International Tax Review (ITR): What advice would you give to companies about how to reduce the risk of becoming involved in a dispute with the Danish tax authorities (SKAT)?
Hans Severin Hansen (HSH) (pictured below): When an enterprise conducts business in Denmark, it is important to be aware of the strategy employed by SKAT.
SKAT's aim is to reduce the tax gap, which is the perceived difference between what taxpayers should have declared on their tax returns and what they de facto have declared and paid in taxes.
SKAT has divided taxpayers into two categories: co-players and opponents.
The vast majority of taxpayers are regarded as co-players who, as a main rule, have the intention of paying the correct tax amount under the applicable tax rules. For this group, it is assumed that if the correct tax amount has not been paid, this is due to misunderstandings and errors. SKAT's concentrates its efforts towards this group on providing information and guidance to ensure the correct tax is paid.
However, some taxpayers are regarded as opponents who only pay the correct tax amount under applicable rules if they are forced to. SKAT uses targeted and effective efforts of control backed by the necessary sanctions – in the event of non-compliance with the rules – with respect to this group.
SKAT’s success is measured against the size of the tax gap, and with a requirement that the tax gap must not exceed 2% of the total tax potential it is obvious that SKAT has high expectations for taxpayer compliance.
In this context, aggressive tax planning increases the risk that a company will be regarded as an opponent and therefore attract increased attention from SKAT.
Taxpayers also have the option of obtaining a binding advance tax ruling before any major transactions or arrangements are made.
With respect to SKAT's biggest current focus area, transfer pricing, advance pricing agreements (APA) may, of course, be recommended.
ITR: What options do taxpayers in Denmark have to resolve tax disputes with SKAT other than litigation?
HSH: If the tax consequences of a transaction have not been predetermined by way of a binding advance tax ruling or, in respect of transfer pricing, an APA, and SKAT disagrees with the taxpayer on the tax treatment, this does not necessarily have to end in tax litigation, since Danish tax rules in certain cases allow the taxpayer to reverse the transaction to the effect that the unexpected adverse tax consequences of the transaction are avoided.
However, this is not often an option, either because it is not possible to reverse the transactions or because SKAT finds that the underlying transactions are motivated by tax saving reasons in which case they do not qualify for a reversal.
In these cases taxpayers must consider alternatives as to how the tax dispute must be handled most efficiently.
The chances of a favourable outcome in a tax case are highest at the level of the National Tax Tribunal which is the highest administrative appeals instance.
The chances of a favourable outcome before the ordinary courts are relatively limited. This suggests taxpayers should seek to resolve cases before they reach the ordinary courts.
It is therefore of great importance that the taxpayer teams up with the necessary experts from the beginning of the process to assess whether a settlement should be sought with SKAT.
This is especially relevant in transfer pricing cases where you often will not have an objectively correct result, or whether chances would be better on appeal to the National Tax Tribunal. In this regard, it should be noted that on appeal the taxpayer, primarily in cases of valuation, has the option of having experts appointed to answer questions from both SKAT and the taxpayer. The National Tax Tribunal, as well as the ordinary courts, generally, attaches significant importance to such expert opinions.
Are you seeing any trends in the types of dispute cases that SKAT is taking up, and those where it is succeeding in the courts?
HSH: SKAT appears to be very focused on efforts that are expected to provide the largest tax revenue.
Every year SKAT publishes its plan of efforts (production plan) that comprises a description of the various areas where SKAT intends to devote specific resources to ensure the correct tax is paid.
Large companies, covering groups with an annual turnover in excess of DKK 3 billion ($521 million), as well as banks and insurance companies, have had SKAT's specific attention for a number of years.
The 2013 production plan details areas where SKAT will devote resources with respect to large companies:
· Transfer pricing cases. Many transfer pricing cases are pending before the National Tax Tribunal though none of importance have yet reached the ordinary courts. It is therefore still unclear to what extent SKAT's – in some cases unprecedented and gigantic - adjustments will be upheld, but regardless of any potential reductions made by the courts it seems to be evident that the transfer pricing cases have resulted in the largest adjustments over the past ten years.
· Beneficial ownership disputes. Lack of withholding tax on interest, dividends and royalties are consequently also an important item on SKAT's agenda for 2013.
· The tax treatment of costs incurred in connection with mergers and acquisitions, as well as on financial institutions’ payment of VAT and the specific tax on labour costs.
Finally, it is worth mentioning that SKAT has initiated a tax governance project under which it has invited a number of large enterprises to enter into a formal and extended co-operation under which the participating enterprises, among other things, commit themselves to disclosing all matters involving potential tax uncertainties. In return, SKAT will quickly respond to the disclosed information to minimise the risks for the taxpayer.
This project will probably primarily will be to the advantage of SKAT since it leads to a significant relief of the tax control efforts and taxpayers most likely cannot assume that SKAT will commit itself bindingly, unless it is absolutely clear that the transactions in question are correct and acceptable.
