Executive summary: The majority of world trade takes place between the associated companies within multinational corporations. Pricing within intercompany trading, also referred to as Transfer pricing, is the major tool for corporate tax avoidance and has become an area of great interest for both corporations and the tax authorities in each country. By manipulating pricing methods, profits can be shifted between the associated companies in individual countries, abusing the system and resulting in an excessive profit in countries with lower taxation. Transfer pricing is an area that requires countries to work together to prevent double taxation and suppress tax avoidance. The OECD Model Tax Convention Article 9 concerns associated enterprises and has been implemented in the Danish Tax Assessment Act §2. The arm's length principle in the Tax Assessment Act §2 shall be construed in accordance with the arm's length principle of the OECD Model Tax Convention Article 9. The Tax Control Act §3B regulates the disclosure and documentation requirements in relation to intercompany trading. The companies Transfer pricing documentation must conform to these requirements so that it may form the basis for the tax authorities to assess whether the controlled transactions are priced in accordance with the arm's length principle. It follows that the first part should document and describe how the associated companies have priced products or services traded within the corporation. Subsequently, the tax authorities assess whether the controlled transactions have been conducted at arm's length. When a controlled transaction is not carried out at arm's length, the tax authorities may adjust the controlled transactions and make changes in income. Fines or other sanctions may be levied if the company fails to satisfy the rules regarding disclosure or Transfer pricing documentation. The OECD recommends five Transfer pricing methods, the choice of which is based, not on a hierarchy, but on which method is best suited for the transaction. The key point here is to obtain the most accurate Transfer price. When a parent company chooses a Transfer pricing method, the choice is influenced by the Transfer pricing structure within the corporation and how functions, risks and assets including intangibles are distributed within the corporation. An analysis of the Transfer pricing structure is therefore an important part of the Transfer pricing documentation. The Transfer pricing structure is significant because it is relevant who has the overall responsibility, who assumes the essential functions, risks and who owns significant intangible assets. The case study features analyses of a principal structure in scenario 1 and a decentralized structure in scenario 2. In scenario 1 the corporation has a principal structure and the Danish parent company owned all essential assets, including intangibles and assumed all essential functions and risks. The foreign subsidiaries assumed routine functions and were all low‐risk enterprises. In scenario 2 the Danish parent company chose to outsource all essential functions and risks, and distribute all assets between its three foreign subsidiaries, making the Danish parent company a low‐risk enterprise. In both scenarios, the transfer pricing structure; distribution of functions, assets and risks between the companies, had direct influence on application of the transfer pricing method.
|Uddannelser||Cand.merc.aud Regnskab og Revision, (Kandidatuddannelse) Afsluttende afhandling|