Denmark tax bill clarifies timing rules for transfer pricing documentation

By Peter S. Andersen, Transfer Pricing Partner, Questro International

Denmark’s Ministry of Taxation on 12 September published a draft bill proposing a number of changes to Denmark’s international tax provisions including a requirement to submit transfer pricing documentation together with the corporate income tax return.

If the draft bill is presented to parliament and enacted, the proposed effective date is 1 January 2020.

Transfer pricing documentation in Denmark

The required timing for the preparation of transfer pricing documentation in Denmark has been the subject of dispute. In Denmark’s original transfer pricing documentation legislation, the law only required taxpayers to submit transfer pricing documentation upon request and the date of preparation, in principle, was not relevant.

In practice, however, Danish tax inspectors often argued that transfer pricing documentation needed to be prepared on an ongoing basis and not later than the deadline for preparation of transfer pricing documentation.

The rules regarding the timing of transfer pricing documentation were most recently amended with effect for income tax years starting on or after 1 January 2019. The legislation requires taxpayers to prepare their transfer pricing documentation before submitting their corporate income tax return.

Transfer pricing documentation need only be submitted upon request, with a minimum deadline of 60 days. This position is consistent with the recommendation of the 2017 OECD transfer pricing guidelines.

 If transfer pricing documentation is not prepared in a timely manner, the Danish tax administration may estimate a taxpayer’s income under the arm’s length principle. Penalties may also be levied. It can be a mitigating factor if a taxpayer prepares the documentation after the deadline for the submission of the corporate income tax return.

However, a recent decision of the Supreme Court (SKM2019.136HR) has cast doubt on the application of the legislation effective as from 1 January 2019, and the draft bill on timing of the transfer pricing documentation is a direct consequence of this decision.

Draft bill on timing

Under the proposed changes, it is made clear that the tax administration is entitled to estimate the taxable income if transfer pricing documentation is not prepared and submitted together with the corporate income tax return.

Similarly, penalties may be levied based on the fact that transfer pricing documentation is not submitted together with the corporate income tax return. Subsequent preparation and submission of transfer pricing documentation can no longer be considered timely compliance.

In addition to clarifying the law, a purpose of the proposed changes is also to restrain taxpayers from developing justifications for their positions after the fact as mentioned in paragraph 5.7 of the 2017 OECD transfer pricing guidelines.

In addition to the provisions clarifying transfer pricing documentation, the draft bill proposes changes to Denmark’s controlled foreign company rules, amendments to the definition of permanent establishment, and provides for the possibility of deductions for losses of foreign subsidiaries.

The deadline for public comments on the new proposal is 10 October.