Danish Supreme Court Upholds Transfer Pricing Adjustment in Maersk Oil Case

READ FULL JUDGMENT HERE

Case Information:

Court: Danish Supreme Court
Case No: BS-15265/2022-HJR and BS-16812/2022-HJR
Applicant: Ministry of Taxation
Defendant: A.P. Møller – Mærsk A/S and TotalEnergies EP Denmark A/S (formerly Maersk Oil and Gas A/S)
Judgment Date: September 6, 2023

Judgment Summary:

The Supreme Court of Denmark ruled in favor of the Ministry of Taxation in two related cases involving transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... disputes with A.P. Møller – Mærsk A/S (Maersk) and TotalEnergies EP Denmark A/S (TotalEnergies). The court upheld the Ministry’s claim that the taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... of both companies for the years 2006-2008 should be increased significantly due to improper transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... practices. Additionally, both companies were ordered to pay substantial legal costs.

Key Points of the Judgment:

Background:

MOGAS, a subsidiary of APMM, conducted preliminary feasibility studies for oil exploration worldwide and provided technical and administrative services to its subsidiaries in Algeria and Qatar. MOGAS issued performance guarantees for these subsidiaries but did not receive compensation for the studies or guarantees. The only intercompany compensation was reimbursement for technical and administrative assistance at cost.

Core Dispute:

The case centered on whether MOGAS’ transactions with its subsidiaries were conducted at arm’s length, as required by Danish tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... The tax authorities argued that MOGAS should have received ongoing compensation for the economic value provided to its subsidiaries through feasibility studies, performance guarantees, and associated know-how.

Court Findings:

1. The Supreme Court determined that the feasibility studies, performance guarantees, and associated know-how had economic value for the subsidiaries, for which independent parties would have required ongoing payment.
2. The court found that MOGAS provided technical and administrative services (timewriting) at cost was not by arm’s length principles.
3. The transactions were considered so closely related that they had to be assessed and priced on an aggregated basis.
4. The court agreed that the tax authorities could determine MOGAS’ income on a discretionary basis and that the assessment was correct and based on OECDThe Organisation for Economic Co-operation and Development (OECD) is an international organisation comprising 38 member countries, established to foster economic growth, trade, and development on a global scale. Founded in 1961, the OECD provides a forum for governments to collaborate, share policy experiences, and develop solutions to common economic challenges. The OECD's core mission is to promote policies that improve... guidelines.

Outcome

The Supreme Court upheld the tax authorities’ discretionary assessment, increasing MOGAS’ taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... and APMM’s joint taxation income for 2006-2008. The court rejected MOGAS’ arguments and found no basis for overturning the tax authorities’ assessment.

The Supreme Court ruled that:

• Maersk’s joint taxation income for 2006-2008 be increased by DKK 506,431,000, DKK 327,562,000, and DKK 468,185,000, respectively.
• TotalEnergies’ taxable incomeThe tax base is a fundamental concept in taxation, representing the total amount of economic activity or assets upon which a tax is levied. It is the foundation upon which governments calculate the amount of tax owed, based on factors like income, property value, sales, or corporate profits. Understanding the tax base is essential for tax professionals, businesses, and policymakers,... for 2006-2008 be increased by the same amounts.
• Both companies pay DKK 3,004,000 to the Ministry of Taxation with interest from April 21, 2022.
• Both companies pay DKK 4,008,500 each in legal costs.

Transfer Pricing Method:

The tax authorities used a profit-based method, estimating additional income corresponding to a royalty rate of approximately 1.7% of the turnover in the two subsidiaries. The Supreme Court accepted this approach, which aligns with the Transactional Net Margin Method (TNMM) or the Profit Split Method as described in the OECD Transfer Pricing GuidelinesThe OECD Transfer Pricing Guidelines serve as a critical framework for multinational enterprises (MNEs) and tax administrations worldwide. They provide detailed principles for the pricing of intra-group transactions to ensure that profits are allocated fairly across jurisdictions, based on the arm’s length principle. In essence, these Guidelines are instrumental in preventing tax base erosion and profit shifting by MNEs. The....

Major Issues and Areas of Contention:

1. Valuation of intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term...: The court had to determine whether the feasibility studies and know-how provided by MOGAS had ongoing economic value for the subsidiaries.
2. Performance guarantees: The court considered whether these guarantees constituted controlled transactions with economic value.
3. Pricing of intra-group servicesFOR MORE INSIGHT ON INTRA-GROUP SERVICES, PLEASE READ THIS ARTICLE: Intra-Group Services: Guidelines, Examples, and Risk Management Strategies Intra-Group Services refer to activities performed by one entity within a multinational enterprise (MNE) group that benefit one or more associated enterprises. These services may include administrative, technical, financial, or commercial assistance provided by a central company to its affiliates. A primary...: The appropriateness of charging only cost for technical and administrative services was disputed.
4. Aggregation of transactions: The court had to decide whether to assess the transactions separately or as a whole.
5. Discretionary assessment: The validity and reasonableness of the tax authorities’ discretionary assessment were challenged.

Controversy and Expectations:

The Supreme Court’s decision was somewhat controversial as it overturned the High Court’s previous ruling, which had referred the case back to the tax authorities for reconsideration. The Supreme Court’s acceptance of the tax authorities’ aggregated approach and discretionary assessment may be seen as a departure from a more transaction-specific analysis.

This decision was unexpected in its broad acceptance of the tax authorities’ position, particularly given the complexity of valuing intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term... and services in the oil and gas industry. The court’s willingness to accept an aggregated approach and a relatively simple royalty-based adjustment may surprise some transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... experts who might have expected a more granular analysis.

Significance for Multinationals and Revenue Services:

1. Increased scrutiny of intra-group arrangements: Multinationals must carefully evaluate and document the economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... of all intra-group transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,..., including those involving intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term... and guarantees.
2. Importance of contemporaneous documentation: The case highlights the need for comprehensive transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... documentation that addresses all potential value-creating activities within a group.
3. Aggregation of transactions: Tax authorities may be emboldened to take a holistic view of related party transactions rather than analyzing them individually.
4. Valuation of intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term...: The case underscores the challenges in valuing intangible assetsIntangible Assets are non-physical assets that have value due to the rights or advantages they confer on a business. Unlike tangible assets like machinery or buildings, intangible assets cannot be seen or touched but often hold significant worth. Common examples include intellectual property (IP) such as patents, trademarks, copyrights, goodwill, and brand recognition. Intangible assets are crucial for driving long-term..., particularly in industries with long development cycles like oil and gas.
5. Cost-plus arrangements: Simple cost reimbursement for services may be challenged, especially where significant value is being created.
6. Performance guarantees: These may be viewed as controlled transactions requiring arm’s length compensation.
7. Retrospective assessments: Tax authorities may look back at historical arrangements, even if they were established long before the tax years in question.
8. Global implications: While this is a Danish case, it may influence transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... approaches in other jurisdictions, particularly within the EU.

Value of Transfer Pricing Expertise:

The Maersk Oil case demonstrates the importance of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... expertise in managing multinational tax affairs. Expert transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... advisors can provide value in several ways:

1. Risk assessment: Identifying potential transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... risks before they become issues with tax authorities.
2. Documentation: Preparing robust, contemporaneous documentation that supports the arm’s length nature of transactions.
3. Valuation expertise: Providing sophisticated valuation analyses for complex transactions, particularly involving intangibles.
4. Industry knowledge: Understanding industry-specific practices and norms that may influence transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... arrangements.
5. Dispute resolution: Assisting in negotiations with tax authorities and providing expert testimony in litigation if necessary.
6. Global perspective: Offering insights into global transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... trends and potential impacts of decisions in one jurisdiction on others.
7. Strategic planning: Helping to structure intra-group transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,... in a tax-efficient manner while managing risk.
8. BenchmarkingBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions...: Conducting thorough comparability analyses to support transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... positions.

The value of such expertise can be measured in millions of dollars, as evidenced by the significant adjustments in the Maersk Oil case. Proper transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... management can help avoid costly disputes, penalties, and double taxationDouble Taxation occurs when the same income or financial transaction is taxed twice, typically in different jurisdictions. It can arise in two primary contexts: economic double taxation, where the same income is taxed twice in the hands of different taxpayers, and juridical double taxation, where the same taxpayer is taxed on the same income in more than one country. Double....

Preventative Measures:

To avoid or better manage cases like this, multinationals should consider implementing:

1. A robust tax risk managementTax risk management is a structured process used by organizations, particularly multinational enterprises (MNEs), to identify, assess, and mitigate potential risks that arise in relation to tax compliance, reporting, and planning. It plays a crucial role in ensuring that a company’s tax obligations are managed in a way that minimizes risk exposure while maximizing efficiency and strategic value. process: This should include regular risk assessments, clear policies and procedures, and ongoing monitoring of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... positions.
2. A tax steering committee: As outlined in the article from taxriskmanagement.com, a tax steering committeeA Tax Steering Committee is a specialised governance group within an organisation responsible for overseeing and guiding the company’s tax strategy and operations. It typically includes senior executives such as the Chief Financial Officer (CFO), Head of Tax, General Counsel, and external tax advisors or auditors. In multinational corporations (MNCs), this committee becomes particularly crucial, given the complex tax environment... can play a crucial role in:
   • Developing and implementing a comprehensive tax strategy
   • Ensuring alignment between tax and business objectives
   • Monitoring and managing tax risksTax Risk refers to the uncertainty surrounding the potential financial or reputational impact of tax-related decisions and events on a business or individual. This risk arises due to various factors, such as complex tax regulations, inconsistent tax authority interpretations, or evolving international tax laws. Effective tax risk management involves identifying, assessing, and mitigating potential tax-related threats to prevent financial penalties,... across the organization
   • Overseeing transfer pricing policiesTransfer Pricing Policies refer to the rules and methods established by multinational enterprises (MNEs) to determine the pricing of transactions between related parties, such as subsidiaries or divisions of the same company. These transactions may involve the transfer of goods, services, intellectual property, or financial arrangements. Transfer pricing policies are essential for ensuring that intercompany transactions adhere to the arm’s... and documentation
   • Facilitating communication between tax, finance, and operational teams
   • Providing governance and oversight of tax matters
3. Regular transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... reviews: Conducting periodic reviews of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... arrangements to ensure they remain appropriate and defensible.
4. Advance Pricing Agreements (APAs)Advance Pricing Agreements (APAs) have emerged as a critical tool for managing transfer pricing challenges. APAs are formal agreements between a taxpayer—often a multinational enterprise (MNE)—and one or more tax authorities that pre-determine the appropriate transfer pricing methodology for specified intercompany transactions over a set period, typically up to five years, with the possibility of renewal. The primary purpose of...: Considering APAsAdvance Pricing Agreements (APAs) have emerged as a critical tool for managing transfer pricing challenges. APAs are formal agreements between a taxpayer—often a multinational enterprise (MNE)—and one or more tax authorities that pre-determine the appropriate transfer pricing methodology for specified intercompany transactions over a set period, typically up to five years, with the possibility of renewal. The primary purpose of... with relevant tax authorities to provide certainty on transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... arrangements.
5. Comprehensive documentation: Maintaining detailed, contemporaneous documentation that explains the economic substanceEconomic substance is a foundational principle in taxation and business law, ensuring that transactions and corporate structures reflect genuine economic reality beyond their legal form. The concept aims to prevent tax avoidance by evaluating whether a transaction or arrangement has a real business purpose and economic effect other than merely achieving a tax benefit. It ensures that taxpayers cannot exploit... and arm’s length nature of all significant intra-group transactionsIntra-Group Transactions are interactions between entities within the same multinational enterprise (MNE). Such transactions form the backbone of related-party dealings and are essential in managing global operations and aligning business objectives across jurisdictions. Understanding intra-group transactions is critical in international tax and transfer pricing, as they directly impact a company's tax obligations, profitability, and compliance standing. Tax professionals, accountants, lawyers,....
6. Functional analysisFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish...: Regularly updating functional analyses to ensure accurate delineation of transactions and allocation of risks and rewards.
7. Industry benchmarkingBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions...: Conduct regular benchmarkingBenchmarking, within the context of transfer pricing, refers to the process of analysing and comparing financial and economic data from independent companies to establish a fair and arm’s length price for controlled transactions. It is typically conducted using databases that provide details about comparable companies and transactions. The objective is to determine whether the terms and conditions of intercompany transactions... studies to support the arm’s length nature of transfer prices.
8. Technology solutions: Implementing transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... software to manage data, calculate prices, and generate documentation more efficiently.
9. Training and awareness: Ensuring that relevant personnel across the organization understand transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... principles and their importance.
10. Scenario planning: Developing contingency plans for potential transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... challenges or disputes.

By implementing these preventative measures, multinationals can significantly reduce the risk of costly transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... disputes and better position themselves to defend their positions if challenged.

In Summary

The Maersk Oil case is a stark reminder of the complexities and potential pitfalls in transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... for multinational enterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include.... It underscores the need for proactive, expert management of transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... issues and the implementation of robust governance structures like tax steering committees.

As transfer pricingTransfer pricing is a fundamental concept in international taxation that defines the pricing methods and rules applied to transactions between related entities within a multinational enterprise (MNE). In the context of tax regulations, it governs how prices for goods, services, or intangibles (such as intellectual property) are set when these items are exchanged between different branches, subsidiaries, or affiliates of... continues to be a focus area for tax authorities worldwide, investing in proper expertise and preventative measures is not just advisable but essential for multinational enterprisesWhat are Multinational Enterprises (MNEs)? Multinational Enterprises, commonly referred to as MNEs, are corporations that operate in multiple countries through various subsidiaries, branches, or affiliates. These entities maintain a central management structure while leveraging diverse resources, labour markets, and customer bases across borders. The fundamental aspect that distinguishes MNEs from other corporate forms is their cross-border activity, which can include... seeking to navigate the complex global tax landscape.