Ministry of taxation publishes plan of action for multinational companies

Date 7 sep. 2010

On 9 July 2010, the Ministry of Taxation published a plan of action for the taxation of multinational companies. The plan of action is based on a desire to limit the existence of so-called zero-taxation companies, i.e. companies whose Danish tax liabilities are zero.

 

The plan of action includes an overview of the areas where the Ministry of Taxation will increase its focus, as well as a description of the initiatives that will assist in an increased efficiency regarding multinational companies’ tax liability to the Danish government. This article aims at providing a brief overview of the contents of the plan of action, as well as providing insights into future focus areas.

 

Transparency and Focus on the Rules

The Danish Tax and Customs Administration (”SKAT”) possesses information regarding multinational companies’ income statement through tax returns. This information is, however, subject to a duty of confidentiality. Yet, the government is of the opinion that increased transparency regarding multinational companies’ tax affairs is desirable. The government will therefore present a model that will allow increased transparency in this area. 

 

There are companies which consistently show a deficit, and companies which have transactions with low-tax countries. In an attempt to achieve greater certainty regarding these companies, it is suggested to implement a special accountant notation requirement. The notation should in any case be initiated by SKAT and only in connection with transfer pricing and the arms length principle.

 

On a more overall level, it is suggested to conduct a service check of the laws applicable to company taxation with the intent to determine whether they are too favourable. The service check will focus on; (i) access to carry forward deficits; (ii) depreciation deductions; and (iii) deductions for financing costs. Additionally, the government wishes to test the scope of applicable rules in order to monitor and verify compliance with the rules. In connection therewith, the rules regarding allocation of expenses to a given entity are mentioned.

 

Specific Focus Areas

The plan of action highlights a number of areas in which the government feels there is a need for a more focused effort. These areas are:

 

·   Companies’ financing. A way, in which it is relatively easy to transfer funds from Danish companies, is to have those companies enter into agreements with companies within the same group, involving substantial interest payments. SKAT therefore has an increased focus on whether the interest deduction rules, as well as the rule regarding thin capitalization, including the interest deduction limitation, are complied with and work as intended.

 

·   Inbound dividends. SKAT will determine whether Denmark is suitable as a flow-through country for dividends, and will focus on whether the conditions for the payment of tax free dividends are met in each instance. In connection therewith, it will be determined whether dividends in reality are being paid from an EU country or a country with which Denmark has a tax treaty, or whether the dividends in reality are being paid from a low-tax country.

 

·   Outbound dividends. A greater effort will be applied towards cases involving beneficial ownership, i.e. whether the recipient of dividends from Denmark in reality is the beneficial owner. This is a requirement for refraining from withholding taxes on these payments. If necessary, the cases will be brought before the courts.

 

·   Transfer of intellectual property. Insofar as intellectual property often has a substantial value, the focus on transfers of these types of assets will be increased.

 

·   Credit for foreign paid taxes. Danish companies with foreign-sourced income are often subject to taxation on that income in the foreign country. A credit is provided for these tax payments, however, since there is a possibility of errors when determining the credit amount, SKAT will increase its efforts in this area.

 

·   Transfer pricing. A so-called compliance-concept will be implemented. The idea is that SKAT and the companies together will determine the value or change in value of a given transaction. SKAT will also increase the use of Advance Pricing Arrangements, which are bilateral agreements between two countries’ tax authorities providing an increased assurance regarding a company’s transfer pricing transactions during a given period. Additionally, a model will be prepared which more accurately can evaluate the efforts in this area.

 

·   Resources. In order to ensure an efficient organisation, SKAT wants increased access to use external experts similar to the workings in the general business community. 

 

 

If you have any questions or require additional information on the guidelines, please contact Partner, Adjunct Professor Jakob Bundgaard (jbu@mwblaw.dk) or Junior Associate Kim David Lexner (kdl@mwblaw.dk).  

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis for decisions or considerations.