Judgment summary
This is a Supreme Court judgment concerning the taxable income of Accenture A/S for the income years 2005-2011. The case concerned two intra-group arrangements: an International Assignment Agreement (IAA agreement) under which Accenture A/S paid a mark-up on the direct and indirect costs of employees hired from other Accenture group companies, and a licence agreement with Accenture Global Services GmbH (AGS) under which Accenture A/S paid a royalty of 7% of external revenue for the use of intangible assets.
The Danish tax authorities (SKAT) had reduced the discretionary profit margin applied to the IAA agreement costs and reduced the deduction for royalty payments, resulting in significant increases to Accenture A/S's taxable income. The National Tax Tribunal later found no basis for changing the 30% mark-up or the 7% royalty rate, though it applied Danish accounting standards to the royalty calculation for 2007, resulting in an increase of DKK 7,027,853 for that year.
The Ministry of Taxation brought court proceedings seeking to reinstate SKAT's increases. The High Court ruled in favour of the Ministry. Accenture A/S appealed to the Supreme Court, seeking acquittal and a reduction of its 2007 taxable income by DKK 7,027,853, alternatively that the assessment be referred back to the Tax Agency.
The Supreme Court found that Accenture's transfer pricing documentation for both the IAA agreement mark-up and the AGS royalty rate was not so deficient as to be equated with missing documentation, and that the Ministry of Taxation had not demonstrated that either the 30% mark-up or the 7% royalty rate was inconsistent with the arm's length principle under section 2(1) of the Danish Tax Assessment Act. The Court acquitted Accenture A/S of the Ministry's claims and reduced its 2007 taxable income by DKK 7,027,853, also ordering repayment of legal costs paid to comply with the High Court's costs order.
Background
The Accenture Group is an international consulting and IT company whose parent company is Accenture plc (Ireland), listed on the New York Stock Exchange. The Group serves clients through local operating companies with their own employees.
In 2001, the Group's operating companies, including Accenture A/S in Denmark, entered into the IAA agreement with Accenture SCA (Luxembourg) for the assignment of employees between operating companies. Under this agreement, the hiring company pays the direct and indirect labour costs of hired employees plus a mark-up, set at 30% according to the Group's transfer pricing analysis. In the income years 2005-2011, Accenture A/S incurred net costs for hiring employees under the IAA agreement.
In 2006, Accenture A/S entered into a licence agreement with the Swiss group company Accenture Global Services GmbH (AGS), under which AGS owns various intangible assets and Accenture A/S pays a royalty of 7% of revenue from external customers for their use.
By decision of 31 August 2011, SKAT reduced the discretionary profit margin on employee-hiring costs to 4.1% for 2005 and 2006, increasing taxable income by DKK 14,919,780 (2005) and DKK 16,996,616 (2006). By decision of 12 March 2014, SKAT reduced the discretionary profit margin to 7.27% for 2007-2011, increasing taxable income by DKK 7,957,753 (2007), DKK 14,027,403 (2008), DKK 14,122,679 (2009), DKK 18,000,146 (2010) and DKK 15,127,184 (2011), and also reduced the deduction for royalty paid in 2007, increasing taxable income by DKK 25,951,421.
The National Tax Tribunal, by decisions of 16 December 2015 and 24 May 2019, found no basis for changing the 30% mark-up and reduced SKAT's increases to DKK 0 for the years in question. It also found no basis for changing the 7% royalty rate, but held that Danish accounting standards should apply to the royalty calculation, setting the 2007 increase at DKK 7,027,853.
The Ministry of Taxation brought an action seeking to reinstate increases to Accenture A/S's taxable income for the years 2005-2011, and the Eastern High Court (18th division, judgment of 29 August 2023) ruled in favour of the Ministry.
Core dispute
The Supreme Court had to decide whether the 30% profit margin applied to Accenture A/S's costs for hiring employees under the IAA agreement for 2005-2011, and the 7% royalty paid to AGS in 2007 on turnover with external customers, complied with section 2(1) of the Danish Tax Assessment Act (the arm's length principle).
A preliminary question was whether Accenture A/S's transfer pricing documentation was deficient to such a significant extent that SKAT was entitled to assess the profit margin and royalty on a discretionary basis under section 3 B(8) of the Tax Control Act, cf. section 5(3).
A further question was whether the Ministry of Taxation had demonstrated that the profit margin and royalty payment were not in accordance with section 2(1) of the Assessment Act, including disputes over the appropriate comparables (IT/consulting firms versus temporary employment agencies for the IAA agreement) and over AGS's ownership of the licensed intangible assets and Accenture A/S's contribution to their value (for the royalty).
Court findings
On the IAA agreement, the Supreme Court found that the Ministry of Taxation had not demonstrated that Accenture's global transfer pricing documentation for 2005-2011 regarding the 30% mark-up was deficient to such a significant extent that it could be equated with missing documentation, noting that the documentation was based on OECD guidelines, contained a reasoned choice of method (Cost Plus), a functional and risk analysis, and a comparability analysis on an informed data basis. Disagreement with the pricing method or comparability analysis did not in itself render the documentation deficient.
The Court further found that the Ministry had not demonstrated that determining the mark-up as a gross margin covering capacity costs and profit was contrary to the arm's length principle, nor that the profit margin could not be determined by comparison with gross margins of other IT and consulting companies rather than temporary employment agencies.
On the royalty, the Court found no basis to conclude that AGS was not the owner of the intangible assets covered by the 2006 licence agreement, noting that since 2001 AGS had been responsible for developing, protecting and managing the Group's intangible assets and marketing activities, had approximately 11 permanent employees in 2007-2011, and incurred significant expenses for hired employees from other group companies.
The Court found that the Ministry had not demonstrated that Accenture's transfer pricing documentation on the royalty rate was deficient to the extent of being equated with missing documentation, noting it was based on OECD guidelines, included a justified method choice (Residual Profit Split), a functional and risk analysis, and a comparability analysis on an informed data basis.
The Court further found that the Ministry had not demonstrated that Accenture's application of the profit split method failed to sufficiently account for Accenture A/S's contribution to the value of the intangible assets, nor that more than 7.68% of earnings should be attributed to consultancy operations. The Court also found no tax law basis to set aside the parties' civil law agreement that royalties be calculated on turnover with external customers under US accounting standards.
Outcome
The Supreme Court upheld Accenture A/S's main claim. Accenture A/S was acquitted of the Ministry of Taxation's claim to increase its taxable income for the income years 2005-2011, and its taxable income for the income year 2007 was reduced by DKK 7,027,853.
The Ministry of Taxation was ordered to repay DKK 1,000,000 in legal costs paid by Accenture to comply with the High Court's costs decision, with interest from 5 September 2023.
Legal costs for the High Court and Supreme Court were fixed at DKK 1,800,000 plus DKK 17,000 for the Supreme Court, totalling DKK 1,817,000, payable by the Ministry of Taxation to Accenture A/S. All amounts were ordered to be paid within 14 days of the judgment, with interest under section 8a of the Danish Interest Act.
Tp method highlighted
For the IAA agreement, Accenture used the Cost Plus method, based on direct and indirect production costs (labour costs) with a mark-up (gross profit) determined by reference to mark-ups and costs of independent parties in comparable transactions, per OECD Transfer Pricing Guidelines (TPG) 2017 section 2.45. Approximately 50 IT and consulting companies were selected, their gross results over a three-year period adjusted so that the ratio between production and capacity costs corresponded to Accenture's, and compared to 16 Accenture operating companies accounting for 70-80% of employee hiring under the IAA agreement. The resulting gross margins were divided into quartiles, with an interquartile range determined; the 30% mark-up fell within this range for all relevant income years.
For the licence agreement royalty, Accenture used the Residual Profit Split Method (RPSM), aiming to allocate profit between related parties as independent parties would have shared it under comparable circumstances, per OECD TPG 2017 section 2.121. The Accenture Group's total earnings were divided between consultancy operations (operating companies) and utilisation of AGS's intangible assets. The share attributable to consultancy operations was calculated by comparing Accenture Group earnings over a three-year period to average earnings of comparable consultancy firms; the remainder was attributed to intangible asset utilisation. A 7% royalty rate corresponded to consultancy earnings of 7.68%, above the median for comparable firms.
Major issues / areas of contention
- Whether Accenture A/S's transfer pricing documentation for the IAA agreement mark-up (2005-2011) was so deficient it could be equated with missing documentation under section 3 B(8) of the Tax Control Act, cf. section 5(3).
- Whether the 30% mark-up on employee hiring costs under the IAA agreement complied with the arm's length principle under section 2(1) of the Tax Assessment Act.
- Whether the appropriate comparables for the IAA agreement mark-up were IT and consulting companies or temporary employment agencies.
- Whether AGS was genuinely the owner of the intangible assets licensed to Accenture A/S, or whether the 2001 transfer was, as the Ministry argued, 'a fictitious construction without reality'.
- Whether Accenture A/S's transfer pricing documentation for the 7% royalty rate (2007) was so deficient it could be equated with missing documentation.
- Whether the 7% royalty rate paid to AGS complied with the arm's length principle under section 2(1) of the Tax Assessment Act, including whether Accenture A/S's contribution to the value of the intangible assets was adequately reflected.
- Whether there was any basis under tax law to set aside the parties' civil law agreement that royalties be calculated on turnover with external customers under US accounting standards.
- Which party bore the burden of proving deficiency of documentation and non-compliance with the arm's length principle.