Viking A/S sold life-saving equipment products to its foreign subsidiaries (internal service stations) at lower prices than to unrelated parties (external service stations). Its transfer pricing documentation did not clearly state or justify the pricing method used. The way in which Viking compared internal sales with external prices also included non-comparable transactions, such as mixing sales to end customers with sales to external service stations, without sufficient explanation of the comparability defects.
Following an audit, the tax authorities issued a transfer pricing assessment after finding that Viking’s documentation did not adequately demonstrate compliance with the arm’s length principle. The tax authorities selected the transactional net margin method (TNMM) and conducted a benchmark study of the profitability of comparable external service stations to determine the arm’s length profitability of the foreign subsidiaries (internal service stations). They applied the interquartile range to account for imperfect comparability and used the median to determine the profits that should have been earned by the subsidiaries at arm’s length, and on that basis determined the additional profits that should have been reported by Viking A/S in Denmark if the transactions had been at arm’s length.
Viking appealed to the district court, which in a decision of April 2023 overturned the tax assessment.
The tax authorities then appealed to the Court of Appeal.
Judgment
The Court agreed that Viking’s documentation was deficient and that the group’s allocation of profits to its foreign subsidiaries was improperly skewed. It upheld the tax authorities’ use of the TNM method and found their choice of comparables and reliance on the interquartile range to be reasonable and in line with OECD standards. Although the final adjustment to Viking’s Danish income was slightly reduced after a calculation error was identified, the court ultimately upheld the discretionary assessment and ordered Viking and LL Cold ApS to repay legal costs plus interest.
Excerpts in English
““In the Court of Appeal’s opinion, it must be considered a significant deficiency that Viking’s transfer pricing documentation does not unambiguously or otherwise clearly show which method has been used, and that no justification has been provided that can be verified by SKAT.”
“Viking would not have sold at the lower price if all service stations had been external. It has therefore been established that Viking did not receive a market-based remuneration from the subsidiaries for providing the most important value-adding functions in the design and taking the greatest risks.”
“Overall, the Court of Appeal assesses on this basis that SKAT, in the work on the benchmark analysis of Viking, has made a customary selection of comparable companies based on objectively founded decisions, which have been further qualified in connection with the processing of the case in the National Tax Tribunal before a final administrative decision was made in the case.”
Click here for English translation
Click here for other translation