TP Ticker – February 2019

On 31 January 2019, the Danish Supreme Court issued a decision in a transfer pricing case between the Danish tax administration and Microsoft’s local marketing affiliate for the four taxable years from 2004 through 2007.  Microsoft Denmark had been remunerated for its marketing activities based on the direct sales of an Irish affiliate in the local market. The tax administration had considered this basis of remuneration incomplete and argued that an arm’s-length remuneration would have involved the sales of computers that had Microsoft products – specifically the Windows Vista operating system – pre-installed based on agreements with the manufacturers and foreign affiliates of the Microsoft group. Arguments of the tax administration involved the wording of the intra-group marketing agreement and marketing material targeted at corporate decision makers that included reference to such pre-installed packages. A major argument though was that the transfer pricing documentation had been prepared too late and that it was too deficient to allow the tax administration to assess the arm’s-length nature of the transaction. In its decision, the Supreme Court found that the tax administration had failed in demonstrating the non-arm’s-length nature of the remuneration, upholding the decision of the lower court. While the tax administration had also argued the deficiency of Microsoft’s transfer pricing documentation, it had been prepared within the time-frame set by the tax administration and fulfilled the respective legal requirements. 

This case demonstrates a traditional approach for many tax administrations: arguing with focus on the line that the transfer pricing documentation prepared by the taxpayer is incomplete and then using more or less factually substantiated assumptions as basis for transfer pricing adjustments. While in this case, the taxpayer had no such transfer pricing documentation at hand when filing the tax returns for the years in question, a contemporaneous documentation requirement was not an explicit legal requirement for the taxable years in question and a post-factual documentation was prepared within the deadline set by the tax examiners. By now, the Danish transfer pricing legislation explicitly states that transfer pricing documentation has to be prepared contemporaneously, which means that the respective materials for supporting the company’s transfer prices need to be at hand at at the date the tax return has to be filed.  The time for submitting such contemporaneous documentation is also clarified as 60 days upon request.  The requirement for contemporaneous documentation reflects the international standard which is also endorsed by the OECD.

(The court decision is available on the website of the Danish courts here: http://www.hoejesteret.dk/hoejesteret/nyheder/Afgorelser/Pages/Omhonoreringafkoncerninternetransaktioner%E2%80%93armslaengdeprincippet.aspx