In the second part of our series on the provision of Section 153(4) AO and its implications for transfer pricing matters, we examined the circumstances under which a reporting and correction obligation regarding transfer prices may apply, using specific case examples. In this context, the distinction between ongoing and newly arising issues in final audit findings will be of significantly increased importance for tax compliance in the future.

The complexity increases when transfer pricing disputes lead to an international mutual agreement procedure after the tax audit has been concluded. The results of a mutual agreement procedure are regularly based on consensual, outcome-oriented agreements between the states, that are involved, without their factual or methodological foundations always being fully disclosed to the taxpayer. Against this backdrop, the question arises as to whether and to what extent such mutual agreement outcomes can be considered as a basis for a reporting and correction obligation under Section 153(4) of the German Fiscal Code (AO). 

In the conclusion of our three-part series, this text examines the question, if – in the wake of an audit – the taxpayer decides not to accept the income adjustment for transfer pricing and initiates a mutual agreement procedure, can the provision of § 153(4) AO be applied, and to what extent.

The mutual agreement procedure is an intergovernmental mechanism to avoid double taxation. The mutual agreement procedure is particularly significant in the context of transfer pricing: Between 2016 and 2023, 656 cases involving German entities were initiated, 325 of which concerned transfer pricing. As a formal consultation process, it is highly results-oriented; its focus is less on individual review under national law and more on an allocation of taxing rights acceptable to both states. Often, multiple issues are negotiated together, so that concessions in one case are linked to advantages in another.

For the taxpayer, the procedure usually remains a “black box.” Despite having the right to file an application, the taxpayer has no genuine rights as a party to the proceedings but must cooperate fully pursuant to § 90(2) AO. The basis for the authorities’ decisions is not usually disclosed to them. Pursuant to § 175a AO, the agreement reached must be implemented by the tax administration into a new assessment without any discretion. There is generally no binding effect on previous audit agreements.

Due to the lack of transparency and the result-oriented nature of the process, it is doubtful whether § 153(4) AO applies. In the context of mutual agreement solutions, taxpayers lack reliable information regarding assumptions, valuation parameters, and methods, so that a reliable projection into subsequent years is usually not possible.

The applicability is discussed below using two examples:

Example 1 should be regarded as a borderline case. Even if, as an exception, the amount of the adjustment in the specific transfer pricing case can be inferred from the outcome of the mutual agreement procedure, it remains unclear whether § 153(4) AO applies. Even at the factual level, it is questionable whether the outcome achieved in the mutual agreement procedure constitutes an “irrevocably implemented audit finding” from a tax audit at all, since the adjustment is no longer based on external audit itself but on a subsequent agreement between the two states. Furthermore, the continued effect of the underlying factual determination required for § 153(4) AO is regularly lacking. Mutual agreement outcomes are typically result-oriented and do not reveal which factual assumptions or methodological considerations were decisive for the agreement. Even a numerical match with the original profit adjustment is therefore not sufficient on its own to establish a carry-forward obligation. Ultimately, the better reasons argue against applicability, although the applicability of the provision cannot be ruled out beyond doubt in such exceptional cases. Therefore, as a precaution, it should be disclosed and explained why § 153(4) AO is considered inapplicable.

If, on the other hand, in a mutual agreement procedure, as in Example 2, several disputed issues in the form of various cross-border transactions are negotiated simultaneously, and the taxpayer and their competent tax office cannot determine, based on the numerical result, on which specific adjustment the outcome of the mutual agreement procedure is based, the applicability of § 153(4) AO is likely ruled out.

Mutual agreement procedures remain largely a black box for taxpayers: the underlying assumptions, valuation parameters, and methods are generally unknown. It is precisely this lack of transparency that typically deprives them of a reliable basis for deriving an obligation to report or correct under § 153(4) AO for subsequent assessment periods from the outcome of a mutual agreement. Since the results of such procedures are generally outcome-oriented, they usually cannot be attributed to individual transactions when more than one transaction is involved, making an automatic carryover to subsequent years virtually impossible. Therefore, the stronger arguments favor applying § 153(4) AO to mutual agreement outcomes only in exceptional cases—such as in the first loan example above. In cases of doubt, it is advisable to disclose one’s own position early on and provide a transparent justification to the tax authorities to avoid tax risks.