By Johnny Bøgebjerg & Henrik Lund, KPMG Acor Tax, Denmark
A Danish tax administration decree, published 12 July in response to the Supreme Court’s decision in the Microsoft case, establishes a new practice for determining whether transfer pricing documentation must be available at the time the taxpayer is required to file its tax return.
In addition, the decree (SKM2019.374.SKTtST) allows some taxpayers to reopen Denmark transfer pricing cases related to income years from 2008 and onwards where the tax administration made discretionary assessments. Taxpayers have six months to apply to have their cases reviewed.
Microsoft Denmark
In January 2019 Denmark’s Supreme Court ruled in favor of Microsoft in a transfer pricing dispute, finding that the Danish tax authority did not establish that the remuneration of Microsoft’s Danish marketing activities was carried out in non-arm’s length conditions.
The Supreme Court concluded that the fact that Microsoft’s transfer pricing documentation had been prepared after the tax return was filed rather than contemporaneously did not give the Danish tax authorities legal basis to assesses Microsoft’s taxable income on a discretionary basis.
The Court ruled that all information provided to the tax agency when the authorities examine a taxpayer’s intercompany dealings must be taken into account by the agency. The Court therefore found that Microsoft had presented all relevant information needed for the authorities to examine the arm’s length character of the intercompany transactions based on normal procedures.
Changes to the legislation
Before the Supreme Court ruled in the Microsoft case, changes were made to Denmark’s Tax Control Act which leaves no doubt that taxpayers must finalize their Denmark transfer pricing documentation no later than the date on which taxpayers must file their tax return. Compliant transfer pricing documentation must meet the formal requirements set out in an executive order.
The new law also provides sanctions for not complying with the documentation requirements. Penalties may apply if the formal requirements are not met and taxable income may be determined on a discretionary basis when the documentation lacks information that is important to determine the arm’s length character of the intercompany transactions.
It should be observed, that the revised law – as a starting point — explicitly allows the Danish tax authorities to make assessments on a discretionary basis in situations where an important part of the transfer pricing documentation is not prepared contemporaneously.
From the preparatory notes to the law it can be seen that it was not the intention to make retroactive changes to the existing law. Furthermore, the new law is drafted based on the understanding or assumption that the old law ‘as a starting point’ provided a legal basis for assessment of the taxable income on a discretionary basis if the contemporaneous documentation requirements are not met.
The new requirements will, at the earliest, apply for companies with financial years beginning 1 January 2018 that have a tax filing date in June 2019 or later.
Denmark transfer pricing decree
The Danish Tax Administration’s new decree is a direct consequence of the Danish Tax Ministry’s defeat in the transfer pricing case against Microsoft earlier this year.
The tax agency is of the opinion that taxable income can be determined on a discretionary basis if the transfer pricing documentation in its entirety is not available at the time the taxpayer was required to file its tax return for each year.
The decree explicitly states the Microsoft ruling only affects the income year commenced before 1 January 2019.
The decree refers to the change in law after which the tax administration’s previous practice is legalized so that the tax administration can in the future estimate the taxable income if the transfer pricing documentation is not sufficiently available at the time the taxpayer must file its tax return.
As such, a case may be reopened upon request from the taxpayer if the tax administration estimated the taxable income for years commenced before 1 January 2019 solely on the grounds that the transfer pricing documentation was not available at the time of the tax return.
Due to the statute of limitation, though, no review can be made further back than the income year 2008.
Observations
In-house tax and transfer pricing managers should consider the option to review Denmark transfer pricing cases which were based on discretionary assessments for the income years 2008 and subsequent years. The deadline for application is six months after release of the decree, namely, 12 January 2020.
After the amendment of the Tax Control Act, non-compliance with the legalized practice and the contemporaneous requirement may lead to sanctions including discretionary assessments.
As such, it is important to have thorough and complete transfer pricing documentation in place promptly to reduce the scope for potential disputes with the tax authorities.
– Johnny Bøgebjerg is Director at KPMG Acor Tax, Denmark
– Henrik Lund is Partner at KPMG Acor Tax, Denmark
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