The Supreme Court rules in favour of the taxpayer in a TP case

22 February 2019

This marks the third time the Danish tax authorities have been defeated in the same case. Both the High Court and the National Tax Tribunal before it also ruled in favour of the taxpayer.

The case concerned whether a Danish company of a large multinational group had received payment at arm’s length from a foreign group company for marketing services rendered. In the opinion of the Danish tax authorities, this was not the case. Consequently, the taxable income of the Danish company was increased by a total of more than DKK 300,000,000 for the income years 2004 - 2007.

The Supreme Court ruled that there was no basis for this increase. The court concluded that there was no basis for a purely discretionary assessment of the company’s income just because the company’s transfer pricing documentation was not available in sufficient detail at the deadline for filing the tax return.

Income years up to and including 2017

For a number of years, the Danish tax authorities have claimed they can make an entirely discretionary assessment of a company's income, if the company cannot substantiate that its TP documentation was in order at the deadline for filing the tax return.

However, the Supreme Court does not agree. If the documentation is present at the time of assessment, the income cannot be estimated on an entirely discretionary basis. The authorities can (only) correct the pricing for specific transactions, and only if this is deemed tenable. The burden of proof is quite heavy in this context.

It is likely that the ruling will have a significant impact on all pending TP cases, as the companies concerned have now been granted an extended timeframe for providing the documentation requested by the tax authorities.

Income year 2018 and onwards

The requirement that adequate documentation must be available at the deadline for filing the tax return is statutory with effect from 2018. The legal significance of this is not clear, but the tax authorities may take the position that the ruling of the Supreme Court will not set a precedent for income year 2018 and onwards.

No implications with regard to fines

The ruling does not have implications with regard to fines for insufficient or missing transfer pricing documentation.