By Susi Baerentzen, Ph.D., Copenhagen
On September 24, yet another Danish National Tax Tribunal decision on discretionary transfer pricing assessments was published. The case, SKM2020.387.LSR, had been decided on July 20.
The Danish National Tax Tribunal is the highest administrative appeals body, which hears complaints in direct and indirect tax matters. So, while the decision is not a court ruling, it is still significant, especially because it adds to the string of recent cases about discretionary assessments from the Danish Supreme and High courts, delivering significant blows to Denmark’s tax administration.
From operating company to commissionaire
The heart of the matter was a Danish corporation which was part of a multinational group providing software solutions.
The group reorganized in 2010, at which time an operating company was transformed into a commissionaire. This entailed terminating a distributor agreement and replacing it with a commissionaire agreement, essentially ensuring that customer contracts were concluded by the consolidated corporation going forward.
The Danish tax administration found that a transfer of intangible assets – knowhow and customer relations -took place in this reorganization in 2010 and that the group’s transfer pricing documentation did not comprise sufficient documentation for this transfer. This led the Danish tax administration to increase the taxable income by conducting a discretionary assessment.
The transfer pricing documentation
The tax tribunal found that there was an insufficient legal basis for such an assessment, as the transfer pricing documentation did, in fact, include a detailed description of the relevant business structures, just as it included an analysis of the functions and risks and comparative analysis for the relevant transactions before and after the reorganization.
The key takeaway here in relation to the quality of the transfer pricing documentation is that the fact that the taxpayer did not describe the transaction in the documentation does not justify that the tax administration can conduct a discretionary assessment.
The key takeaway here in relation to the quality of the transfer pricing documentation is that the fact that the taxpayer did not describe the transaction in the documentation does not justify that the tax administration can conduct a discretionary assessment.
The onus is on the tax administration to prove that intangible assets have been transferred from the Danish corporation, that the terms and prices are not on arm’s length, and that therefore a correction is justified.
Intangibles transfer during reorg
The tax tribunal did uphold one claim put forward by the Danish Tax Administration, though.
The tribunal said the tax authority proved that a transfer of valuable intangible assets had taken place in the reorganization and that these should be valued in accordance with the relevant domestic legislation.
In this regard, the tax tribunal referred to the OECD’s 2017 transfer pricing guidelines, point 9.45-9.47, according to which an independent distributor with high future profit potential is not likely to give that up in exchange for a lower, stable earning without compensation.
As the corporation had a significantly higher income than the expected stable level after the reorganization, the Danish Tax Tribunal concluded that the administration had been correct in assuming that the reorganization was not carried out on arm’s length terms.
Thus, the tribunal accepted the tax administration’s basis for the assessment. The tribunal decreased the life expectancy of the assets, though, from an infinite period to ten years based on an assessment of the length of the customer relations of the corporation.
The decisive factor here was that the contracts relate to software and that there is a significant risk that a new product will come along and replace it on the market.
This also meant that the tax tribunal rejected the corporation’s claim that the assessment should be based on the individual expiration dates for the customer contracts.
Susi Baerentzen holds a Ph.D. international tax law. She has published several articles and book chapters on tax issues related to the Danish beneficial ownership cases, State aid, and alternative financing. Most recently, she was a reporter for the International Fiscal Association’s 73rd Congress in London in 2019.
Prior to commencing her research, she was a legal advisor for the Danish Minister of Taxation and an external lecturer in Tax Law and EU Law at the University of Copenhagen, Denmark, and she has extensive experience from working at a Big4 corporation. As part of her current research activities she is officially appointed to the Danish Corps of External University Examiners in EU Law and Tax Law.
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