Transfer pricing has proven a hot topic in Denmark lately, and a recent public hearing on the Paradise Papers confirmed that the Nordic nation is not immune to tax controversy.

One of the areas that has proven especially delicate is permanent establishment (PE). In December 2017 a Danish High Court ruled that storage of construction material constitutes a PE, and in a different case in January 2018, a Danish law on deductibility of losses by a PE was deemed incompatible with EU law by an Advocate General of the European Court of Justice.

A transfer pricing manager at a Danish multinational, who wanted to remain anonymous, told TP Week PE, especially in relation to allocation of profit, was one of the main transfer pricing issues in Denmark at the moment. The transfer pricing manager said they would like more guidance from the Danish tax authority, SKAT, and the OECD on this topic, with useful examples, as the OECD’s draft guidance was “not very helpful”.

“Recently, we have seen a number of cases from SKAT involving PEs. The adjustment process, i.e. primary and corresponding adjustments, seems to cause some disputes with SKAT, and generally transfer pricing audits involving PEs seem to be complex,” Asger Mosegaard Kelstrup, partner at Deloitte in Copenhagen, told TP Week.

Are APAs a waste?

Henrik Lund, partner at KPMG Acor Tax in Copenhagen, told TP Week his team continues to see a high level of transfer pricing audit activity as well as transfer pricing controversy.

SKAT’s latest report on transfer pricing statistics from August 2017 showed an increase in mutual agreement procedure (MAP) cases, with the number of pending cases rising from 36 in 2010 to 143 in 2016. However, it seems SKAT’s capacity remained the same despite rising taxpayer interest in concluding MAPs as the number of resolved MAP cases was 27 in 2010, compared to 22 in 2016. Pending advance pricing agreements (APA) were eight in 2010 and 21 in 2016, while the number of resolved cases was seven in both years.

Despite this, some companies are starting to doubt whether an APA really is an effective way to avoid controversy. The anonymous transfer pricing manager told TP Week they used to think APAs were quite significant and an important tool for companies in managing risk, but experience showed that tax authorities had a very difficult time handling very complex transfer pricing matters, which is what APAs are intended for.

“This means a very long processing time and information requests with questions all over the place. The investigations performed by the tax authorities are in addition so detailed that there is no significant difference compared to an ordinary transfer pricing audit,” the transfer pricing manager said.

As a result, companies are looking at strategies to minimise controversy risk – including using litigation as a strategy.

“While litigation used to be seen as something to be avoided, as tax authorities have become more aggressive and less likely to settle, litigation has become a viable component of many company strategies for dispute resolution,” Lund said. “During the next one to two years, a number of sizeable and important cases will be ruled on in the National Tax Tribunal as well as in the Ordinary Courts. The cases have been long under way, and it will therefore be very exciting to follow the outcome hereof, as they to a high degree will set precedence for future cases and audit activity.”

Other areas attracting scrutiny are financial transactions and transfer pricing methods.

Kelstrup said SKAT had become more active in financial transactions and has become more skilled in this complex area of transfer pricing over the past few years, leading to a more refined approach by the tax authority compared to just a few years ago.

“The past couple of years we have also seen an increase in cases where the taxpayer has relied on the CUP method and SKAT has rejected the CUP method, usually without considering whether reliable comparability adjustment can be made, and ‘jumped’ directly to an alternative pricing method,” Kelstrup added.

Nevertheless, SKAT is working to improve relationships with taxpayers through a new initiative on alternative dispute resolution. The initiative was introduced in 2016 and 12 mediators were trained after the UK’s alternative dispute resolution model. With this, SKAT is hoping to avoid long court proceedings. The results of this could start to show in 2018.