersion.

Although the opinion makes only conditional statements on the reasons for the estimates and therefore specific criticisms of the audits remain unclear, some aspects can be deduced from the opinion for practice:

This summary of a more quantitative analysis from the point of view of the audit bodies is now to follow a summary of qualitative findings from their own audit practice.

Experience from practice

In the audit practice different case groups are observed in the context of functional storage. In order to ensure the anonymity of the cases, a description of the cases is omitted. Rather, the essential aspects are summarised in case groups. The recommendations formulated can only provide one indication and should be examined on a case-by-case basis.

Ground classification There are several audits to be observed in which the auditors assumed a loss of function even though the facts were not fulfilled. The legislator considers that the fact that a function is transferred with its economic assets and other benefits, as well as opportunities and risks, to a close person across borders is fulfilled (cf. One Abbs. 1.i.V. m.1. Abs. 3 sentence 9 AStG). There can therefore be no storage of functions without the transfer of a function. Pure closure for business reasons without transfer the commencement of research and development activities in another country and the simultaneous cessation of research and development activities in Germany without the transfer of, in particular, intangible economic assets, does not regularly constitute a loss of function. A detailed functional and risk analysis, as well as a description of the distribution of economic goods before and after the storage of functions, is therefore essential.

Detailed analysis of input variables A number of tests are to be observed in which auditors examine in detail the evaluations and the related input variables. To this end, various audit bodies have qualified auditors for company evaluations, partly as intermediaries from industry or consultancy. For example, in Hamburg Citizenship 2011 the proposal was discussed to employ cross-trainers with a business studies degree (at least Bachelor). Appendix 1 of the Senate's opinion on the application for citizenship of the 23rd. June 2011 "Strengthening the tax audit" (Press Case 20/742 and Supplementary Application: Press Case 20/848), Press Case 2020/2509). This was subsequently implemented.

The audits, for example, examined plan data, capitalisation periods and discount factors in detail. The input variables should therefore be well reasoned when assessing impairment. The high relevance of the planned data and the associated responsibility for its plausibility by the management level have also confirmed various judgments in legal disputes. For example, OLG Dusseldorf already stressed 2008 that the forecasts must be "the result of the respective business decision of the persons responsible for the management". In this context, business decisions should be based on "relevant information and informed, realistic and non-contradictory assumptions" (cf. OLG Dusseldorf v. 07.05.2008 I 26 W 16/06). It is advisable to consider the sensitivity of input variables to the results already in the evaluation. Particularly critical input variables for the analysis are particularly well justified. Practice shows that when individual assumptions are rejected, e.g. the discount rate or an infinite rather than finite period of capitalisation, large amounts are quickly placed in the space.

Documentation layers In various audits information was not provided as a closed document but fragmented to the auditor without sufficient explanation. This has led to lengthy tests. The examiner could not be given the feeling that he fully understands the situation. Although it is ultimately up to the auditor to get to grips with the facts and to evaluate the documentation made available to him, the practice shows that well-comprehensible documentation can have a positive influence on the audit.

In the individual case, the scope of the documentation should be considered. A two-step approach to documentation may be recommended. In an initial document, the taxable person complies with his obligations to participate and gives the auditor the opportunity to assess the facts. Essential assumptions, but also peculiarities such as an atypical margin development, should be justified. Additional documents are provided on request, such as the derivation of the plan data. In some cases, it was advisable, in order to increase legal certainty, to seek a discussion with the examiner during the transfer and to discuss the matter.

In the view of the taxable person, the audit did not take sufficient account of the facts and came to an early decision. Individual assumptions were rejected without justification and replaced by insufficiently substantiated assumptions. The taxable person is required to submit documentation on request for the storage of functions often within thirty days (cf. 90s Abbs. 3.AO). Insufficient assessment of the documentation submitted and inadequate analysis by the audit are not acceptable. In so far as the documents submitted are not invaluable, the burden of proof shall lie with the financial administration.

Current publication on Functional Storage and Restructuring

Against the background of the increasing relevance of the storage of functions, at the beginning of 2017 a collection volume appears as a manual for practitioners (cf. Heidecke / Schmidtke / Wilmanns (Hrsg.) (2017), Functional Storage and Settlement Prices: Legal bases, Reviews, Practical tips, Springer). In 17 Chapters, over 20-authors (economists, tax consultants and lawyers) on approx. 550 pages highlight typical topics in restructuring from a clearing price perspective as well as related issues. A focus is on how to identify and evaluate a function storage. In addition, the following topics are discussed: