International Tax Planning and Transfer Pricing Planning: Denmark from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Denmark in the OECD context
    • 2.3 Transfer pricing rules of Denmark
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Arm's length principle
      • 2.3.3 Transfer pricing methods
      • 2.3.4 Scope of legislation
      • 2.3.5 Reporting requirements
      • 2.3.6 Country-by-Country Reporting
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructuring
      • 2.3.10 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Denmark and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Denmark-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Denmark in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Denmark to the US
      • 2.4.8 Case study 2: Interests from Denmark to the US
      • 2.4.9 Case study 3: Royalties from Denmark to the US
      • 2.4.10 Case study 4: Management and technical service fees from Denmark to the US
      • 2.4.11 Case study 5: Capital gains with Denmark as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Denmark
      • 2.4.13 Case study 7: Interests from the US to Denmark
      • 2.4.14 Case study 8: Royalties from the US to Denmark
      • 2.4.15 Case study 9: Management and technical service fees from the US to Denmark
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Denmark as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Denmark confirms in 2016 with a gross domestic product (GDP) of US$ 302,571 million the thirteenth-highest GDP of the European Union. In Denmark, corporate tax is levied at the rate of 22.00%. Thus, Denmark is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Denmark has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Denmark, economic growth is projected to gradually strengthen to 1.9% in 2018 fueled by investment and exports. Household consumption growth will remain robust, backed by employment growth, higher real wages and rising property prices. Both residential and business investment will pick up due to low interest rates and increasing capacity utilization. The current account surplus will remain sizeable. Implementation of a proposed comprehensive package of reforms addressing a number of structural challenges, such as strengthening work incentives, fostering medium-term fiscal sustainability and boosting productivity, would improve economic performance and raise incomes. Frontloading property tax reform would help to rein-in an increasingly buoyant housing market and make the tax mix more growth friendly. The fiscal stance remains broadly neutral with strong public investment declining only gradually. Against the backdrop of the package of reforms, the government has proposed to postpone the return to a balanced budget to 2025. Given the moderate public debt level, the authorities are right to use fiscal space and to push for structural reforms. This chapter provides a survey on the actual tax law frame conditions in Denmark and practical support in international tax planning and transfer pricing planning between Denmark and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Denmark applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP) and other traditional transaction methods (the resale price method and the cost-plus method) According to the Guide, if a traditional transaction method and a transactional profit method are equally reliable, the traditional transaction method is preferred. Similarly, the CUP method is preferred over the resale price method and the cost-plus method if the methods are equally reliable. Transactions between associated persons are subject to the arm's length principle (section 2 of the LL). This applies to transactions between all associated persons, whether resident or non-resident, and is thus not restricted to cross-border transactions. The arm's length principle applies to: a person controlled by another person; group-related companies; the relationship between a head office and a permanent establishment; and the relationship between employers and employees. There are reporting and documentation requirements. Cost sharing is allowed and business restructuring possible. There is interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Denmark, as developed mixed economy that is classed as a high-income economy by the World Bank and It ranks 18th in the world in terms of GDP (PPP) per capita and 6th in nominal GDP per capita, while Denmark's economy stands out as one of the most free in the Index of Economic Freedom and the Economic Freedom of the World, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Denmark confirms in 2016 with a gross domestic product (GDP) of US$ 302,571 million the thirteenth-highest GDP of the European Union. In Denmark, corporate tax is levied at the rate of 22.00%. Thus, Denmark is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Denmark has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] in Denmark, economic growth is projected to gradually strengthen to 1.9% in 2018 fueled by investment and exports. Household consumption growth will remain robust, backed by employment growth, higher real wages and rising property prices. Both residential and business investment will pick up due to low interest rates and increasing capacity utilization. The current account surplus will remain sizeable. Implementation of a proposed comprehensive package of reforms addressing a number of structural challenges, such as strengthening work incentives, fostering medium-term fiscal sustainability and boosting productivity, would improve economic performance and raise incomes. Frontloading property tax reform would help to rein-in an increasingly buoyant housing market and make the tax mix more growth friendly. The fiscal stance remains broadly neutral with strong public investment declining only gradually. Against the backdrop of the package of reforms, the government has proposed to postpone the return to a balanced budget to 2025. Given the moderate public debt level, the authorities are right to use fiscal space and to push for structural reforms.

According to Orbitax, [3] (Daily Tax News Digest of 22 November 2016), the Danish Ministry of Taxation has published updated rate and threshold tables for individual and corporate tax purposes. The tables cover 2010 to 2017. For individual income tax purposes, changes between 2016 and 2017 are mainly limited to an increase in top tax bracket threshold to DKK 479,600 as well as increases in certain allowances and credits. For corporate tax purposes, the only change is an increase in the carried forward loss offset limit to DKK 8.025 million in taxable income (for taxable income in excess of this amount the 60% offset limit applies).

Click the following links for the tax rate table (Danish language) [4]and the threshold table (Danish language) [5].

According to Orbitax, [6] (Daily Tax News Digest of 2 September 2016) on 30 August 2016, the Danish government presented its tax reform plan for 2017 through 2025. The plan includes a number of major measures, including:

  • The introduction of an equity investment allowance in 2019 in the form of a notional interest deduction that will be based on equity in excess of the amount existing at the end of 2018, with an annual rate based on the average two-year Central Bank interest rate capped at 3%;
  • The introduction of an additional 50% deduction for qualifying R&D expenses from 2017 to 2025 for SMEs and an additional 25% for large enterprises (150% and 125% total deduction respectively);
  • The introduction of a three-year tax holiday exemption for new entrepreneur start-ups with a taxable income cap of DKK 7 million, which is to be available from 2017 and set to expire in 2021, but may be extended; and
  • A reduction in individual income taxation overall, with a reduction in the maximum tax burden, including state, municipal and health contributions, from the current 51.95% to 46.98%.

The reform measures must be approved by parliament, and are subject to change.

The pivotal question is therefore, how groups of affiliated companies with group companies in Denmark and in the US can – before the background of ant-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high tax country Denmark is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Denmark (see section 3), and constructive hereon 10 case studies in international tax planning between Denmark and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Denmark and the US.

This...

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