By Michael Vorndran, Nord Advisory AS, Oslo, Norway
The Danish Supreme Court has affirmed a 2018 High Court decision concluding that Microsoft Denmark ApS’ intercompany commissions on marketing services were at arm’s length.
The case, decided on January 31, relates to the Danish Tax Authority’s (SKAT) claim that commissions on marketing services received by Microsoft Denmark from Microsoft Ireland Operations Ltd. were below an arm’s length level.
SKAT claimed that the commissions should have applied to a broader base of marketing activities than what was included in the agreement between Microsoft Denmark and Microsoft Ireland. SKAT’s recharacterization of the transaction resulted in a discretionary increase of Microsoft Denmark’s taxable income by approximately DKK 300 million (USD 25.4 million) from 2004–2007.
SKAT based their discretionary assessment on the claim that Microsoft Denmark’s transfer pricing documentation was not prepared in time and was insufficient in substance, thus shifting the burden of proof to the taxpayer.
Although it is true that the documentation was not prepared in time, both the High Court and Supreme Court ruled that that this did not justify a discretionary assessment under the regulations in force at the date. Further, the Supreme Court did not find the documentation to be insufficient to the extent that it could justify a discretionary assessment from SKAT.
The case reflects SKAT’s tendency to make significant discretionary adjustments on the claim that taxpayer transfer pricing is late, insufficient, or both. The case is one of many that demonstrates the importance of compliant transfer pricing documentation for taxpayers to avoid discretionary adjustments under audit.
–-Michael Vorndran is a principal with Nord Advisory AS, Oslo, Norway.
The decision highlights a very important point for all Tax Administrations that even if the documentation is delayed or incomplete it does not give the Tax Administration a right to make discretionary adjustment which is not in accordance with facts of the case. The Tax Administration is under obligation to bring those relevant facts on record which may warrant such adjustments.
I agree with the first commenter, looks like following this Supreme Court ruling, taxpayers can maintain lighter documentation – that should be reflected in the documentation fees.
It should be observed that the law has changed relevant for the fiscal year 2018 and onwards. According to the new law the Tax Agency is allowed to increase the taxable income on a discretionary basis if the transfer pricing documentation was not prepared contemporaneously. The law was changed before the Supreme Court ruled in the microsoft case. However, there is some unclarity about this caused by a mismatch between the wording of the law and some of the comments in the preparatory work.