Taxing authority and tax law
Tax authority: Ministry of Taxation (MT)
Tax law:
- Section 2 of the Tax Assessment Act
- Sections 3B, 14(3) and 17(3) of the Tax Control Act
- Sections 26 and 27 of the Tax Administration Act
Relevant regulations and rulings
Regulation number 42 of 24 January 2006 pertains to the documentation of the pricing of intercompany transactions and guidelines for preparation of written documentation. The regulation sets forth the minimum requirements and guidelines for tax assessment and for disclosing information. The regulation is referred to as the Executive Order on Transfer Pricing Documentation.
OECD guidelines treatment
The MT will, for the purpose of its assessment, apply the principles of the OECD Transfer Pricing Guidelines.
Priorities/pricing methods
The MT accepts CUP, Resale Price, Cost Plus, Profit Split and TNMM. In selection of the method, the taxpayer should take into consideration the aspects regarding the application of methods stated in the OECD Transfer Pricing Guidelines.
Transfer pricing penalties
Fines were introduced for income years commencing on or after 2 April 2006, if the transfer pricing documentation requirements are not observed either intentionally (deliberate omission) or due to gross negligence or if incorrect and misleading information on the exemption rule for small and medium-sized companies is given. The amount of the penalty is twice the costs saved for not having prepared the transfer pricing documentation in the first place. The penalty may be reduced by 50% if the documentation required is produced subsequently.
If, in addition, the income is increased because the arm’s length criterion has not been satisfied, the minimum fine will be increased by an amount equal to 10% of the income increase.
In case of income adjustments, a 5.1% (6.1% for 2009, 6.3% for 2008, 5.8% for 2007, 5.3% for 2006, 5.4% for 2005 and 5.7% for 2004) nondeductible surcharge on all adjustments of prior years’ corporate taxes payable will be levied. Furthermore, a non-deductible interest of 0.5% (0.6% for income year 2007-2009, 0.5% for the income years 2005-2006 and 0.6% for the income year 2004) for each month since the due date for the corporate tax payable for the income year in question is applicable.
Penalty relief
If the taxpayer prepares the lacking or insufficient documentation and ensures that the documentation meets the requirements, the fine (except that which is related to the increase of taxable income) will be reduced to half of the original amount.
Documentation requirements
The documentation must be available upon request from the tax authority within 60 days’ notice. The earliest such a request can be made is the date of filing for a company’s tax return. The transfer pricing documentation requirements affect both domestic and foreign intercompany transactions. In certain circumstances the transfer pricing documentation requirements are reduced for small and medium sized companies (companies are classified according to thresholds measured at group level), as well as for entities subject to tonnage tax.
The documentation requirements were tightened as of 2006. According to the Executive Order on Transfer Pricing Documentation, the documentation should include:
- A description of the group, including the legal group structure, the history of the group, including a description of restructurings, operational structure and primary business activities, as well as a description of the industry in which it operates
- A description of the Danish entity, its intercompany transactions and the other entities involved (primary business activities and three years’ key financials for all entities involved)
- A description of each intercompany transaction including:
- Parties, types of products/services/assets transferred and the volumes involved
- An analysis of functions and risks undertaken and assets employed by the entities involved
- Contractual terms
- Economic conditions
- And
- Business strategies
- Comparability analysis by intercompany transaction, including:
- Information about the transfer pricing policy and method applied, and how the transfer pricing principles are implemented in practice (e.g., whether year-end adjustments are made)
- An analysis of how the transfer prices satisfy the arm’s length principle
- A list of any written intercompany agreements entered into by the Danish entity and a copy of any written agreements in place with foreign tax authorities regarding transfer prices
According to the tightened documentation requirements, a taxpayer must, within 60 to 90 days’ notice, provide external comparable searches as part of the arm’s length analysis upon request from the tax authority.
As of August 2009 additional documentation guidelines are applicable to the valuation of companies/businesses, shares and intangible assets/IP in a related party context.
Documentation deadlines
The deadline for preparing documentation is the same as the deadline for filing the tax return. Documentation must be provided upon request. 60 days’ notice is given.
Statute of limitations on transfer pricing assessments
The statute of limitations for a transfer pricing assessment is 1 May in the sixth year after the end of the calendar year following the income year.
Return disclosures/related-party disclosures
Form 05.021 (05.022 - English version) discloses information on all controlled transactions and whether the company is qualified for reduced documentation requirements.
Audit risk/transfer pricing scrutiny
The risk of transfer pricing issues being reviewed under an audit is high. Three dedicated transfer pricing audit centers across Denmark are operated by the tax authorities with the single purpose of carrying out transfer pricing audits. We see an increasingly intense focus on transfer pricing which is emphasized in the well publicized plan of action on taxation of MNEs released by MT in July 2010. From a transfer pricing perspective the plan of action focuses on MNEs which are operating at breakeven or are loss making.
The transfer of business/intangibles out of Denmark is also a key target for MT and audit risk associated with these transactions is high. In line with this focus the August 2009 MT guidelines were published on the valuation methods applicable to and documentation of companies/businesses, shares and intangible assets/IP in a related party context.
Most normal tax audits now include and are being initiated with requests related to transfer pricing. Intensified cooperation between the Nordic tax authorities has led to a higher level of information sharing and a significant increase in the number of coordinated cross-Nordic audits.
APA opportunity
The Danish legislation provides for unilateral APAs only. There is no APA regime in place, but the MT has entered into a limited number of bilateral APAs. For instance, MT has entered into the first bilateral APA between China and a European country.
We expect this area will develop significantly within the next few years.
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