The Danish tax authorities assessed that the local unit of Microsoft should pay roughly USD 46m in additional taxes relating to Microsoft software pre-installed on computers manufactured by third parties such as Dell and retailed in Denmark between 2004 and 2007.
Over the period, Microsoft Ireland, which held the rights for licencing the software, paid a commission on sales to Microsoft Denmark. The authorities argued that the commission paid was artificially low, and did not include commission for sales of software pre-installed on computers sold by third party retailers in Denmark, ensuring that value was retained in Ireland and keeping revenue artificially low in Denmark. Additionally, the tax authorities claimed that the transfer pricing documentation submitted by Microsoft had not been prepared within the deadline stipulated in Danish transfer pricing legislation.
During the trial, Microsoft Denmark insisted that all Microsoft’s Danish operations were in line with the corporation's international accounting and TP policy which fairly determined where profit from operations was retained and, accordingly, where tax liabilities were paid. Microsoft emphasised that Microsoft Ireland undertook more functions and bore more risks, as it was one of the country's biggest private sector employers, and served as the base for operations across the European market. Microsoft’s legal team called for the case to be dismissed pointing to similar cases in Sweden, Norway and Finland where the authorities had either lost or withdrawn their case.
The Supreme Court ruled in favor of Microsoft, concluding that Microsoft Denmark was not obliged to market the software pre-installed on computers and that the sales had already performed by Microsoft companies in the United States and other countries outside Denmark.
The case followed on from a long running case between the authorities and Microsoft over the company’s acquisition of Danish IT group, Navision. The Danish tax authorities demanded USD1 billion (EUR809 million) claiming Microsoft had sold the rights to Navision's successful business planning software, now marketed under the name of Dynamics NAV, at below market value to a subsidiary in Ireland. In this instance, the tax authorities were successful in securing tax and interest payments amounting to USDXXX million.
Yuliia Naumenko, Consultant, Transfer Pricing, KPMG in Ukraine