Transfer pricing, restructuring – ruling in favour of taxpayer
In a recent ruling, the Danish Tax Tribunal (Landsskatteretten) disqualified the Danish tax authorities' transfer pricing adjustment attributable to the closedown of business operations in Denmark. The Tribunal referred to the OECD Transfer Pricing Guidelines (2010) on business restructurings and ruled that the tax authorities had failed to demonstrate that assets had been transferred or that the contractual relationship between the Danish company and its affiliates gave the grounds for any compensation.
The operations of a Danish multinational enterprise were closed as part of a group-level decision. The Danish tax authorities (DTA) found that the Danish enterprise, at arm's length, should have been compensated, and deemed the closedown of operations part of a business restructuring within the context of the OECD Transfer Pricing Guidelines (2010). In the DTA's view, the decision resulted in the redeployment of functions, assets and/or risks, resulting in cost savings for other group members.
The DTA made a transfer pricing income adjustment – deemed compensation – of an amount equivalent to the actual net costs of the business closedown. The income adjustment was made on a discretionary basis, as the DTA found that taxpayer had failed to properly consider the restructuring in its transfer pricing documentation.
The Tax Tribunal's ruling
The Tax Tribunal held that there was no basis for a discretionary income adjustment and that the DTA needed to demonstrate that the arm's length principle had not been observed.
In its decision, the Tribunal made reference to the guidance in the OECD Transfer Pricing Guidelines (2010) on business restructurings and ruled that the tax authorities had failed to demonstrate that any assets had been transferred. The Tribunal noted that the production in Denmark did not rely on intangibles such as patents, knowhow or similar, and no such intangibles were therefore transferred as part of the closedown.
Further, the Tribunal ruled that the DTA had failed to demonstrate that the contractual relationship between the Danish company and its affiliates was such as to warrant compensation under the OECD guidance on business restructurings, specifically the guidance on arm’s length compensation for the restructuring outlined in Chapter IX, Part II, Section E ("Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements").
The ruling of the Tax Tribunal reaffirms that the Tribunal will critically review the DTA's alleged basis for transfer pricing adjustment, including in light of the OECD Transfer Pricing Guidelines.
Similar to the adjustments in another recent transfer pricing ruling from the Tax Tribunal (see our previous news article: Transfer pricing deemed services ruling in favour of taxpayer), the DTA's adjustments were based on vague arm's length considerations, not the taxpayer's actual transactions, and that approach was shot down by the Tribunal.