The case concerns the validity of the tax office’s decision of 18 October 2022 regarding DHL Global Forwarding (Norway) AS (DGF Norway). The decision increases the company’s taxable income for the years 2014 to 2019 by a total of NOK 242,870,750. The core of the dispute is whether DGF Norway’s income has been reduced due to a community of interest with companies in the same group, so that there is a basis for a discretionary assessment pursuant to section 13-1 of the Tax Act.
DGF Norway made losses for 22 years from 1998 to 2019. The tax authorities claims that the business has been maintained for strategic reasons related to the group’s need for representation in Norway, and that the company has not been sufficiently compensated for the continuation of the loss-making activities seen in isolation. In the tax authorities’ view, a ‘service charge’ would have been agreed between independent parties, cf. the OECD TPG (2017), Chapter I, D.3. ‘Losses’, paragraphs 1.129 and 1.130.
DGF Norway submitted a claim that the decision is invalid and should be cancelled. The company was of the opinion that no discretionary power has been demonstrated pursuant to section 13-1 first paragraph of the Taxation Act. In the alternative, it was argued that the discretionary power has not been exercised in line with the provision’s third paragraph, and that the decision to review the case was incorrect and insufficiently justified, cf. section 12-1 of the Tax Administration Act. In addition, the right to review for the years 2014 to 2016 is considered to have expired.
Decision of the District Court
The court found in favour of DGF Norway, ruling that the tax authorities had not demonstrated a sufficient causal link between the company’s losses and its community of interest with other group companies, nor had it adequately identified or analyzed the supposed transaction that would justify a service charge.
The court criticized the abstract and imprecise nature of the tax authorities’ assumptions and underlined that no comparable transaction or clear counterparty had been identified. It also pointed out that the company turned a profit from 2020 onwards following management and operational changes, not a shift in transfer pricing.
The court concluded that the prerequisites for a discretionary income adjustment under section 13-1 of the Tax Act were not met.
Excerpts in English
“In this case, there is no formalised agreement or terms on which to base an analysis of the transaction. No specific counterparty has been identified, but it is claimed that it is the network as a whole that must compensate DGF Norway. In addition, the factors that the state believes illustrate the benefit that the company creates for the Group and which should provide a basis for additional remuneration, are to a small extent concretised and documented.
It has been argued that the presence in Norway creates direct ‘business’ in foreign group companies, as well as indirectly by advertising that GFF is present in most countries in the world. The extent to which this is true is unclear. In particular, the government has highlighted the shipping of seafood, including the round-the-world flights in connection with the export of live crab from Northern Norway in 2017 to 2018, which the government claims benefited other parts of the Group through more favourable prices for transport to or from Asia. The exact effects have not been clarified. Access to evidence here was a topic in the latter part of the case preparation, but was not emphasised. The parties’ handling of this issue does not provide a basis for reversing the burden of proof, as argued by the state.
The uncertainty surrounding the alleged deviations from the arm’s length principle is well illustrated by the fact that the government has referred to the group’s principles for pricing and allocation as almost impenetrable, and that the decision states that the tax office lacks a basis for evaluating whether purchases and sales of intra-group services have been determined at arm’s length. The latter was stated in the decision after referring to the draft decision, where the group’s benefit from the company’s presence in Norway is mentioned as one of several factors that may have caused the reduction in income. Nor does the government have any idea of the reasons for the later profits from 2020, other than that it may be due to factors such as reorganisation of pricing, allocation of costs, changes in the tripartite relationship Starbroker/DGF Norway/external airlines or extraordinary gross margin due to the corona pandemic.
The result is that the alleged transaction that forms the basis for a service charge is not specified and analysed as required by the transfer pricing rules. Nor does it make it possible to identify comparable uncontrolled transactions or to compare with such transactions. In the court’s opinion, it is therefore not reasonable and justifiable to apply the service charge approach in point 1.130 of the OECD Guidelines, as the state has done.
The mainstay of the State’s argumentation in favour of discretionary power is the persistent deficits.
The Court does not agree that a special utility value for the Group is the only plausible explanation for why DGF Norway’s operations have been maintained, at least not during the six-year control period, the first years of which were characterised by restructuring after a major restructuring, an oil crisis that resulted in poor market conditions and crab shipping as a failed business project. An equally plausible explanation is that the company and the Group have been convinced that it is possible to make a profit, but that unexpected costs, market conditions, poor management or combinations of such factors have stood in the way of succeeding with what have basically been business strategies and decisions that do not deviate from the arm’s length principle. The company made large profits from 2020, the year after the control period and after significant operational changes had been implemented.
[…]
In the decision, neither the restructuring from 2014 nor the challenges faced by the company during the control period are considered in more detail as possible extraordinary and temporary reasons for the weak financial results.
Section 13-1 of the Tax Act applies regardless of whether there is a tax motive. In the assessment of whether the decline in income is due to a community of interest with companies in the same group, the court is of the opinion that some emphasis can nevertheless be placed on the fact that the group does not appear to have benefited from negative taxable earnings in the control period. The loss is locked in and not recognised against other profits.
The conclusion is that there is no discretionary power.”
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