Coherence between income tax return and transfer pricing compliance

There is a direct coherence between the income tax return and the transfer pricing documentation. Therefore, it is important that the information submitted is consistent.

In brief

• In the income tax return, companies are to disclose whether they have had controlled transactions and the volume of these.
• The information from the income tax return must be consistent with the information documented in the companies' transfer pricing documentation.
• At present, the authorities are sending letters to the companies having stated in their information form that they are subject to transfer pricing documentation requirements. However, the documentation was not received.

Companies are subject to the transfer pricing documentation obligation if they have 250 or more employees or if revenue exceeds DKK 250 million and the balance sheet total exceeds DKK 125 million. If these limit values have been exceeded at group level, it is mandatory to prepare and submit the transfer pricing documentation, as per section 39 of the Tax Control Act. Whether the limit values are exceeded must be stated in the information document.

However, in particular cases, it may be difficult to determine whether you are subject to the documentation obligation or not (e.g., transactions with specific countries). For that reason, EY has developed a support tool that can be accessed here: Check your need for transfer pricing documentation in Denmark.

Part of the income tax return comprises issues implying that the companies must disclose their controlled transactions. Companies are to decide on a range of field descriptions where "yes” or “no" must be stated. The initial field numbers are among the other things related to whether the company has had controlled transactions, issues regarding controlling influence and the number of employees and revenue or balance sheet total. Subsequently, the principal line of business and the exact number of entities with which controlled transactions have been carried out in Denmark and abroad is indicated. The information must be reflected in the transfer pricing documentation.

The income tax return also includes a specification of the controlled transactions of the company. For instance, under controlled transactions relevant to the income statement, field no. 513a appears, in which companies are to specify whether there have been controlled transactions of expenses for services, including management fees and allocated costs. If the companies state "yes" to this field, the gross amount is to be specified with respect to the total expenses and the countries in which the counterparty (counterparties) in the transaction is resident. This part of the income tax return is divided into four fields, where field 1 indicates that you have only had controlled transactions in Denmark, field 2 that you did also have controlled transactions in the EU or EEA, field 3 that you did also have controlled transactions in countries outside the EU or EEA, and field 4 that you did  also have controlled transactions in countries outside the EU or EEA without transfer pricing-relevant double taxation agreement (DBO).

The same will apply to controlled transactions falling under the balance sheet, such as the purchase or sale of intangible assets, the purchase or sale of property, plant and equipment, and whether controlled loans have been granted.

Thus, companies must be in control of their controlled transactions before filling in the income tax return. If you tick the boxes incorrectly, you risk incurring criminal liability pursuant to section 84 of the Tax Control Act. This is the case if you have correctly stated that you do not comply with the limit values, see above, but incorrectly state that you have not had controlled transactions with a market outside the EU or EEA with which Denmark does not have a transfer pricing-relevant double taxation agreement (e.g., Hong Kong). Thus, the criminal offence is  that you have indicated to the tax authorities that you are not covered by the limited documentation obligation in section 40(1) of the Tax Control Act.

Below is an illustration of the coherence between the income tax return and the transfer pricing documentation, indicating that if the company has had one or more intra-group loans (shown in field 532a), the sum of the analyzed loans in the transfer pricing documentation must be accommodated in the range stated in field 532a.