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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Section 3B of the Tax Control Act imposes obligations for natural and legal persons to disclose and document various information about their transfer pricing transactions. The specific content of transfer pricing documentation is outlined in Statutory Order 401/2016. The specific content of Danish country-by-country reporting is outlined in Statutory Order 1133/2016.
The parties subject to the disclosure and documentation requirements are the same parties covered by the obligation to carry out controlled transactions at arm's-length terms.
According to Section 3B(1), taxpayers must include information on the type and extent of their commercial and economic transactions with related parties (controlled transactions) for a tax year in their tax return for that year. Further, a specific transfer pricing return must be annexed to the tax return containing information about types of controlled transaction and amounts related to each type of transaction.
The position of the Danish tax authorities is that the transfer pricing documentation must be made on a contemporaneous basis and finalised by or on the date that the tax return must be submitted to the Danish tax authorities for the relevant tax year. Some cases on this matter are pending decision in the administrative tax appeal system. With the amended Tax Control Act, the ‘contemporaneous basis’ when preparing the documentation and the finalising date are now explicitly part of statutory law, as mentioned under the heading "Trends and developments".
In general, companies must file the tax return (including the transfer pricing documentation) for a tax year no later than six months following the end of that year.
Taxpayers with controlled transactions under Dkr5 million during a tax year are only obligated to state in the tax return that the threshold is not exceeded.
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
In general, the Danish documentation requirements are fully aligned with the Organisation for Economic Cooperation and Development (OECD) standards and therefore include the filing of:
- a master file containing basic information relevant for all group entities;
- a local file containing specific information on the Danish entities (if applicable, see below); and
- a country-by-country report containing information on the global allocation of the group's income and taxes (in some cases).
The files should include the information specified in Annexes I to III of the OECD report "Transfer Pricing Documentation and Country-by-Country Reporting". The annual country-by-country report must, under certain circumstances, be submitted to the Danish tax authorities each year if the annual worldwide turnover of the group exceeds Dkr5.6 billion. Documentation can be prepared in one of the Scandinavian languages or in English.
According to Section 3B(5) of the Tax Control Act, taxpayers must prepare and keep for five years documentation in writing on how prices and terms for controlled transactions are determined.
Further, according to Section 3B(5) the tax authorities may require, by giving a 60-day notice, that the taxpayer produce database benchmark studies substantiating the transfer prices.
However, under Section 3B(6), certain small enterprises, while subject to the transfer pricing principles, are not obliged to produce written documentation relating to intragroup transactions. ‘Small enterprises’ are enterprises with fewer than 250 employees and a balance sheet total of under Dkr125 million, or an annual turnover of under Dkr250 million measured at a group level. However, documentation is always required in respect of intragroup transactions with natural and legal persons and permanent establishments resident in countries outside the European Union and European Economic Area with which Denmark has not concluded a tax agreement.
No written documentation is needed in respect of controlled transactions of an insignificant extent or frequency.
What are the penalties for non-compliance with documentation and reporting requirements?
A company may incur a fine if it fails to state in its income tax return that it is subject to the transfer pricing documentation requirements. This fine may be calculated on the basis of either the company’s annual turnover or the number of employees. The fine will never be set below Dkr250,000. If the failure to report correctly is deemed to be part of a systematic violation of the tax legislation, the fine may be increased by up to 50%.
Fines calculated on the basis of annual turnover may be set at:
- 0.5% of the turnover for a turnover up to Dkr500 million;
- 0.1% of the turnover if the turnover is between Dkr500 million and Dkr1 billion; and
- 0.05% of the turnover if the turnover exceeds Dkr1 billion.
Fines calculated on the basis of the number of employees may be set at Dkr250,000 per group of 50 employees. If the number of employees exceeds 500, the fine may be set at Dkr2 million.
Further, fines may apply for failure to prepare transfer pricing documentation when the company is required to do so by the tax authorities. The minimum fine for failure to prepare transfer pricing documentation is set at Dkr250,000.
Moreover, a 10% fine may be applied on any increase in the taxable income resulting from transfer pricing adjustments.
The tax authorities are entitled to disregard the price and transfer pricing method applied by the taxpayers and, instead, apply their own method and correct pricing if the taxpayer fails to comply with the documentation requirements.
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
Transfer pricing documentation should be prepared according to the methods outlined in the OECD Transfer Pricing Guidelines – the Danish tax authorities will rely on these methods for calculating the arm's-length price. The reasons for selecting a certain method should also be stated clearly. Transfer pricing documentation sometimes primarily provides for an account of the transfer pricing methods, while little or no attention is given to why a specific pricing method is used. Further, as described under “Content requirements”, taxpayers are obligated to keep documentation on how prices and terms for controlled transactions are determined for five years.
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