On 10 November 2015, the Danish Ministry of Taxation introduced a draft bill (bill no. L46) including an amendment to section 3B of the Danish Tax Control Act (skattekontrolloven). The purpose of the proposed amendment is to implement Action Point 13 of the BEPS Initiative (Guidance on Transfer Pricing Documentation and Country-by-Country Reporting) into Danish law.
With the new proposal, the requirement of transfer pricing documentation will be extended from the current "two-tiered structure" to a "three-tiered structure" consisting of: (i) a master file containing standardised information relevant for all multinational enterprise group members; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a country-by-country report. Furthermore, it is made apparent from the annotation to the proposed bill that the transfer pricing documentation itself must be prepared in accordance with the new OECD guidelines on documentation. The amendment necessary is expected to be incorporated into the executive order on documentation requirements following the adoption of the proposed bill.
The amendment proposed is a direct implementation of the OECD recommendation of BEPS Action Point 13, and although the country-by-country reporting requirement is new, the OECD standard to be used is very similar to the EU standard already being used by many Danish companies.
The country-by-country report must, for example, contain information
- (i) Relating to the global allocation of the multinational enterprise's income and taxes paid together with certain indicators of the location of financial activity within the multinational enterprise group;
- (ii) On the multinational enterprise's total employment, capital, retained earnings and tangible assets in each tax jurisdiction; and
- (iii) Identifying each entity within the group doing business in a particular tax jurisdiction and providing an indication of the business activities performed by each entity.
As a main rule, Danish companies will, however, only be required to submit a country-by-country report if (a) the Danish company is the ultimate parent of a multinational enterprise group and (b) the multinational enterprise group has a consolidated turnover of at least DKK 5.6bn (approx. EUR 0.75bn) in the 12-month period for which the report must be filed.
A Danish company which is not the ultimate parent may, however, still be required to submit a country-by-country report if (a) the foreign ultimate parent company is not legally obliged to complete and file a country-by-country report in its resident jurisdiction; (b) no automatic exchange of information takes place between the parent company’s resident jurisdiction and Denmark, or (c) a systematic error exists in the parent company’s resident jurisdiction.
Current Danish legislation regarding transfer pricing documentation requires that Danish companies with controlled transactions prepare transfer pricing documentation. However, whereas such Danish companies must disclose the existence of controlled transactions in the company’s annual tax returns, the Danish companies are not required to submit the documentation to the Danish Tax Authorities unless specifically requested to do so. The proposed amendment stipulates, however, that the country-by-country report must be submitted to the Danish Tax Authorities no later than 12 months after the last day of the income year covered by the report.
The purpose of the proposed amendment is to provide the Danish Tax Authorities with a better opportunity to easily identify situations where multinational groups have reported taxable income in a country different from the country in which the activity given rise to the taxable income took place. This topic is expected to be a focus area in the years to come, and enterprises should prepare themselves accordingly.
The draft bill suggests that the new reporting requirement come into effect on 1 July 2016, but be applicable to fiscal years beginning on or after 1 January 2016. As for Danish subsidiaries subject to reporting requirements as substitution for their parent companies, the requirement will apply to fiscal years beginning on or after 1 January 2017.
The Danish Minister of Taxation is expected to provide detailed provisions in respect of the information to be contained in the country-by-country report. Currently, the report is expected to include country specific information regarding the group turnover, profit before tax, corporate tax paid, corporate tax calculated, number of employees, group material assets in each jurisdiction, etc.