Transfer pricing leads to record fines

2012 could be a record tax year for tax authorities as they crack down on multinational companies that ship profits abroad Tax authorities are getting ready to come down hard on companies that they say have been misusing a practice...

2012 could be a record tax year for tax authorities as they crack down on multinational companies that ship profits abroad

Tax authorities are getting ready to come down hard on companies that they say have been misusing a practice known as transfer pricing as a way to pay lower corporate taxes.

Transfer pricing happens when two related companies – a parent company and a subsidiary, or two subsidiaries controlled by a common parent – trade with each other. When the companies set the price for the transaction, they are engaging in transfer pricing.

Transfer pricing is not illegal in itself. What is unlawful is transfer mispricing.

When two related companies trade with each other, they can artificially distort the price of the transaction in order to minimise the overall tax bill. Skat, the tax authority, said that the missing taxable profits disappeared into tax haven countries and the companies in question paid no Danish taxes on the deals.

Skat has examined transactions conducted by multinational corporations between their subsidiaries in Denmark and other countries. They uncovered backdoor deals amounting to more than 15 billion kroner in income, on which it says the companies will now be required to pay taxes.

“It's not that big corporations are cheating exactly, but they are going right up to the edge and there have been mores cases this year than ever,” Skat head Rasmus Bo Andersen told DR News.

Andersen said the previous record year was in 2009, when 15 billion kroner in transfer deals were recorded, but that he expects this year’s amount will be higher.

It may be too early to start spending the extra tax revenue that Skat plans to bill for. Companies seldom pay up voluntarily, and some disputes can drag on for years.

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