New Challenging TP Requirements in Denmark
In line with international standards, Danish transfer pricing (“TP”) legislation requires calculating taxable income under the arm’s-length principle. This means setting prices and terms for controlled transactions in line with what unrelated parties would chose to do. On 31 January 2022, the Danish tax administration published an update of its transfer pricing documentation (“TPD”) guidelines. This update reflects a legal change from November concerning the submission deadline.
Contemporaneous Submission Requirement
Previously, taxpayers had to submit the TPD to the Danish tax administration within 60 days after a respective request. With the new law, they must submit annually within 60 days after the tax return deadline. In other words, taxpayers now have to submit proactively instead of waiting for tax examiners asking for it. Failing to comply with the TPD requirement may cause penalties and a weak position of the taxpayer to defend the pricing of its controlled transactions.
Contents of the Documentation
In line with OECD TP Guidelines, the Danish regulations require a two-part TPD: a group-documentation and country-specific documentation. These two documents correspond to the Master File and the Local File as outlined by the OECD. They have to provide a sufficient basis to assess, if the taxpayer applied arm’s-length prices for the controlled transactions.
Important contents of the group documentation are an overview about the group’s business activities and organizational structure, as well as information about intangibles and financing activities. For the country-specific documentation, the taxpayer needs to include detailed descriptions of the local company’s business activities and its controlled transactions. The regulations allow for preparing the documents in English. However, they do not limit tax examinations only to the information in the actual TPD. Rather, tax examiners can request further data for corroboration and refinement of the analyses.
Extent of the Documentation Requirement
The Danish TP and TPD regulations generally cover all controlled transactions of all local taxpayers, natural persons as well as corporations, including permanent establishments. Nevertheless, there are two exceptions. Firstly, transactions of limited extent only require mentioning in the TPD, not a detailed analysis. Secondly, domestic transactions that do not meet certain criteria – especially where they are being conducted between entities with differing tax treatments. Additionally, small companies have reduced documentation obligations.
General Arm’s-Length Requirement
While the TPD obligations are lesser for certain controlled transactions, the Danish regulations emphasize that the arm’s-length principle is still the standard for all related-party transactions. Accordingly, examiners may ask for further information about transactions without detailed documentation.
Our Views
From our perspective, the new Danish requirement is in line with the international trend. We informed recently about a similar regulatory update in Italy. In Italy, if is now necessary to evidence the timely preparation of TPD with an electronic signature. While the Italian taxpayer do not proactive submit this documentation, the time-stamped electronic signature represents a similar time constraint. This approach is in line with the guidance provided by the OECD. It can be expected that the number of jurisdictions imposing similarly strict requirements over the next years.
Traditionally, many taxpayers handle TPD as an after-the-fact compliance matter, preparing documents over the course of many weeks or even months after the closure of the respective financial year. TPDs covering multiple past years are not uncommon either. While both measures help to reduce workload and advisor fees, they are not feasible where the TPD must be at hand or submitted timelyy with the tax return.
To prepare a robust TPD timely, taxpayers that historically operated under an “outcome testing” ex-post approach can shift to a “price setting” ex-ante system. Instead relying solely on actual data and year-end true ups, this involves analyses early during the year. This allows determining arm’s-length pricing on a forward-looking perspective. Documentation of this process can be prepared in a way that it easily feeds into the final TPD. Effectively, this strategy, develops the TPD carefully and over a longer time, too, but starts at the begin of a new financial year. Therefore, the final report is ready much earlier.
More Information
The current TPD Guidelines of the Danish tax administration are available online here: https://www.skat.dk/skat.aspx?oId=2232479. For a discussion of suitable strategies to time- and cost-efficiently prepare accurate documentation, do feel free reaching out to us under info@bdanalysis.ch