by Rasmus Christian Johansen, Lead Transfer Pricing & Valuation Specialist, MSc & LL.M., Chief adviser at the Danish Tax Agency, Copenhagen
On 23 June, the Danish Ministry of Taxation proposed draft amendments to the Danish Tax Control Act to relax the transfer pricing documentation requirements for some domestic transactions (i.e., Danish-Danish transactions only). Thus, the draft proposal would mainly affect Danish entities covered by the transfer pricing documentation requirements that only have domestic transactions, as these entities, if the bill is passed, would not have to prepare and submit a transfer pricing documentation to the Danish Tax Authorities.
The draft proposal aims to ensure that the transfer pricing documentation requirements do not go beyond what is necessary in relation to the EU legislation and that the transfer pricing documentation requirements only apply as necessary to prevent tax evasion.
If the proposed amendments are passed by the Danish Parliament, the amendments will enter into force from and apply to fiscal years beginning 1 January 2021. This may affect the mandatory submission of written transfer pricing documentation (i.e., master file and local file) for Danish group companies, which with these amendments would be exempted from the mandatory transfer pricing documentation requirements.
Despite this relaxation of the legislation, the arm’s length principle would still apply to controlled transactions between Danish group companies (also those who are subject to the same taxation regime). Thus, Danish group companies would still have to comply with the mandatory disclosure of the information form (either digital via ‘TastSelv Selskabsskat’ (DIAS) or via form 05.021 and the English version 05.022) with respect to the group’s controlled transactions.
The rules on the mandatory submission of the information form on controlled transactions are stated in Chapter 4 (e.g., paragraph 38) of the Danish Tax Control Act.
The deadline to comment on the proposed amendments is 18 August.
Less administrative burdens for Danish companies in certain situations
In the EU case C-382/16, Hornbach-Baumarkt AG, the European Court of Justice (second chamber) ruled on 31 May 2018 that EU legislation in principle does not preclude national legislation from providing for the re-assessment of a taxpayer’s income from cross-border activities and transactions between group companies under prices and terms that differ from those that independent parties under comparable circumstances would have agreed to. This is despite the fact that such a correction is not made with respect to taxable income between domestic group companies.
The European Court of Justice stated in point 20 that restrictive transfer pricing:
[L]egislation of a Member State establishing a difference in the tax treatment of resident companies, depending on whether or not the companies to which they have granted unusual and gratuitous advantages and with which they have a relationship of interdependence are established in that Member State, constitutes, in principle, a restriction on freedom of establishment, but that it pursues legitimate objectives concerning the need to maintain the balanced allocation of the power to tax between the Member States and that of preventing tax avoidance.
With this EU ruling, the Danish Ministry of Taxation will now remove unnecessary administrative burdens for certain situations of domestic controlled transactions and for certain situations between Danish companies, except with respect to hydrocarbon taxation and tonnage taxation.
The Danish legislation on the application of the arm’s length principle is based on the fact that there may be a risk that multinational enterprises (MNEs) will transfer profits to group companies in countries with lower and more favorable taxation via transfer pricing and the pricing of transactions in the group. When the MNEs have to prepare the written transfer pricing documentation, it gives the MNEs the opportunity to show that the arm’s length principle has been complied with.
In light of the above-mentioned EU case, the draft proposal would remove the obligation to prepare this written transfer pricing documentation only for domestic controlled transactions in Denmark. Thereafter, the special transfer pricing documentation should only be prepared in situations where there is an inherent risk of mispricing and where transfer pricing between foreign associated companies would deviate from the arm’s length principle.
Thus, the draft proposal, if passed, would exempt some domestic transactions from transfer pricing documentation, and entities that only participate in such transactions would be exempt from the requirement to prepare and submit transfer pricing documentation at all. An exception would apply in certain situations where at least one of the Danish companies is taxed by the Hydrocarbon Taxation Act or the Tonnage Tax Act, etc. However, the exception would not apply if all the Danish companies are taxed in accordance with this special tax legislation.
Entry into force for fiscal years beginning on 1 January 2021
If the proposed amendments are passed by the Danish Parliament, the amendments would enter into force for fiscal years beginning on 1 January 2021 or later. This is the same effective date as for the implementation of law no. 1835 of 8. December 2020 – amendments to the Danish Tax Control Act – under which written transfer pricing documentation must, for the fiscal year beginning 1 January 2021, be prepared on an ongoing basis and submitted to the Danish Tax Agency no later than 60 days after the deadline for the submission of the mandatory information form (tax return).
Requirements for companies covered by Danish tonnage and hydrocarbon taxation
The draft proposal states that the transfer pricing documentation should only be prepared in situations where there is a risk of aggressive tax planning and tax evasion via incorrect pricing. The proposal would also require that written transfer pricing documentation be prepared for Danish groups where at least one company in the group is taxed in accordance with legislation in the Danish Hydrocarbon Tax Act or the Danish Tonnage Tax Act and for other associations, self-governing institutions, etc. In such situations, there may be a risk that tax optimization could take place between companies via incorrect pricing.
In situations where all the Danish companies are only taxed in accordance with this special tax legislation, there is specific legislation addressing documentation requirements, including with respect to transfer pricing. But under the proposed amendments, these companies are not required to submit the written transfer pricing documentation. These companies need to be aware of a different tax regime and the special legislation.
Arm’s length principle still in place between two Danish group companies
The amendments in the draft proposal would only remove specific written transfer pricing documentation requirements in certain situations. Thus, the arm’s length principle, incorporated in the Danish Tax Assessment Act paragraph 2, will continue to apply to all domestic controlled transactions, regardless of whether the transactions are exempt from transfer pricing documentation. Associated domestic group companies will therefore still have to make sure that their intra-group transactions are priced in accordance with the arm’s length principle.
The Danish legislation on the disclosure of the information form on controlled transactions (either digital or via form 05.021 and 05.022) is not proposed to be changed. Danish group companies under national joint taxation must therefore continue to submit the information form on controlled transactions, even for transactions exempted from transfer pricing documentation.
Also in tax audits, the Danish Tax Agency may still, upon request, require the company to present documentation (prepared written documentation, calculations, etc.) for the pricing of the controlled transactions to demonstrate that it complies with the arm’s length principle. In any case, the Danish companies must ensure that controlled transactions between the related companies have been determined in accordance with the arm’s length principle.
Danish group companies must in any case examine their controlled transaction even if they are not required to prepare and submit written transfer pricing documentation for the fiscal year beginning of 1 January 2021 (submitting 60 days after the submission of the information form – first time 1 July 2022). Danish companies still need to have some sort of documentation, and this must be provided upon request to the Danish Tax Agency to assess whether the controlled transactions are in compliance with the arm’s length principle.
In situations where group companies must prepare written transfer pricing documentation, this must be done on an ongoing basis and be of such a standard that the Danish Tax Agency could assess whether the transfer pricing within the group is determined in accordance with the arm’s length principle. This assessment should be made taking into account that the Danish Tax Agency applies the OECD transfer pricing guidelines when making the tax assessment. The written transfer pricing documentation is considered to have been prepared in time if it has been prepared and submitted in accordance with the already passed amendments of the Danish Tax Control Act, paragraph 39, subsection 3, cf. paragraph 46, subsection 1.
If a request for submission of either the written transfer pricing documentation or any additional documentation (for companies that are not required to submit transfer pricing documentation, but still have to comply with the arm’s length principle) from the Danish Tax Agency is not complied with, there is a risk that the Danish Tax Agency will make a discretionary assessment of the pricing and the calculation of the taxable income.
The comments on the draft proposal also clarify that benchmarking studies are part of the documentation requirements in accordance with the administrative order no. 1297 of 31 October 2018 on the transfer pricing documentation requirement. In paragraph 5, subsection 2, no. 10, it states that the local file (transfer pricing documentation) for each category of controlled transactions in which the group company (the taxpayer) is involved must be provided with information in the form of a list and a description of the selected comparable transactions (internal and external) and information on the financial indicators (e.g., profit level indicators) for the independent comparable companies used in the transfer pricing analysis, including a description of the selection process and the data source used.
Further paragraph 41 in the Danish Tax Control Act is repealed. The provision that the Minister of Taxation, on the recommendation of the Danish Tax Assessment Council (Skatterådet), decides what information on controlled transactions the information form must contain, is removed.
It is proposed that the Danish Tax Control Act paragraph 39, subsection 4 should be clarified so it is clear that the provision relates to further written documentation in the form of benchmarking studies. The proposed amendments should clarify that the Danish Tax Control Act paragraph 39, subsection 4 only relates to cases where additional written documentation (i.e., a benchmarking study) must be prepared.
Be the first to comment