New Rulings Point Towards Increased Lenience In Incomplete TP Documentation Cases

Two new rulings, one from a district court and one from the Eastern High Court, have given the impression that fines in cases regarding transfer pricing (TP) documentation could be considerably smaller than previously thought. The rulings are the two first on fines for faulty TP documentation.

The Rules On Fine Calculation For Faulty TP Documentation

The principle on fine calculation in relation to missing or incomplete TP documentation was introduced simultaneously with the legal framework for the fines themselves.1

In the official guidance relating to the bill (2004/2 LSF 120), it is stated that the fines should, in general, make sure that it is not advantageous to avoid preparing the required TP documentation. Therefore, the fines shall, in terms of size, be two times the cost of preparing the required documentation. Additionally, a company is fined based on how much its income is raised if it is found that dealings with other companies have not been conducted on arm's length terms.

It turned out, however, that in practice it is immensely difficult to assess the actual saved costs. Therefore, the rules were changed so that the fine would be calculated on a base amount and not a specific assessment in each case. The base amount was set at DKK250,000 (USD36,628) for each income year that the TP documentation was either missing or incomplete. The fine shall then be lowered to another base amount of DKK125,000 if the company is able to provide sufficient documentation.

The procedure outlined above has been, and as such still is, the basis for determining the fines for faulty TP documentation. The two new rulings may, however, be an indication that the Courts will somewhat deviate from this.

District Court Ruling On Incomplete Documentation

The case 2 concerned a Danish subsidiary to a foreign group, with which the Danish company had had some intergroup dealings. As the company generated losses for several consecutive years, the Danish tax authorities decided to request TP documentation from the company. The request included the income years 20092012. In the time between receiving the request and the deadline 60 days later the company tried to fulfill the request and provide the proper documentation. During this period the company was continuously in contact with the tax authorities.

The company did not manage to provide the complete TP documentation in time. The company was fined DKK500,000, i.e., DKK125,000 per income year, as the company afterwards did submit TP documentation for the years in question.

The district court lowered the fine further to a final amount of DKK250,000, as it was of the opinion that the case did not call for complete accumulation.

Further, the district court attached importance to the fact that the company had cooperated with the tax authorities and had assisted in procuring the information.

Eastern High Court Ruling On Missing TP Documentation

In the case before the Eastern High Court,3 the Danish tax authorities had requested TP documentation from a company in relation to the income years 20092012. The company did not manage to comply with this request before the deadline, as the message from the Tax Authorities was lost internally in the group.

The information that the Tax Authorities requested was, however, already prepared prior to the request. All that was required was for the company's accountant to gather this information and answer a few additional questions. As such, the company was aware of the TP documentation requirement, and was only unable to meet the deadline because the request had been misplaced.

Both the district court and the Eastern High Court found that the company had been grossly negligent by not complying with the request. Both courts also found that the company should have been able to do so before the deadline.

The district court laid out the legal grounds in its ruling and subjected the company to a fine of DKK125,000 for each year with incomplete TP documentation, thus a total amount of DKK500,000. The district court did not find any reason to be harsher or more lenient than the principle set out in the explanatory notes.

The Eastern High Court, likewise, found the company guilty in accordance with the bill of indictment and agreed in full with the reasons laid down by the district court. The High Court, however, lowered the fine to a total amount of DKK250,000, as it deemed all four years to be the one and same offense and reasoned that the fine would otherwise be disproportionate.

Taxand's Take

The result of the two rulings and the reasoning of the courts suggest the possible introduction of a more lenient approach to fine sizes in relation to missing or incomplete TP documentation. Though the cases are different they do possess some similarities that give the impression that the courts are not convinced that the base amounts of DKK250,000 per income year for missing or incomplete TP documentation and DKK125,000 per income year when sufficient information is provided reflect the severity of the offense in all cases.

The cases are not, as such, to be viewed as a new free assessment of saved cost in each case. Rather, it seems, they herald a new standard in less severe cases of faulty TP documentation.

The courts have to a high degree taken the motives and objectives behind the law into account. They have done this rather than sticking with the "guidelines" that were originally put forward in the explanatory notes when deciding on the fines related to missing or incomplete TP documentation.

The rulings in question give the impression that the courts will not be quite as categorical in their approach to cases on incomplete or missing TP documentation as was otherwise suggested within the guidelines.

The rulings set the stage for an assessment of "defensible situations" though this is not mentioned in either judgment in which certain factors within the company can affect the outcome of a judgment.

Therefore, it is, as before, wise to take every possible step to comply with the TP documentation requirements, and cooperate fully with the tax authorities.