Eduardo Vistisen, of Vistisen Tax Attorneys, explains how the dispute arose and suggests how it may have been prevented.
Transfer of biopharmaceutical division
The transfer pricing dispute concerns the transfer of global healthcare company Novo Nordisk?s entire biopharmaceutical division from Denmark to Switzerland.
In 2002, Novo Nordisk began the transfer of its biopharmaceutical division to Switzerland by transferring the rights and patents of a number of biopharmaceutical products to two Swiss subsidiaries: Novo Nordisk Femcare and Novo Nordisk Health Care.
The Danish media has reported that those two Swiss companies only employed between 60 and 70 employees, mainly working within marketing and distribution.
The rights and patents to the products transferred included the haemophilia drug Novoseven, the growth hormone Norditropin and drugs for hormone replacement therapy (HRT) treatment of women.
The haemophilia drug Novoseven was transferred in 2002 and the drugs for HRT treatment of women were transferred in 2004. In 2006 and 2007 Novo Nordisk transferred a number of patents regarding the growth hormone Norditropin.
After the transfer of the drugs, Novo Nordisk?s Danish parent company assisted the two Swiss companies with
According to Novo Nordisk?s CFO, Jesper Brandgaard, the R&D work on the growth hormone Norditropin is performed in Denmark and China, but not in Switzerland.
So the set-up appears to be a classical contract R&D and contract manufacturing business restructuring.
When interviewed about the Novo Nordisk transfer pricing case by Danish newspaper Politiken, the OECD?s director for tax policy and administration said it is yet another example of how multinational companies place large values in ??places where they do not have much real activity.
?[It is] the kind of aggressive tax planning, we must neutralise with new international rules," Saint-Amans was reported as saying.
After the transfer, the two Swiss companies with between 60 and 70 employees has had a turnover of DKK 85 billion, including a turnover for last year of DKK 17 billion.
SKAT adjustment
SKAT has found that the transfer price of the growth hormone Norditropin was too low. According to the Danish tax authorities, the transfer price of the patents was DKK 6.8 billion too low in 2006 and DKK 10.8 billion too low in 2007.
SKAT further found that Novo Nordisk in Denmark ? as a contract manufacturer and contract R&D provider? should have received a total of DKK 4.2 billion more for a number of services such as administration, research and production, because Novo Nordisk's Danish parent company continuously worked for the Swiss subsidiaries in the years between 2005 and 2009.
Novo Nordisk has accepted the adjustment of the DKK 4.2 billion in relation to the performance of services, R&D and manufacturing under the condition that the adjustment is approved by the Swiss tax authorities.
"If the development is done in Denmark, and you then just have two lawyers and their dog walking in Switzerland, it won?t work. It demonstrates that the world's tax rules are not up to date. Well, let's fix them," Saint-Amans was quoted as saying in Politiken.
The taxpayer has appealed the adjustments of the transfer price for the transfers of the growth hormone Norditropin to the Danish Administrative Tax Tribunal.
The Danish tax authorities are arguing that achieving a turnover of DKK 85 billion after the transfer occurred must lead to a higher transfer price. Hence, SKAT is arguing that the transfer price does not reflect future cash flows.
Novo Nordisk said it has chosen to transfer everything that is not part of the diabetes business (the biopharmaceutical division) to Switzerland. Novo is famous for its diabetes business and most of the company?s turnover derives from its diabetes business.
The movement of the biopharmaceutical division to Switzerland is, according to CFO Jesper Brandgaard, based on the fact that Zurich is a fantastic city to run a business in and to attract a skilled
He adds that Novo Nordisk has been waiting for SKAT to assess the value of the transfer, even though they did not expect it to take so long.
APA
Novo Nordisk is further arguing that when the growth hormone Norditropin was transferred in 2006 and 2007, Novo Nordisk was only around number three in the world market with respect to growth hormones, but is now the number one manufacturer and has 25% of all the sales in the world when it comes to growth hormone.
The case involves the tricky question of valuing intellectual property rights after they have been transferred without using hindsight. The taxpayer had no hindsight when filing the tax return but the tax authorities have such hindsight when assessing the tax return many years after.
In principle, the tax authorities are not allowed to use such hindsight when assessing the tax return of a taxpayer, but because intellectual property rights as a standard are valued on the basis of future cash flows such hindsight is very difficult to avoid.
I think this case could have been avoided if Novo Nordisk had asked for an advance pricing agreement (APA) in relation to the restructuring.
Brandgaard is positive that the final adjustment will be much lower than the tax authorities? initial adjustment.
