On 24 February 2016, the results of the Danish National Audit Office’s investigation into the circumstances allowing for suspected fraud involving an amount expected to exceed DKK 9.1bn (approximately EUR 1.2bn) were published. Following the report, the Danish Public Accounts Committee strongly criticized the Danish Tax Authorities’ completely inadequate control of the repayment of Danish dividend withholding tax as well as the exceedingly flawed supervision carried out by the Danish Ministry of Taxation. The Danish Ministry of Taxation has now announced the implementation of new and improved control mechanisms as well as stricter documentation requirements.
On 6 August 2015, the Danish Tax Authorities (”DTA”) suspended all payments in respect of claims for repayment of Danish dividend withholding tax. The suspension was based on a suspicion that a number of the reclaims were fraudulent.
The DTA filed the first report on suspected fraud involving Danish dividend withholding tax reclaims with the Danish Public Prosecutor for Serious Economic Crime on 24 August 2015, followed by a second report being filed on 15 November 2015. The total suspected fraudulent amount is believed to exceed DKK 9.1bn (approx. EUR 1.2bn).
In September 2015, the DTA’s internal audit department completed its investigation of fraud involving the dividend withholding tax reclaims and found that there had been a complete lack of control on the part of the tax authorities.
In the period from 1 January 2010 to 5 August 2015, claims for repayment of Danish dividend withholding tax could be filed either with an approved bank (in Danish ”bankordning”) or directly with the DTA (in Danish ”blanketordning”). The DKK 9.1bn fraud discovered so far involves reclaims filed using the ”blanketordning”. Currently, no information has been received as to whether the ”bankordning” has also been used as part of the fraud.
The tax fraud presumably involves companies reclaiming withholding tax on dividends on Danish shares which such companies had untruthfully and fictitiously stated to own. Allegedly, the documentation provided to the DTA as a basis for such reclaims had been falsified.
Findings of the Danish Public Accounts Committee
Following the investigation made by the DTA’s internal audit department, the Danish Public Accounts Committee (in Danish: ”Statsrevisorerne”) requested that the Danish National Audit Office (in Danish: ”Rigsrevisionen”) make an assessment of the DTA’s administration, and the Danish Ministry of Taxation’s supervision of payments of Danish dividend withholding tax during the period from 1 January 2010 to 5 August 2015.
The Danish National Audit Office submitted its report to the Danish Public Accounts Committee on 17 February 2016. The report was presented to the Danish Parliament on 24 February 2016 and subsequently released to the public.
In its statements made to the Danish National Audit Office’s report, the Danish Public Accounts Committee strongly criticizes the DTA’s ”com- pletely inadequate” control of repayment of Danish dividend withholding tax as well as the Danish Ministry of Taxation’s supervision, which the Danish Public Accounts Committee found to be exceedingly flawed.
Among the key findings in the Danish National Audit Office’s report are:
- That the DTA repaid dividend withholding tax amounting to approximately DKK 3.2bn after receiving information on suspected fraud.
- That the DTA failed to carry out basic control of information on the reclaims, including information on ownership, verification that tax had actually been withheld and whether the form had been approved by a competent authority.
- That the DTA, without any statutory power, had delegated the task of controlling reclaims filed to three separate banks without ensuring that the banks actually carried out the control required.
- That, despite receiving numerous indications of possible risks, the Danish Ministry of Taxation failed to investigate the issue even though a simple analysis would have uncovered the problem.
Among the most interesting points of the Danish National Audit Office’s report are the discoveries that
- The amount of dividend withholding tax repaid increased from DKK 0.8bn in all of 2010 to DKK 9.3bn in the first seven months of 2015, corresponding to an increase of approximately 1,300%.
- The suspected fraud – currently estimated at DKK 9.1bn – amounts to 2/3 of the total amount repaid under the ”blanketordning” repayment scheme.
- In 2014, the DTA repaid 111% of the dividend tax actually withheld for one single company.
- Although the DTA has implemented a control function in respect of the repayment of withholding tax in excess, such function was disabled for a number of companies in the period from 2013 to July 2015.
- The average amount of reclaims filed increased by 1,700% from DKK 37,113 in 2010 to DKK 681,007 in 2015. The DTA’s initial report filed on suspected fraud covers 2,120 repayments at a total amount of DKK 6.1bn, corresponding to an average repayment of DKK 3m in respect of each reclaim.
- Despite receiving and approving monthly accounts, the Danish Ministry of Taxation did not find any reason to investigate the increase in dividend withholding tax repayments.
Following the Danish National Audit Office’s report, the Danish Ministry of Taxation announced that it had identified two specific loopholes in Danish tax legislation whereby otherwise taxable dividend payments could be reclassified as tax-free capital gains on shares.
Whereas the Danish Ministry of Taxation said it was not aware of the loopholes having been used to evade Danish dividend withholding tax, new legislative initiatives are underway in order to not only close such loopholes, but also to tighten the current legislative scheme in order to prevent any future risk of fraud.
In addition to the said legislative initiatives, the Danish Ministry of Taxation also announced a number of action points.
The action points include (i) stricter documentation requirements, (ii) a ”task force” performing random checks on the claims for dividend withholding tax, (iii) a ”task force” monitoring all types of dividend withholding tax reclaims, and (iv) an anti- fraud division analysing new trends and risks relating to international tax fraud.
Furthermore, the Danish Ministry of Taxation announced the establishment of a new supervisory authority within the Ministry which will be tasked with supervising the ongoing risk assessment and ensuring that critical reports will be brought to the attention of the Danish Ministry of Taxation.
In addition, the procedures for early warnings (internal written reports indicating possible issues) and for approval of accounts of payments within the Ministry are tightened.
Suspension of reclaim payments
The processing of dividend withholding tax reclaims was suspended on 6 August 2015. The Danish Ministry of Taxation has announced that all reclaims will remain suspended until proper procedures have been established to prevent any future risk of fraud.
As of 1 January 2016, approximately 28,000 dividend withholding tax reclaims are currently pending.
In addition to the procedures already initiated by the Danish Ministry of Taxation, we anticipate that all cases pertaining to the matter of reclaiming dividend withholding tax and the basis thereof will be subject to in-depth consideration by the DTA. Furthermore, it is likely that this procedure will prolong and complicate the dividend withholding tax reclaim process.
However, following the announcement made by the Danish Ministry of Taxation that new control functions have already been established and that the Danish Ministry of Taxation is preparing new legislative initiatives, we expect the DTA to begin the processing of reclaims within the foreseeable future.