The Danish tax administration has dropped its stance that transfer pricing documentation for pre-2019 tax years must be complete by the time taxpayers file their returns, a change required by the Supreme Court’s Microsoft decision.
Denmark’s tax agency announced the new policy in a July 12 practice note, which acknowledges that the rule change was prompted by the Supreme Court’s judgment of 31 January 2019, case 269/2009. The Supreme Court sided with the taxpayer, a Danish subsidiary of Microsoft Corp., in a dispute concerning DKK 308 million (about $46.4 million) in transfer pricing adjustments and the validity of the company’s transfer pricing documentation. The practice note provides that, for tax years that precede the effective date of Denmark’s December 2017 transfer pricing documentation legislation, no estimated adjustments will be imposed solely because a taxpayer’s documentation is incomplete at the time its return is filed.
The practice note abandons the position set out in a 2013 executive order under which the tax return filing date was considered the deadline for transfer pricing documentation. In addition to the policy change regarding future adjustments, the note offers taxpayers subject to adjustments assessed solely on the basis of incomplete documentation the opportunity to request a reopening of the relevant tax year. Requests generally must be made no later than May 1 of the fourth year following the end of the relevant tax year.
The note only affects tax years covered by Denmark’s 2013 transfer pricing legislation, which was amended by a 2017 law that took effect January 1, 2019. The amended legislation specifies that transfer pricing documentation ”must be prepared on an ongoing basis and completed no later than the time when the information return must be submitted to the customs and tax administration.”
The note is also limited by the scope of the Microsoft holding, which only protects transfer pricing documentation prepared after the relevant return was filed but before the tax administration issued an estimated assessment. Taxpayers with transfer pricing documentation that provides an insufficient basis for assessing compliance with the arm's-length principle can still be treated as having maintained no transfer pricing documentation, the note says.
The existence and adequacy of a taxpayer’s transfer pricing documentation, as it was in the Microsoft case, can be critical in Danish transfer pricing disputes. If a taxpayer fails to comply with Denmark’s transfer pricing documentation rules, the tax administration may estimate the arm's-length price for the relevant transaction on the basis of available information. Although the tax administration generally bears the burden of proving that a transfer pricing adjustment is warranted, the burden shifts to the taxpayer if the documentation requirements are not satisfied.
In rejecting the government’s attempt to use the 2013 executive order to shift the burden of proof to Microsoft, the Supreme Court held in its January decision that the statute provided no basis for requiring that documentation be complete when the taxpayer files its return.
“The Supreme Court finds that neither the wording of sec. 3B, para. 8 nor the preliminary work on the provision is grounds for understanding that, when an estimate of income can be made if transfer pricing documentation is not available, anything other than the time of the estimate is the decisive point,” the decision says. “Similarly, the Supreme Court finds that only transfer pricing documentation so inadequate that it does not provide the tax authorities with a sufficient basis for assessing compliance with the arm's-length principle may be equated with a lack of documentation.”