Iceland: Penalty provisions introduced for transfer pricing documentation noncompliance

Administrative penalties for any legal entity that fails to document its transactions with related parties

Administrative penalties for any legal entity that fails to document its transactions

Under Article 57 of the income tax law of Iceland, transfer pricing documentation is mandatory for companies with income or assets over ISK 1 billion and cross-border transactions with related parties.

The Parliament recently modified the legislation authorizing the Director of Internal Revenue (DIR) to impose administrative penalties on any legal entity that fails to document its transactions with related parties, regardless of whether this failure is intentional or negligent.

The penalty measures apply for companies that are subject to the documentation requirement and also to permanent establishments of foreign companies in Iceland. Documentation must be available, and it must be satisfactory in the opinion of the DIR. The decision on a penalty is made by a ruling of the DIR, which is enforceable. If the penalty is not paid within a month, interest is added to the penalty amount.

The penalty amounts are as follows:

  • ISK 3 million for each financial year in which a company has not fulfilled its documentation obligation in part or in full.
  • ISK 3 million if the company does not fulfill its obligation to document within 45 days of request from the tax authority.
  • ISK 1.5 million if the company has submitted documentation that the DIR does not consider satisfactory and the company has not made corrections in accordance with the DIR´s requirements within 45 days.

Penalties may be imposed for a maximum of six income years immediately preceding the year for which the penalty was imposed and can amount to a maximum of ISK 6 million. The penalty is reduced by 90%, 60%, and 40% respectively, if deficiencies in documentation are rectified within 30 days, two months, and three months of the DIR´s ruling.

The legislation covers breaches and negligence of the documentation obligation that occur after its effective date; thus, penalties cannot be applied to any tax years preceding 2021.

The DIR´s penalty ruling may be appealed to the Internal Revenue Committee. An appeal to the Internal Revenue Committee does not delay collection or release the company from sanctions imposed for non-payment of the penalty.

KPMG observation

The law is silent on the requirements of “satisfactory” documentation; thus, application of penalties has the potential to be subjective. For instance, if the DIR does not agree with the choice of transfer pricing method, does it constitute unsatisfactory documentation even if the taxpayer has prepared a full transfer pricing report according to OECD Transfer Pricing Guidelines? Icelandic law has a separate section for tax penalties in Chapter XII.  Some believe it would have been more appropriate to formulate transfer pricing penalties in that section rather than Article 57.

The new penalty provisions are yet another indicator of the Icelandic tax authority´s intensifying focus on transfer pricing. The past two to three years have seen an increase in transfer pricing audits and “informal” enquiries regarding taxpayers´ transactions with foreign related parties. The tax authority has expanded its team dedicated to transfer pricing matters. Iceland has also entered into bilateral agreements with over 60 countries for the automatic exchange of country-by-country reports, which gives the tax authority a greater visibility into the global framework of all companies operating in Iceland. Coupling these developments with the new penalty provisions, taxpayers can expect to see an increase in requests from the tax authority for transfer pricing documentation.

For more information, contact a tax professional with KPMG’s Global Transfer Pricing Services practice in Iceland:

Ágúst K Guðmundsson | +354 545 6152 |

Ása Kristín Óskarsdóttir | +354 545 6392|

Veena Parrikar | +354 545 6054  |


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