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OECD releases new Mutual Agreement Procedure Statistics

Excerpts from OECD.org, 22 November 2022

The 2021 Mutual Agreement Procedure (MAP) Statistics show the following trends:

• Significantly more MAP cases were closed in 2021. Approximately 13% more MAP cases were closed in 2021 than in 2020, with both TP cases (+22%) and other cases (almost +7%) closed significantly more than in 2020. Competent authorities were able to close more cases in 2021 due to the greater use of virtual meetings, the prioritization of simpler cases and greater collaboration to solve common issues collectively that could be applied across multiple MAP cases. Furthermore, jurisdictions noted that increases in staff and the experience of these staff are now reflected in their ability to resolve more cases.
• Fewer new cases in 2021. The number of new MAP cases opened in 2021 decreased (almost -3%) (see trends since 2016) compared to 2020. This is attributed to a significant decrease in new TP cases being opened (almost -10.5%), while the number of other cases opened increased (almost +4%) compared to 2020.

28 jurisdictions sign international tax agreements to exchange information with respect to income earned on digital platforms and offshore financial assets

Excerpts from OECD.org, 11 November 2022

At a signing ceremony held in Seville in the side-lines of the 15th Plenary Meeting of the Global Forum on Transparency and Exchange of Information for Tax Purposes, 22 jurisdictions signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of information under the OECD Model Rules for Reporting by Digital Platforms.

The agreement will allow jurisdictions to automatically exchange information collected by operators of digital platforms with respect to transactions and income realized by platform sellers in the sharing and gig economy and from the sale of goods through such platforms. The annual exchange of this information will assist tax administrations and taxpayers in ensuring the correct and efficient taxation of such income.

In addition, 15 jurisdictions signed a separate MCAA supporting the Model Mandatory Disclosure Rules on Common Reporting Standard Avoidance Arrangements and Opaque Offshore Structures (CRS Mandatory Disclosure Rules). This agreement will enable the annual automatic exchange of information collected from intermediaries that have identified arrangements to circumvent the Common Reporting Standard (CRS) and structures that disguise the beneficial owners of assets held offshore with the jurisdiction of tax residence of the concerned taxpayers. This will allow tax authorities to ensure compliance of both the taxpayers and the intermediaries involved in such arrangements and structures.

Transfer Pricing

Denmark: Tax authorities entitled to exercise discretion in relation to controlled transactions

Case BS-22176/2021-HJR

Background

‘A’ is the sole owner of ‘B’ ApS (B), which owns ‘C’-Advisory Business ApS(C), which was established in 2003 for the purpose of advising on tax deductions for land improvements to immovable property. In addition, A is the sole owner of X (the Dubai company), which obtained a license to operate in Dubai in 2006.

In the years 2006-10, the Dubai company provided services such as legal advice for C's tax advisory activities in Denmark. In connection with the same, C Aps booked an expense of DDK 78 million.

Tax Authorities

The Danish tax authorities considered that the payments had not been at arm’s length and approved C’s expenses only to the extent of DKK 20 million for the income years in question. The reduction of C’s management fee expenses by DKK 24,7 million was on account of work in progress, included for calculating the profit-based fee, contrary to the service agreement, and the same was acknowledged by C. The case therefore concerned the balance reduction of DKK 33,70 million resulting in an increase of C's taxable income for the tax years in question, which was due to SKAT’s(tax agency) estimated calculation for determining ALP.

The parties agreed that C's purchases of services from the Dubai company were controlled transactions covered by Section 2(1) of the Equalisation Act. The main issue was whether the tax authorities were entitled to exercise the said discretion in respect of the controlled transactions between C and the Dubai company. If so, the question was whether there were grounds for setting aside that discretion.

Regional Court

C filed an appeal in the Regional Court after an unsuccessful complaint in the tax tribunal. The Regional Court found that the tax authorities had been entitled to exercise discretion over the pricing of the controlled transactions as the transactions had not been priced at arm’s length and the TP documentation did not provide the tax authorities with a sufficient basis for assessing whether the arm’s length principle had been complied with.

Supreme Court

Aggrieved by the judgment of the Regional Court, C filed an appeal with Supreme Court, which observed, as did the Regional Court, that C would not have entered into an agreement on terms with an independent company, as it did with Dubai company. The Court considered the contention of the tax authorities that the TP documentation was deficient and it did not provide a sufficient basis for assessing whether the arm's length principle was complied with.

Furthermore, Court observed that SKAT calculated margins using TNMM and Return on Total Cost (RoTC) as PLI, against which B and C did not demonstrate why TNMM was not applicable. The Ministry of Taxation had submitted to the Supreme Court a calculation which, according to the Ministry, showed that a discretionary tax assessment would not have resulted in a lower tax assessment than the tax assessment calculated by SKAT based on the application of the TNMM method and RoTC. The Supreme Court, therefore, considered that, with regard to this calculation, C and B did not provide any evidence that the tax authorities’ estimate rests on an incorrect or inadequate basis and therefore, there are no grounds for setting aside the tax authorities’ assessment and referring the case back to the Court.

Held

The Supreme Court upheld the decision of the Regional Court and found in favor of the tax authorities. The Court considered that the tax authorities had been entitled to exercise discretion in relation to the pricing of the controlled transactions at issue and that there were no grounds for setting aside the tax assessment.