During the past years, there has been an increased focus on transfer pricing. This has, among other thing, resulted in the Danish tax authorities, SKAT, having undertaken a large number of increases. The complaints proceedings regarding these increases have been at a standstill for a number of years, but we are now starting to see decisions coming in, including decisions where the tax payers are successful in their complaints.
Most recently, the High Court of Eastern Denmark has overruled SKAT on its decision to increase Microsoft Danmark ApS’s taxable income for the 2004-2007 accounting periods by a total of approx. DKK 307m.
Read more about the High Court of Eastern Denmark’s reasoning for reducing SKAT’s increase of Microsoft Danmark ApS from approx. DKK 307m to DKK 0 on page 29.
SKAT’s report on transfer pricing adjustments for 2016
In September 2017, SKAT published its report on transfer pricing adjustments for 2016. The report contains, inter alia, key figures for adjustments undertaken by SKAT with regard to transfer pricing throughout the year. Particular interest should be attached to the fact that, in 2016, the total transfer pricing reductions carried out by SKAT are higher than in any previous year.
The situation is unprecedented, however, as the 2016 reductions exceed total increases. SKAT has reduced the taxable income of Danish companies by a total of DKK 11.5bn compared with an increase totalling DKK 7.3bn.
Read more about SKAT’s transfer pricing adjustments in 2016 on pages 26-27.
Drafting of transfer pricing documentation
For a number of years, the question of when a company’s written transfer pricing documentation was to be completed has caused doubts. In future, such doubts will not arise as it will from 1 January 2019 appear directly from the Danish Tax Control Act (skattekontrolloven) that a company must prepare its transfer pricing documentation on an ongoing basis and that the documentation must be completed no later than at the time of submission of the tax return.
Fine calculation in cases relating to non-existing or deficient transfer pricing documentation
A company must, at SKAT’s request, submit its transfer pricing documentation to SKAT within a time limit set by SKAT of a minimum of 60 days. If the company fails to do so or if the submitted transfer pricing documentation is insufficient, SKAT has the authority to impose a fine on the company. It has been an assumption of the preparatory works of the act that the level of the fines must generally follow the principle that it should not be worthwhile to decide not to prepare the required transfer pricing documentation. Accordingly, the fines should correspond to twice the costs saved as well as a subsequent additional fine, if the company’s income is increased due to the discovery that the arm’s length principle has been set aside. In the preparatory works of the act, this additional fine is set at 10% of the increase in income.
It proved to be extremely difficult to determine the costs actually saved and consequently this estimate was replaced by a fixed amount. It was assessed that the future level of fines should be DKK 250,000 per accounting period if adequate transfer pricing documentation had not been prepared. The fine must, however, be reduced if the company remedies the defects to amount to DKK 125,000 per accounting period.
Two judgments and the reasoning of the courts in these decisions may be taken as an expression that specific circumstances may result in relaxation as compared to the general rule regarding the size of fines imposed for non-existing or deficient transfer pricing documentation. Even though the cases are different they do have certain similarities which taken together result in the impression that the courts do not believe that the standard fines of DKK 250,000 per accounting period as a consequence of non-existing or deficient transfer pricing documentation and DKK 125,000 in cases where the defects are subsequently remedied, in all cases are in proportion to the seriousness of the offence.
It is expected that, over the next years, we will see more decisions which may shed light on the realistic level of fines in cases where the company has failed to prepare transfer pricing documentation or where such documentation is deficient.
As has previously been the case, it pays to make sure that you live up to the requirement for transfer pricing documentation and cooperate with SKAT to a reasonable degree.