The German government has published a draft of the 2008 corporate tax reform, including substantial modifications to Germany’s transfer pricing legislation. Under the proposed rules, the contemporaneously prepared documentation for extraordinary business transactions would have to be submitted in a tax audit within 30 days of a tax auditor’s request in order to avoid delays during the audit. The German government clearly states a preference for the comparable uncontrolled price (CUP) method if reliable data is available. The proposed law introduces the interquartile range concept in order to determine the arm’s length range, whereas prices outside the arm’s length range would be adjusted to the median. The rules propose a hypothetical arm’s length test when sufficient data to apply the arm’s length test is not available. Moreover, it is assumed that a transfer of functions gives rise to a transfer of profit potential. Finally, it would be presumed that in an arm’s length situation independent third parties would agree to a clause that allows retroactive adjustments according to the actual circumstances (commensurate with income standard). The authors critically analyse the proposed...