The Danish government will increase its powers to enforce transfer pricing rules through the proposed legislation, and foreign multinationals are their primary target.
The draft bill is intended to increase the financial penalties for non-compliance with transfer pricing requirements and enables the tax authorities to request that companies submit an auditor’s certificate for their transfer pricing arrangements.
The Danish tax authorities have said the power to request an auditor’s report will not be used extensively, though it will target groups that have reported losses for four consecutive years, and those which have controlled transactions with non-treaty countries.
Asger Kelstrup, of Deloitte, said the government is targeting Danish subsidiaries of foreign multinationals with the new legislation, though some Danish-based groups will also be affected.
If an auditor’s report is requested, a company’s financial auditor cannot conduct the transfer pricing audit, unless the transfer pricing documentation was prepared by an independent tax adviser.
Anders Hansen, of Bech-Bruun, said the audit requirement will be a significant cost to businesses.
“At present, the question of whether transfer pricing documentation is in compliance with the law is not something audit firms have had to deal with,” said Hansen.
“Audit firms may charge high fees to assess transfer pricing documentation because if the Danish tax authorities do not agree with their audit, they will have potential liability issues to deal with themselves,” he added.
Kelstrup estimated that around 15 companies will be required to submit separate transfer pricing audit reports annually.
Income years from 2007 will be subject to the new rule requiring an audit certificate for transfer pricing documentation.
Fines for non-compliance will also increase.
Failure to prepare transfer pricing documentation will trigger a minimum fine of DKK 250,000 ($42,000), while businesses that make incorrect reports on their income tax return, averting the need for transfer pricing documentation, will receive fixed fines at 0.5% of turnover up to DKK 500 million, 0.1% of turnover between DKK 500 million-DKK 1 billion and 0.05% of any turnover exceeding DKK 1 billion.
Kelstrup said groups with more than one Danish subsidiary which operate group taxation arrangements must be careful in light of the new penalties.
“Each company [in a group] can be fined for up to five years’ worth of audits if the transfer pricing documentation is not submitted so the fees can quickly add up to a large number and, as they are penalties, they won’t be deductible,” said Kelstrup.
Hansen said taxpayers who are concerned about the developments should apply for APAs to protect themselves and reduce the likelihood of the authorities requesting an audit.
However, it will be difficult for those taxpayers targeted by the legislation to obtain APAs before the legislation takes effect, particularly where companies have reported losses for four consecutive years.
If APAs are unobtainable, those companies being targeted will need to work on their transfer pricing documentation, which can be investigated back to 2007.
And if the authorities do request an independent auditors’ report on a company’s transfer pricing documentation, it is common for them to request this for more than one year.
Henrik Lund, of KPMG, said this highlights the need for companies to set up processes to retain the necessary information to prepare transfer pricing documentation from previous years.
“If a company is going back four or five years, some of the relevant transfer pricing information may have been lost,” said Lund.
“Taxpayers should choose to prepare documentation for all those years now, but if they do not, they should at least make sure they have a thorough process which captures and ring-fences the relevant information so they can respond to an audit - that way taxpayers reduce the risk of being subject to the Danish tax authorities issuing discretionary assessments and shifts in the burden of proof,” he added.
Companies that have reported consecutive losses should also spend time explaining those losses, since, if there are good reasons for them, it is less likely the authorities will ask for an auditor’s opinion.
“I would advise taxpayers to produce good transfer pricing documentation, explain their losses, explain their business model and make sure they implement that business model to justify their pricing,” said Kelstrup.
