I. Issue One
Does your tax administration have a published strategy on the conduct of transfer pricing enquiries/audits (steps, timetable etc.), and if so what is it?
In recent years, the Danish tax authorities (''SKAT'') have increased their focus on transfer pricing as part of their audit activities.
Hence, SKAT's transfer pricing adjustments in 2010 were Danish Krone 6.6 billion (DKK), in 2009 DKK 15.3 billion and in 2008 DKK 8.7 billion. SKAT has also set up a centralised transfer pricing audit team, which in 2010 consisted of 80 people.
Each year SKAT publishes a focus area plan. According to the 2011 focus area plan (published on April 6, 2011), the focus on the loss-making companies or so-called ''zero-tax-companies'' which was initiated by the project in 2010, continues in 2011. SKAT is focusing on companies which have had losses for the last three–five years. Furthermore there is focus on Intellectual Property Rights, in relation to both royalties, transfers and restructurings.
Generally speaking, a transfer pricing audit is not different from other tax audits.
However, the Danish transfer pricing legal system contains provisions requiring the enterprises to disclose information about their affiliates and to provide documentation for this information, and some time limits are longer than usual.
According to section 3 B of the Danish Tax Control Act, companies subject to taxation in Denmark and affiliated with foreign companies are under an obligation to disclose information about controlled transactions in their self-assessment tax returns. This duty of disclosure means that all companies subject to section 3 B are obligated to inform the Danish Tax Authorities about controlled transactions — even when no such transactions have taken place in the relevant period of time.
Enquiries into transfer pricing issues are made through the companies' self-assessment tax returns. Corporation tax returns are generally required to be filed no later than six months after expiry of the accounting period to which they relate.
In practice, when filling out its self-assessment tax return, the company has to tick a box stating whether or not it is subject to the duty of disclosure in section 3 B. If the company is subject to the duty of disclosure and the company's controlled transactions exceed DKK 5 million (approx. a670,000), a separate schedule has to be filled out. In this schedule, the company has to account for the types of transactions which have taken place in the relevant year of assessment and the profits connected hereto.
Once a tax return has been filed, the Danish Tax Authorities may enquire into a company's tax return. Usually, a tax audit starts with SKAT asking for information. SKAT can request the full transfer pricing documentation within 60 days. If the company fails to provide such material, SKAT may, according to section 5 of the Danish Tax Control Act, assess the company's taxable income based on an estimate.
SKAT has to send a proposal for a decision no later than May 1, in the sixth year after the relevant income year. When receiving the decision, the taxpayer will be granted a deadline in which he can comment on the proposal. The final decision has to be made no later than August 1, in the sixth year after the relevant income year. The deadline can be extended upon the taxpayer's acceptance. Normally the taxpayer will wish to accept such an extension in order for the taxpayer to have more time to reply to the proposed decision.
If the company's return is amended, it has up to three months to appeal against the amendment to the Administrative Tax Tribunal.
If the taxpayer has acted grossly negligently or intentionally, SKAT can amend the tax return within 10 years. In such case, however, SKAT must react within six months from receiving the information about the grossly negligent or intentional behaviour.
Until August 15, 2011, the local tax administration making a cross-border transfer pricing adjustment needed to have the adjustment approved by the Danish Transfer Pricing head office (SKAT, Centre for Store Selskaber, Kontoret for International Selskabsbeskatning).
II. Issue Two
What is the appeals process against a transfer pricing adjustment? What is the subsequent litigation process (in terms of the sequence of courts)?
Individuals can appeal to the Tax Board of Appeal within three months from SKAT's decision.
The appellant is required to provide a written and reasoned appeal to the Tax Board of Appeal.
Corporate taxpayers who disagree with a transfer pricing adjustment made by the tax authorities can appeal to the Administrative Tax Tribunal which is the highest administrative appeal body for all tax-related matters. The Administrative Tax Tribunal is not a court, but a quasi-judicial body. Thus, The Tribunal's case management process is governed by administrative law and administrative legal principles, among others the inquisitorial principle. Individuals can also appeal directly to the Administrative Tax Tribunal, thus skipping the Tax Board of Appeal.
The appeal to the Administrative Tax Tribunal must be in writing, and the appellant must enclose a copy of SKAT's decision being appealed, along with a copy of any statement of the reasons for that decision. The appeal must state on which points the taxpayer disagrees with SKAT and the reason behind this. Any documents of evidence need to be attached to the appeal.
All decisions (substantive or procedural) rendered by the Administrative Tax Tribunal can be brought before the ordinary courts of Denmark within three months. However, a judicial appeal is only possible if the appellant has previously filed an administrative appeal with the Administrative Tax Tribunal.
As a general rule, a case starts at the municipal court level. Appeals from a municipal court lie to one of the High Courts (the Eastern High Court or the Western High Court). Provided that the case is of fundamental importance (e.g. concerns statutory interpretation) a case may be referred to the High Court.
Generally speaking, a judgment can only be appealed once. Hence, if the tax case begins in the municipal court, the case can be appealed to the High Court within four weeks from the judgment. If the case begins in the High Court, the case can be appealed to the Supreme Court within eight weeks from the judgment.
III. Issue Three
What can taxpayers expect in terms of the process of preparation for, and participation in, a transfer pricing hearing?
As accounted for above, corporate taxpayers can appeal against SKAT's transfer pricing adjustment to the Administrative Tax Tribunal.
In practice, the procedure before the Administrative Tax Tribunal contains the following steps:
- filing of complaint;
- SKAT is allowed to comment on the complaint;
- the taxpayer is allowed to comment on SKAT's comments;
- meeting with the case officer (where the facts are normally discussed) without SKAT;
- the taxpayer may procure an expert opinion;
- the case officer issues a proposal for a decision;
- SKAT is allowed to comment on the proposed decision;
- the taxpayer is allowed to comment on SKAT's comments and the proposed decision;
- hearing before the Tribunal if requested by the taxpayer or SKAT;
- decision.
As a general rule, all cases are decided on the basis of written statements. The Tribunal can grant an oral hearing if requested by the taxpayer, and this will normally be granted in transfer pricing cases. If the Tribunal finds that an oral hearing of the case is unnecessary, the Tribunal may refuse to grant such a request.
The hearing before the Administrative Tax Tribunal is a full review of facts and law. It is possible to procure an expert opinion in cases pending before the Administrative Tax Tribunal, which is often relevant in transfer pricing disputes due to the complex nature of such disputes. The rules of civil procedure are applied in this regard, i.e. the expert is appointed by a (district) court.
It is generally not possible to call witnesses before the Administrative Tax Tribunal. The procedure at the Administrative Tax Tribunal is likely to take between 9 and 24 months.
IV. Issue Four
Does your tax administration have a published strategy on transfer pricing litigation (in the sense of which cases to take forward and when to settle) and if so what is it?
The Danish Tax Ministry has not published any strategy specifically on transfer pricing litigation. However, the Danish Tax Ministry has published guidelines on tax litigation in general (Guidelines on Litigation).
According to the Guidelines on Litigation, it is a general rule that the Danish Tax Ministry does not appeal against a decision from the Administrative Tax Tribunal unless the case is of fundamental importance. The Danish Tax Ministry may appeal if the case concerns a matter of principle, a case of great value or a case that may have influence on a large number of taxpayers.
Furthermore, only cases where the courts are likely to reach a different decision than the Administrative Tax Tribunal will be appealed by the Tax Authorities. Annually approximately 10 cases are appealed to the Courts by the Danish Tax Ministry.
It follows from the Guidelines on Litigation that as a general principle the Danish Tax Ministry must endeavour to decide as early as possible whether a case must be settled or not. If the counsel of the Danish Tax Ministry is of the opinion that the case is dubious, the counsel must inform the Danish Tax Ministry of this and — if necessary — a proposal for settlement.
V. Issue Five
What is your tax administration's position on alternative transfer pricing dispute resolution techniques such as mediation?
There are no published examples of alternative dispute resolution. It is reasonable to assume that the Danish Tax Authorities would be reluctant to enter into mediation in transfer pricing issues.
VI. Issue Six
What is the Mutual Agreement Procedure in your jurisdiction? What is the arbitration procedure?
Denmark has a large network of tax treaties. Where the other country agrees, Denmark generally includes a Mutual Agreement Procedure (MAP) article in its international treaties. This allows SKAT and the competent authorities of treaty partners to consult to resolve matters relating to the application of Danish tax treaties.
The double-tax treaties entered into by Denmark are generally based on the OECD Model.
In general, the MAP article gives the taxpayer concerned the right to present his case to the competent authority (in Denmark ''SKAT'') if he finds that the actions of one or both of the contracting states result or will result for him in taxation contrary to the treaty in question, see article 25 of the OECD Model. There are few formal requirements, and a taxpayer may file a MAP request even if there is a complaint pending before the tax authorities. It is, however, a requirement that the taxpayer is able to render it probable that the taxation is inconsistent with the treaty concerned.
If SKAT finds that the complaint is justified and that the problem cannot be solved domestically, SKAT is obligated to set in motion the mutual agreement procedure and thus involve the competent authority of the other contracting state.
In consequence of a statement by the Danish Ombudsman, the administrative procedure in MAP cases in Denmark is subject to the right of information. Thus, a taxpayer has a right to access relevant documents in MAP cases involving SKAT. As a general rule, however, SKAT will not disclose foreign countries' negotiation papers.
It should be noted that the MAP article only obligates the competent authorities to use their best efforts to reach an agreement. There is therefore no certainty that the Mutual Agreement Procedure will actually result in an agreement between the competent authorities in the contracting states. In 2010 Denmark agreed on 36 MAPs, and 27 MAPs were pending.
Denmark has started to incorporate arbitration provisions into recently negotiated tax treaties upon request from the treaty partners, e.g. with Switzerland and Israel. Denmark does not, however, have the domestic rules in place for such arbitration and does not intend to adopt such rules in the near future. Hence, it is normally agreed that the arbitration clause will take effect upon Denmark's notification to the treaty partner that such domestic rules have been adopted.
Being an EU member state, Denmark is also a party to the EU Arbitration Convention (Convention 90/436/ EEC) which also establishes a procedure to resolve (transfer pricing) disputes. The convention provides for both a Mutual Agreement Procedure and an Arbitration Procedure.
In general the convention provides that whenever the competent authorities in the contracting (member) states fail within a two-year period to reach an agreement with the purpose of eliminating double taxation resulting from intercompany transfer pricing transactions, the dispute must be solved by referring it to an independent advisory body.
As opposed to the Mutual Agreement Procedure in the OECD Model, the competent authorities in the contracting (member) states are thus obligated to resolve the transfer pricing dispute in question under the EU Arbitration Convention.
VII. Issue Seven
What is the mechanism, if any, for avoiding the statute of limitations for appeals or litigation when Competent Authorities have failed to reach agreement after a long period of negotiation?
In order to avoid the statute of limitations for appeals, a corporate taxpayer must file an appeal with the Administrative Tax Tribunal within three months (see above Issues One and Two). The taxpayer will normally ask for the appeal to be put on hold during the MAP. If the MAP fails, the appeal will be reassumed. Hence, the taxpayer must appeal against SKAT's decision even when a MAP procedure is requested.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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