On 6 November 2019, the Danish Ministry of Taxation proposed transfer pricing rule changes that would require taxpayers to file the statutory transfer pricing documentation package with the Danish Tax Agency. The new rule is proposed to be effective for income years beginning on or after 1 January 2020.The draft legislation was announced along with a proposal to implement the EU Anti-Tax Avoidance Directive, as well as other changes.
The draft legislation reflects two substantial changes from the rules under the current transfer pricing law.
― The statutory transfer pricing documentation would have to be submitted to the Tax Agency no later than 60 days after the deadline for filing of the tax return. Under certain circumstances, upon request, the deadline may be extended even further by additionally 60 days.
― If the taxpayers fail to submit the required documentation by the deadline, this would have a significant impact on the burden of proof in case the Tax Agency reassesses the taxable income (i.e. a discretionary assessment).
The transfer pricing documentation content requirements would continue to follow the OECD Transfer Pricing Guidelines. As such, the full documentation would have to be prepared contemporaneously. The proposed rule would imply that the documentation package must be submitted within the deadline, and this would include the Master file of the taxpayer group as a whole.
The consequences for failing to submit the transfer pricing documentation timely would include penalties and potentially a discretionary assessment.
In general, the penalties for non-compliance comprise a one-off penalty of DKK 250,000 (approx. EUR 33,330) per income year per entity and a fine of 10% of any increase in income. The fine of DKK 250,000 may be reduced to DKK 125,000 should the taxpayer choose and be able to provide the requested documentation subsequently.
In addition to these changes, the draft legislation would in addition to the consequences mentioned above clarify the possibility of a daily fine for each day the transfer pricing documentation has not been filed as well as a surcharge of maximum DKK 5,000 (approx. EURO 670) in case the tax return is incomplete as such. And finally, the draft legislation would imply a modified definition of controlling interest.
Until March 2018, there was uncertainty as to whether the transfer pricing documentation needed to be prepared contemporaneously (i.e. no later than the tax return deadline).
A March 2018 decision of the Danish court (the Eastern High Court) concluded in favour of contemporaneous documentation. Further, with the implementation of the new Danish Tax Control Act (legislation no. 1535 of 19 December 2017), the requirement for contemporaneous documentation was even further clarified for income years beginning in 2019 or later because the contemporaneous documentation requirement was stipulated directly in a provision of the legislation (section 39 (1)).
Until January 2019, there was uncertainty regarding the legal basis for assessing taxable income on a discretionary basis. A landmark case from the Danish Supreme Court clarified that the evaluation of a taxpayer’s intercompany transactions must be based on all relevant information provided by the taxpayer, including information provided and prepared after the deadline of the tax return; see SKM2019.136HR.
The new proposal in the October 2019 draft legislation aims to “clarify” that the Supreme Court decision does not affect income years beginning in 2019 and onwards.
When the Tax Agency is authorised to make a discretionary assessment of the taxable income in accordance with the arm's length principle, the taxpayer – according to the practice of the courts – has 'the burden of proof' and must provide evidence that the Tax Agency’s estimate is obviously unreasonable or was formed on an incorrect basis.
The draft legislation proposes that the Tax Agency would be allowed to perform a discretionary assessment solely because the transfer pricing documentation has not been prepared contemporaneously and filed within the deadline.
The proposal would be a substantial change, given that the Tax Agency – under current law – is only allowed to make a discretionary assessment, if the documentation is non-compliant or not filed at the time of the Tax Agency's final assessment. However, with the draft legislation, the Tax Agency would still need to take into account information provided prior to the assessment, and the discretionary assessment must be in accordance with the arm's length principle (section 2 (1) of Tax Assessment Act; in other words, if prices and conditions applied by the taxpayer are in accordance with the arm's length principle, a discretionary assessment would not be justified.
Finally, the Tax Agency would still be required to make 'reasonable efforts' to establish the facts and circumstances of the case, i.e. approach the taxpayer prior to making any discretionary assessment so as to substantiate the discretionary assessment. If the Tax Agency were to decide to adjust the filed taxable income, the income adjustment would in legal terms still be a discretionary assessment.When the Tax Agency is authorised to make a discretionary assessment of the taxable income in accordance with the arm's length principle, the taxpayer – according to the practice of the courts – has 'the burden of proof' and must provide evidence that the Tax Agency’s estimate is obviously unreasonable or was formed on an incorrect basis.
If the draft legislation as proposed were to be enacted, the Tax Agency would be allowed to make discretionary assessments, even if the taxpayer prepared and filed all relevant documentation after the deadline. This means that the Tax Agency would now be legally allowed to make a discretionary assessment based on a formality instead of insufficiency of evidence.
The consequences of failing to file the transfer pricing documentation in due time would provide a strong incentive for taxpayers to prepare and timely file compliant transfer pricing documentation.
Lastly, it is worth noting that many other jurisdictions, including most EU Member States, do not have a documentation filing requirement, and others have different deadlines for finalising the transfer pricing documentation. Such variations in compliance rules and deadlines could cause challenges – especially in situations when the taxpayer group’s Master file is prepared in a different jurisdiction and in situations when the relevant group entities have different financial years.
For more information, please contact a professional with KPMG’s Global Transfer Pricing Services practice in Denmark:
Simon Schaadt | +45 5374 7044 | email@example.com
Henrik Lund | +45 5374 7066 | firstname.lastname@example.org
Holger Haugstrup | +45 5374 7019 | holger.Haugstrup@kpmg.com
Johnny Bøgebjerg | +45 5374 7090 | email@example.com
Sebastian Næs Hallund Rasmussen | +45 5077 0947 | firstname.lastname@example.org