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New legislation on transfer pricing
Limited incorporation of OECD guidelines
New legislation formalises the status for the OECD Transfer Pricing Guidelines in Norwegian law. The Tax Act now provides explicitly that the OECD Guidelines must be taken into consideration when applying the Norwegian arm's length principle between Norwegian and foreign related entities. The guidelines should also be consulted in cases involving only Norwegian entities, and in other cases regarding transfer pricing.
However, the new legislation empowers the Ministry of Finance to provide guiding on how the OECD Guidelines should be interpreted and applied. And as to current or future OECD Guidelines not being officially supported by Norway, these are not to be taken into consideration.
The Ministry of Finance has stated that their objective is to clarify and strengthen the OECD guidelines in Norwegian law. As there is Supreme Court precedence in Norway, that it may be assumed that Norwegian law is in line with the guidelines to a large extent, and therefore the guidelines may be consulted, the effect of the new legislation remains to be seen.
Changes in the reverse burden of proof
The Tax Act has provided for the presumption that any reduction of capital or income is a result of commonality of interest, if the related party is resident in any foreign country, unless the taxpayer can provide evidence to the contrary. This reverse burden of proof shall now apply only if the contracting entity is domiciled outside the EEA, or if Norwegian tax authorities are not empowered (by tax treaties) to demand information about the entity's income and capital.
Reporting and documentation requirements
A new reporting requirement has been enacted to provide Norwegian tax authorities with sufficient information to determine which taxpayers and transactions they would like to look more into. Together with the new legislation on a documentation requirement, this is how Norway adopts to the guidelines of the new EU Code of conduct on Transfer Pricing Documentation passed by the EU Council at 27 June 2006.
The new reporting and documentation requirements apply to all taxpayers making any transactions or having a debt etc. with a related entity. The new requirements will only apply when both the related parties are legal persons such as a limited liability company, fund, trust, or company pension fund. Individuals are not included.
The following parties are to be considered "related" to the taxpayer:
1. Entities owned or "controlled" by the taxpayer by at least 50 %. The "control" criterion may be established on the basis of various means of influence, e.g. by a majority vote at the general meeting, the right to appoint a majority of the board members in a company or by an agreement providing deciding influence. Both direct and indirect ownership and control is relevant.
2. Entities and individuals owning or controlling the taxpayer directly or indirectly by at least 50 %.
3. Entities owned or controlled by the entities and individuals in para 2 by at least 50 %.
4. Individuals with a relation to individuals in para 2 as further specified in the provisions (mainly relatives).
5. Entities owned or controlled by the individuals in para 4 by at least 50 %.
The reporting requirement also applies when a Norwegian entity is making transactions or having a debt etc. with a permanent establishment (PE) of the entity abroad, and vice versa: a foreign entity with a Norwegian PE.
In order to ease the burden of reporting, the reporting requirement applies only to transactions during a fiscal year exceeding a total of NOK 10 million and debt at the end of the fiscal year exceeding NOK 25 million. Related entities will need to report whether they have such transactions debts or not. Transactions with no consideration and with PE's are nevertheless to be reported irrespective of these thresholds.
The documentation requirement is subject to a de minimis rule: it does not apply if the taxpayer, together with the related parties, has less than 250 employees and either less than NOK 400 million in total annual turnover, or a total capital in the balance sheet of less than NOK 350 million. The de minimis rule will however, not apply if the related entity is domiciled in a country in which Norwegian tax authorities are not empowered, by means of international treaties, to demand information about the entities' income and assets. Neither does it apply to entities taxable under the Norwegian Petroleum Tax Act.
The taxpayer must provide the transfer pricing documentation only on request by the tax authorities, and in such case within 45 days after receiving the request.
The content of the required documentation is described in draft guidelines from the Directorate of Taxes. Subject to some qualifications, the documentation may be produced in accordance with the requirements in the EU code of conduct on transfer pricing documentation. The documentation may be prepared on paper or electronically. The Norwegian, Danish, Swedish or English language is accepted.
The transfer pricing documentation must be stored for 10 years after the fiscal year, regardless of whether or not the documentation is actually requested by the authorities.
If the taxpayer does not comply with the new reporting and documentation requirements, the consequences are similar to those regarding the regular tax returns: the documentation may be set aside, and the transfer price assessment is left to the tax authorities' discretion. Furthermore, the authorities might levy surtaxes. If the 45-day deadline is exceeded, the taxpayer may also loose the right to appeal the tax authorities' discretionary decision.
The reporting requirement is expected to become effective from the fiscal year 2007 provided the Ministry in due course will pass some detailed regulations described in a discussion paper issued in July 2007. This means that the taxpayers in question will have to file the required form with their tax returns filed during spring 2008. The documentation requirement is expected to become effective from the fiscal year 2008.