By Ólafur Evert Úlfsson, Transfer Pricing specialist at Skatturinn – Iceland Revenue and Customs, Reykjavik
The Icelandic Parliament passed into law on May 31 changes to article 57 of income tax act no. 90/2003 to introduce new rules that allow Iceland Revenue and Customs to impose administrative fines on taxpayers that fail to fulfill their transfer pricing documentation obligations as set out in paragraph 5 of article 57 of the income tax act.
The new rules state that the Iceland Revenue and Customs can impose an administrative fine on any legal entity (Icelandic: lögaðili) that fails to meet its transfer pricing documentation obligation upon request, either through having no documentation at all or having inadequate documentation. The rules also specifically add that the administrative fine will be enforced regardless of the legal entity’s level of intent.
Before Iceland Revenue and Customs imposes the fine, it has to give the legal entity a minimum of 45 days’ notice to provide the Iceland Revenue and Customs with its transfer pricing documentation.
The administrative fine can equal as much as ISK 3 million (approximately USD 24,000) for each year that the legal entity has failed to provide Iceland Revenue and Customs with transfer pricing documentation. A reduced fine of ISK 1.5 million (approximately USD 12,000) applies for each year that the documentation was inadequate and the legal entity failed to improve it upon request from the Iceland Revenue and Customs.
The fines can be applied up to six financial years preceding the year of the decision and can amount to a maximum of ISK 6 million (approximately USD 48,000). That means that if a legal entity fails to comply with a request from Iceland Revenue and Customs for its transfer pricing documentation for the preceding six years, the total fine can only amount to a maximum of ISK 6 million (i.e., less than the sum of ISK 3 million for each of the six years). This maximum was ISK 12 million in the original bill, but it was reduced during the legislative process.
If a legal entity is fined by Iceland Revenue and Customs for having inadequate or nonexistent transfer pricing documentation, it can reduce its fine by complying with the original requests from Iceland Revenue and Customs within certain time frames set out in the legislation. If it fully complies within 30 days from the Iceland Revenue and Customs’ decision, the fine should be reduced by 90%. Compliance within two months reduces the fine by 60% and within three months reduces the fine by 40%.
The new legislation also clarifies that the transfer pricing documentation requirements apply to permanent establishments operating in Iceland that meet the minimum thresholds. Those thresholds are set forth in paragraph 5 of article 57, which states that if a legal entity’s income or assets in one financial year exceed ISK 1 billion (approximately USD 7.9 million), the entity is required to prepare transfer pricing documentation for its cross-border transactions with related parties the following financial year.
The decision to impose fines can be appealed to the Internal Revenue Board, which is the supreme administrative appeals authority in cases regarding taxation and duties. Such an appeal does not suspend the legal effect of the decision.
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