1. Introduction
On 1 January 1999 eleven Member States of the European Union replaced their national currencies by a single European currency, the euro. From this point on these countries will share a single monetary and exchange rate policy.
In the Edinburgh decision from 1992, Denmark announced that it will not participate in the third stage of the EMU and in the single currency.
Denmark has made an agreement with the new European Central Bank (ECB) on limiting the fluctuations between Danish Kroner and the euro (ERM 2). By this agreement the Danish Krone is in fact linked closely to the euro.
In Denmark there is an increasing awareness of the advantages of the single currency. A referendum, however, has to be held before Denmark can join the EMU. It is anticipated that a referendum will be held within the next few years which may enable Denmark to join the EMU by 1 January 2002 when the euro notes and coins are introduced.
2. Implications of the euro
An important barrier to free trade in the European Single Market will be removed by introducing the single currency.
The euro once and for all eliminate exchange rate uncertainties between participating countries and some of the costs of international trade for enterprises and consumers. The single currency also means that exchange rate uncertainties will be reduced for countries outside the euro area.
The single currency will enhance transparency of prices. This will lead to increased competition in the Single Market and thereby lowering prices. The result will be cheaper commodities thus raising real incomes. Hence, the euro improves welfare in all Member States.
The gains will be larger in the euro countries than in the countries outside the euro area (Denmark, Sweden and UK).
The accounting implications of the introduction of the euro are limited for companies in non-participating Member States. The euro will be just another foreign currency which their accounting systems need to cope with.
However, Danish companies must be prepared to handle transactions in euro with customers and suppliers.
2. Key issues
The need for businesses to prepare for the euro is crucial.
The following issues are among the key tax and business considerations that
Danish companies should address:
- How will the euro affect tax filing obligations?
- What tax relief will be available for conversion costs?
- How will foreign currency gains and losses on conversion be treated for accounting and tax purposes?
- How will EMU affect external pricing and transfer pricing policies?
- How can re-denomination of share capital be implemented?
3. Filing obligations
In December 1998 two bills on modification of the Danish legislation were enacted by the Danish Parliament as a result of the introduction of the euro.
The bills imply that Danish companies are allowed to do bookkeeping and present accounts and share capital in euro as from 1 January 1999.
Danish companies are, however, not allowed to file their tax returns in euro nor to pay income taxes and VAT in euro.
4. Treatment of conversion costs
The conversion costs are basically to be categorised as current expenses for accounting and tax purposes as they may be considered part of the companies' costs of adapting to the changing financial climate and technological developments.
General provisions for future conversion costs are not allowed.
5. Exchange gains and losses
The introduction of the euro does not change the relationship between the currency of a participating Member State and a non-participating Member State. The currencies will continue to fluctuate in relation to each other and the exchange differences will be treated as usual.
Exchange differences realised on the euro's potential future adoption as the functional currency in Denmark should be treated in the same way as other realised exchange differences. Realised and unrealised exchange gains and losses are generally included in the profit and loss account.
6. Transfer pricing
The ability to sell across the euro zone in one currency will increase price transparency and is likely to increase competition. Companies should therefore review purchasing and marketing strategies including pricing strategies. As the prices paid or charged to third parties change, then inter-company pricing will need to change.
The elimination of exchange rate risks and new methods of doing business will change the relationships between group companies and the way risk and function is divided between companies in the group.
As a result, companies need to review their transfer pricing to ensure that in the new business environment the transfer prices can still be justified to tax authorities whilst making the most of the opportunities that arise.
7. Re-denomination of par value shares and bonds
Danish bonds and shares are traded in par value amounts. Legislation allowing Danish companies to re-denominate their share capital into euro is effective as from January 1 1999.
Re-denomination of par value shares to the euro and rounding will be tax neutral provided that additional shares are acquired for the purpose of obtaining a holding of shares in round euro amounts. Divestment for the purpose of obtaining a round euro amount may trigger taxation.
For further information e-mail Aksel H. Olsen, KPMG Copenhagen by facsimile on +45 38 18 30 51 or e-mail: Click Contact Link or visit the KPMG Denmark website at Click Contact Link
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.