Business Restructuring - Comments on Germany and Proposal for the OECD

Abstract

Cross border business restructuring involving commissionaire arrangements, toll-manufacturing and more generally transfer of risks and intangibles toward central locations within a Multi National Enterprise (MNE) group, have become widespread practice. That raises important treaty, transfer pricing and other tax issues. The OECD observes significant effects on countries' revenue base and the risk of double taxation faced by MNE groups. Key problem is that through business restructuring the state which allowed for an deduction of business expenses on the creation of (intangible) assets may not be able to tax the corresponding income (capital gains or current income) at a later stage. Germany, e.g., developed a vital interest in taxing those hidden reserves and adopted specific legislation through the German Corporate Tax Reform Bill 2008 which basically taxes a "transfer package" at the time of the transfer based on expected future gains. The article scrutinizes the German legislation 2008, investigates the comparability of the German provisions with international law and proposes a profit split approach to the OECD.

Keywords: business restructuring, shift of functions, price adjustment, Art. 9, Arm's-length, hidden reserves, permanent establishment, IRC 482, commensurate with income, transfer pricing, profit split, Germany, OECD, transparency, double taxation