Danish distributor group successful in landmark transfer pricing case before the Danish National Tax Tribunal
22 February 2021
On 28 October 2020, the Danish National Tax Tribunal ruled in favour of a Danish distributor group in a landmark transfer pricing case regarding the income years 2010-2012. The case was conducted by Plesner.
The intra-group salesThe Danish group is one of Europe's largest distributor within its industry and distributed to more than 20 different countries in 2020.
The tax case concerned the intra-group resale of goods within the distributor group. The group purchases goods from independent suppliers and resells them alongside its own products to the sales companies of the group. The resale price is set according to the Cost Plus Method. The group applied exactly the same intra-group price for each respective product towards all affiliated sales companies.
The sales companies determine their own resale prices.
The transfer pricing documentation prepared by the group included a comparability analysis in the form of a comparison of the gross margins achieved by the group's sales companies compared to the gross margins achieved by independent comparable benchmarks companies. The group's arm's length test included all results from the database searches.
The transfer pricing documentation of the group was based on market data available in international acknowledged databases in each year. During the administrative appeals case, the group presented additional market data
concerning the tax years in question.
The Danish Tax Agency's positionIn 2016, the Danish Tax Agency (SKAT) increased the group's taxable income for FY2010-2012 based on a discretionary assessment, as SKAT did not find that the intra-group resale prices for 7 of the group sales companies were on arm's length terms.
Specifically, SKAT challenged the group's transfer pricing setup on the following four points:
First, SKAT argued that the comparability analysis had to be carried out on the basis of net margins (as opposed to gross margins).
Second, SKAT argued that additional benchmark data could not be taken into account.
Third, SKAT argued that the arm's length interval should be narrowed down to the interquartile range.
Fourth, SKAT argued that in case any net margins were outside of the interquartile range, any corrections should be made to the median.
The Danish National Tax Tribunal's rulingThe National Tax Tribunal agreed with the group that the comparability analysis should be carried out based on gross profits.
The National Tax Tribunal then found that the comparability analysis should be based on market data from the database searches submitted with the transfer pricing documentation for the respective years in dispute. The National Tax Tribunal also found that the interquartile range was the proper arm's length range.
The National Tax Tribunal found that the earnings of some of the group's sales companies were outside the arm's length range, raising the final question of which point in the interval a correction should be made to.
For this part of the Tribunal's assessment, the group had obtained and submitted a statistical expert opinion from a professor of mathematics
concluding that the most natural point to make a correction to would be the closest point within the arm's length range.
The group had also submitted calculations showing that a correction to the median would lead to arbitrary differential treatment of the group's sales companies.
On this final issue, the National Tax Tribunal agreed with the group that any corrections should be made to the closest point within the arm's length range (the third quartile), and not to the median point, as held by SKAT.
This was a question of fundamental importance, as the group is the first taxpayer to successfully argue that corrections should be made to the third quartile of the interval, outside of cases with specific circumstances regarding the data base searches.
Against this background the National Tax Tribunal upheld the group's claim that SKAT's increases of the group's taxable income for the income years 2010-2012 were incorrectly made and reduced the income adjustments by approximately 77 %.
The Ministry of Taxation has appealed the case to the courts.
A team from Plesner represented the group before the National Tax Tribunal.
Lasse Esbjerg Christensen argued the case before the National Tax Tribunal.
Read more about our practice area Transfer Pricing