The Danish National Tax Tribunal has rendered another ruling regarding the Tax Authorities possibility to make an estimated assessment in Transfer Pricing cases. Taxand Denmark provides an overview.
The case concerned a Danish production and sales company and its foreign branch. The Danish Tax Authorities was of the opinion that the transfer pricing-documentation prepared by the company contained substantial flaws. Due to the incomplete documentation the Tax Authorities made an adjustment to the company’s taxable income based on an estimated assessment.
Transfer pricing documentation
Dealings between group companies must be carried out on arm’s length terms according to the Assessment Act (ligningsloven) section 2. In addition to this, the Tax Management Act (Skattekontrolloven) section 3B states that group companies shall continuously prepare documentation describing how prices and terms for controlled transaction are established. This documentation shall be submitted to the Tax Authorities on request. If the documentation is not prepared, or the documentation is substantially flawed, the Tax Authorities can conduct an estimated assessment, which is refutable only if the company can prove that it is manifestly unreasonable or rests on an incorrect basis.
Summary of the case
The case (SK 2017.115 LSR) concerned a Danish company that produces, develops and sellsproducts of high quality to the construction industry. The company is one of the leading actors in this business. It delivers, among other things, customer suited products for largescale project in Denmark. Production and sale also takes place in Denmark. The company has a branch abroad that conducts sale to customers in the branch country, as well as develop and design project solutions to these costumers. All production and actual sale is carried out by the headquarters in Denmark. The headquarters also conducts the financial administration of the branch and the billing of the foreign customers.
The transfer pricing area is an immensely important one to the Danish Tax Authorities. Therefore, it is paramount for groups to live up to the transfer pricing documentation requirements and take all necessary steps to ensure complete compliance with these. The ruling indicates that in the long run, the Danish Tax Authorities need to substantiate their assessments even in cases were the original transfer pricing documentation was incomplete or lacking. Furthermore the ruling shows that under appeal it is possible to get a critical review of the approach taken by the Danish Tax Authorities.