Monday, 19 June 2017

Denmark: National Tax Tribunal — ruling in estimated assessment in transfer pricing case issued

On 15 December 2016, the National Tax Tribunal (Landsskatteretten) issued Ruling SK 2017.115 LSR (recently published) on an estimated assessment made in a transfer pricing case. Details of the ruling are summarized below.

The case concerned a Danish company involved in the production, development and sales of high-quality products to companies in the construction industry.

The company, inter alia, delivered customer-suited products for a large-scale project in Denmark. The production and sale of the products also took place in Denmark.

The company has a branch abroad selling products to customers in the branch country. In addition, the branch develops and designs project solutions to these customers.

The total production and actual sales are carried out by the Danish headquarters, which also manages the financial administration of the branch and the billing of the foreign customers.

Because the tax administration regarded the transfer pricing documentation as insufficient, it adjusted the profits of the company concerned on the basis of an estimated assessment.

The issue was whether the tax administration was authorized to make an adjustment on the basis of an estimated assessment.

The tribunal began by referring to section 2 of the Tax Assessment Law (Ligningsloven ), which provides that dealings between group companies must be at arm's length.

Thereafter, the tribunal noted that Section 3B of the Tax Management Law (Skattekontrolloven[) obliges group companies to prepare transfer pricing documentation that, inter alia, describes how the prices and terms for a controlled transaction are established. Upon request, this documentation must be submitted to the tax administration.

Finally, the tribunal decided that if no transfer pricing documentation is prepared or the documentation is incomplete, the tax authorities are authorized to make an adjustment on the basis of an estimated assessment.

In such a case, the taxpayer has the burden of proving that the adjustment is manifestly unreasonable or incorrect.

Source: EY