First Danish transfer pricing dispute decided in arbitration under the EU Arbitration Convention

Quite recently, history was made in Danish tax law when a so-called "advisory commission" - an arbitration tribunal - delivered its first ever opinion in a Danish transfer pricing dispute. Plesner represented in cooperation with Deloitte the multinational group with Danish roots in the arbitration proceedings, including in the oral presentation and discussion before the arbitration tribunal. The unanimous opinion of the arbitration tribunal leads to a significant reduction of the adjustment made by the Tax Agency (and a corresponding adjustment of the maintained part of the adjustment in the UK so that double taxation is fully eliminated).  

The past years we have seen a rise in transfer pricing disputes - and a great deal are appealed to the Tax Appeals Agency and further on to the ordinary courts. This has created an increased focus on the EU Arbitration Convention. Thus, the Arbitration Convention provides tax payers within the EU with a legal right to have double taxation disputes based on transfer pricing adjustments between and among the member states ultimately settled by way of arbitration proceedings.

The EU Arbitration Convention is construed such that there are two phases; The first stage is the so-called mutual agreement procedure - "MAP" - which is also known from the double taxation conventions, and where the competent authorities of the involved states seek to negotiate a solution to eliminate the double taxation arisen as a result of the income adjustment made unilaterally by one of the states. If the competent authorities cannot agree on a solution within two years, stage two comes into play and involves the setting up of a so-called advisory commission - the arbitration tribunal - which consists of at least three independent tax experts (in addition to representatives from the involved competent authorities).

The task of the arbitration tribunal is to deliver an opinion on the elimination of the double taxation. Based on this opinion, the competent authorities must then make (and execute) an agreement on how the double taxation is eliminated. This agreement does not necessarily have to be in conformity with the opinion of the arbitration tribunal. However, if the competent authorities cannot agree on a different result, they must comply with the opinion. The enterprise involved will finally be asked to accept the result. The enterprise may turn the reached solution down, in which case the original adjustments are upheld, and the enterprise may then elect to continue its domestic appeal proceedings.

Even though the EU Arbitration Convention has been in force for more than 20 years, Denmark - and the other state in the specific case, Great Britain, for that matter - has never before been involved in a case that has reached stage two, i.e. the proceedings of an "advisory commission". This is most likely because this second stage turns over the decision powers of the involved states to independent tax experts, including judges, from other states. This, in itself, will normally be ample motivation for the states to reach a negotiated outcome in the first stage, the MAP.

In this specific case, the two competent authorities from Denmark and the UK did, however, not manage to reach an agreement in MAP why an arbitration tribunal with three independent persons was set up, including a Spanish lawyer as the chairman.  

Following intensive arbitration proceedings with numerous information requests from the arbitration tribunal, as well as an oral presentation and discussion of the case before the tribunal, the arbitration tribunal finally gave its opinion quite recently.

The opinion is unanimous meaning that both Denmark and the UK have accepted the result - as has the Danish enterprise now. The opinion entails that the transfer pricing adjustment made by the Danish Tax Agency originally will be reduced to a considerable extent. In addition, the double taxation that will arise on the upheld (minor) part of the decision will be eliminated. This is done by way of the UK giving a corresponding relief in the British income tax statement. 

It has been decided by the tribunal that the opinion shall not be published. 

As a final comment, it should be mentioned that the EU Arbitration Convention today, to all intents and purposes, has been replaced by the so-called EU Arbitration Directive - "Directive on tax dispute resolution mechanisms in the European Union" (2017/1852/EU) - according to which the scope of application of arbitration has been widened so that it also covers other disputes (than transfer pricing) on the interpretation and application of double tax conventions. In addition to this directive, Denmark has to some extent, that is with some non-EU states, opened up for arbitration in relation to disputes under double tax conventions by way of acceding to the so-called MLI convention (Multilateral Instrument).

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