Companies are fined if they are unable to provide adequate proof of their transfer prices at short notice - even if the Danish tax authorities find nothing to correct.
Group-related companies are obligated to trade with each other at the same prices and on the same terms as independent parties. In many cases, transfer pricing documentation must be prepared and kept available.
In 2012, an amendment of the law resulted in more clear guidelines for the fines in transfer pricing cases. As a starting point, the fine for missing or not timely submission of documentation constitutes a fixed basic amount of DKK 250,000 per year. However, the fine may be reduced by half if documentation is submitted subsequently. Conversely, it can be raised by 10 pct. of any increase of the taxable income implemented by the Danish tax authorities.
Recently, the Danish tax authorities have published two rulings regarding this issue.
The first case concerned a Danish subsidiary of a German group. In August 2013, the company received a letter from the Danish tax authorities with a request to submit transfer pricing documentation for the years 2009–2012 within 60 days. Initially, the company submitted information that the Danish tax authorities found inadequate. Complementary documentation was not submitted until the end of February 2014, which was four months late.
Although the Danish tax authorities approved the documentation, the district court sentenced a fine of DKK 250,000 for late submission of the documentation. Normally, the fine for 4 years would amount to DKK 500,000, but the court ruled there was no basis for total accumulation of fines as the company had cooperated and contributed to the provision of the necessary information.
The second case concerned a Danish company belonging to a larger group. The company received a letter from the Danish tax authorities in September 2013 with a request to submit transfer pricing documentation for the years 2009-2012 within 60 days. However, the letter was lost internally in the company. Hence, the documentation was not submitted before the deadline expired.
The company was sentenced to a fine of DKK 250,000 at the High Court. In the ruling, the size of the fine was substantiated by the fact that the offense had to be regarded as one infringement in four years, and that a fine based on the number of years would result in an excessively high penalty.
Both cases are characterised by the companies willingly contributing to the procurement of the documentation requested by the Danish tax authorities, and that the tax authorities – at least in the latter case - did not find grounds for criticising the transfer prices.
Nevertheless, in both cases, the companies were penalised with significant fines solely for exceeding the deadline for submission of transfer pricing documentation.
The Danish tax authorities state that another trial is underway in the judicial system.
It may be tempting for companies to choose a model, where the statutory transfer pricing documentation is initially only made in a light version, because the full version is very resource-intensive to compile. However, a decision on this may prove problematic if sufficient transfer pricing documentation cannot be obtained within the 60-day time limit.
The above article is taken from tax:watch, our electronic English newsletter on Danish Tax and VAT matters. tax:watch is issued on the last Friday of each month and is free of charge. Please sign up here.