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Denmark vs Tetra Pak Processing Systems A/S, June 2020, Court of Appeal, Case No SKM2020.224.VLR

Posted on June 8, 2020 | By Courts of Denmark | No comments

Category: Benchmark, Range and Median, Comparability Analysis, Losses | Tag: Choice of tested party, Comparable companies, Continuous losses, Discretionary assessment, Manufacturing, Profit Level Indicator (PLI), Tested party, Transactional net margin method (TNMM), Transfer pricing documentation

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At issue was whether the Danish tax authorities had been entitled to make a discretionary assessment of the taxable income of Tetra Pak on the basis of inadequate transfer pricing documentation and continuous losses. And, if such a discretionary assessment was justified, whether the company had satisfied the burden of proving that the tax authorities’ assessments were manifestly unreasonable.

The Court held that the transfer pricing documentation provided by the company was so inadequate that it did not provide the tax authorities with a sufficient basis for determining whether the arm’s length principle had been observed. The tax authorities were therefore entitled to make a discretionary assessment of the taxable income. To this end, the Court held that the tax authorities were entitled to use the TNM method with the Danish company as the test person, since sufficiently reliable information on the group’s sales companies had not been provided.

(In April 2021 a final decision (Tetra Pak) was issued by the Danish Supreme Court.)

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Click here for translation (Part II)

Related Guidelines

TPG2022 Chapter III paragraph 3.65Generally speaking, a loss-making uncontrolled transaction should trigger further investigation in order to establish whether or not it can be a comparable. Circumstances in which loss-making transactions/ enterprises should be excluded from the list of comparables include cases where losses do not reflect normal business conditions, and where the losses...

TPG2022 Chapter III paragraph 3.64An independent enterprise would not continue loss-generating activities unless it had reasonable expectations of future profits. See paragraphs 1.149-1.151. Simple or low risk functions in particular are not expected to generate losses for a long period of time. This does not mean however that loss-making transactions can never be comparable....

TPG2022 Chapter III paragraph 3.19This can be illustrated as follows. Assume that company A manufactures two types of products, P1 and P2, that it sells to company B, an associated enterprise in another country. Assume that A is found to manufacture P1 products using valuable, unique intangibles that belong to B and following technical...

TPG2022 Chapter III paragraph 3.63Extreme results might consist of losses or unusually high profits. Extreme results can affect the financial indicators that are looked at in the chosen method (e.g. the gross margin when applying a resale price, or a net profit indicator when applying a transactional net margin method). They can also affect...

TPG2022 Chapter III paragraph 3.20In order to select and apply the most appropriate transfer pricing method to the circumstances of the case, information is needed on the comparability factors in relation to the controlled transaction under review and in particular on the functions, assets and risks of all the parties to the controlled transaction,...

TPG2022 Chapter III paragraph 3.18When applying a cost plus, resale price or transactional net margin method as described in Chapter II, it is necessary to choose the party to the transaction for which a financial indicator (mark-up on costs, gross margin, or net profit indicator) is tested. The choice of the tested party should...

TPG2022 Chapter III paragraph 3.10Another example where a taxpayer’s transactions may be combined is related to portfolio approaches. A portfolio approach is a business strategy consisting of a taxpayer bundling certain transactions for the purpose of earning an appropriate return across the portfolio rather than necessarily on any single product within the portfolio. For...

TPG2022 Chapter II paragraph 2.110See in particular paragraphs 3.18-3.19 for guidance on the tested party, paragraphs 3.55-3.66 for guidance on the arm’s length range, and paragraphs 3.75-3.79 for guidance on multiple year data....

TPG2022 Chapter I paragraph 1.135Business strategies also could include market penetration schemes. A taxpayer seeking to penetrate a market or to increase its market share might temporarily charge a price for its product that is lower than the price charged for otherwise comparable products in the same market. Furthermore, a taxpayer seeking to enter...

TPG2022 Chapter II paragraph 2.105Other net profit indicators may be appropriate depending on the facts and circumstances of the transactions. For instance, depending on the industry and on the controlled transaction under review, it may be useful to look at other denominators where independent data may exist, such as: floor area of retail points,...

Supplemental Guidance

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