The Danish National Tax Tribunal has rendered another ruling regarding the Tax Authorities possibility to make an estimated assessment in Transfer Pricing cases.
The case concerned a Danish production and sales company and its foreign branch. The Danish Tax Authorities was of the opinion that the transfer pricing-documentation prepared by the company contained substantial flaws. Due to the incomplete documentation the Tax Authorities made an adjustment to the company’s taxable income based on an estimated assessment.
Transfer pricing documentation Dealings between group companies must be carried out on arm’s length terms according to the Assessment Act (ligningsloven) section 2. In addition to this, the Tax Management Act (Skattekontrolloven) section 3B states that group companies shall continuously prepare documentation describing how prices and terms for controlled transaction are established. This documentation shall be submitted to the Tax Authorities on request. If the documentation is not prepared, or the documentation is substantially flawed, the Tax Authorities can conduct an estimated assessment, which is refutable only if the company can prove that it is manifestly unreasonable or rests on an incorrect basis.
Summary of the case The case (SK 2017.115 LSR) concerned a Danish company that produces, develops and sells products of high quality to the construction industry. The company is one of the leading actors in this business. It delivers, among other things, customer suited products for large-scale project in Denmark. Production and sale also takes place in Denmark. The company has a branch abroad that conducts sale to customers in the branch country, as well as develop and design project solutions to these costumers. All production and actual sale is carried out by the headquarters in Denmark. The headquarters also conducts the financial administration of the branch and the billing of the foreign customers.
The Danish Tax Authorities requested transfer pricing documentation for the income years 2006-2009, which company complied with before the deadline. The company had not prepared a comparative analysis as part of the transfer pricing documentation. The company claimed that the actors in the business in general “kept the cards close to the chest”, which meant it was impossible to perform a meaningful comparative analysis
The company had used the cost-plus method to determine the prices between the company and the branch for the income years 2006-2009. After the Tax Authorities had submitted their proposed ruling, the company submitted transfer pricing documentation for the income year 2011, that stated that the resale minus method was to be applied; not only for 2011 but also for 2006-2009.
For these reasons the Tax Authorities was of the opinion that the company’s transfer pricing documentation formed an insufficient basis for assessing of the terms of the company’s controlled transactions. Therefore, the Tax Authorities increased the company’s income based on an estimate.
The Tax Authorities used the TNM (transactional net margin) method and conducted a benchmark-analysis in which they compared the branch’s profit margin to that of independent parties’.
The ruling of the National Tax Tribunal The National Tax Tribunal ruled in the favour of the Tax Authorities as it found that the company’s transfer pricing documentation contained substantial flaws and because of this could not provide the basis for an assessment on whether or not the arm’s length principle had been complied with.
The National Tax Tribunal emphasised the facts that there had not been conducted a comparative analysis, that the company changed its transfer pring-method, and that new method, according to the documentation for 2011, was to apply for previous years.
The National Tax Tribunal partly set aside the Tax Authorities’ benchmark-analysis. The National Tax Tribunal did so, as it found that the company had proved that the branch carried out certain functions which required a higher degree of specialisation and know-how than several of the companies in the benchmark-analysis possessed. Because of this, the National Tax Tribunal determined that given the branch’s functions, and the risk associated with these, it was more comparable with the companies included in the third quartile of the Tax Authorities’ benchmark-analysis.
Bech-Bruuns comments The transfer pricing area is an immensely important one to the Danish Tax Authorities. Therefore, it is paramount for groups to live up to the transfer pricing documentation requirements and take all necessary steps to ensure complete compliance with these. The ruling indicates that in the long run, the Danish Tax Authorities need to substantiate their assessments even in cases were the original transfer pricing documentation was incomplete or lacking. Furthermore the ruling shows that under appeal it is possible to get a critical review of the approach taken by the Danish Tax Authorities.