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Small Countries Taking Big Bites

By Kash Mansori
Posted: April 30, 2015

Even relatively small countries can raise substantial tax and transfer pricing issues for the world’s largest multinationals. Take Denmark, for example. A couple of years ago the Danish tax authorities (“SKAT”) announced that they would be making a significant enforcement push with regard to transfer pricing. Recently reported statistics illustrate exactly how significant this enforcement push has been:

   "SKAT is going after multinationals in transfer pricing cases

   The tax authority SKAT has challenged 76 companies for their tax bill in 2014 to the tune of 20 billion kroner, Jyllands-Posten reports.

   This continues a war on so called transfer pricing cases (where there has been manipulation of prices between related or controlled companies in a business group), which SKAT has been waging for three years. Companies have been hit with extra tax bills for a value of 59 billion kroner during this period."

Okay, that sort of sounds like a lot, but is it really? For context, consider that Denmark’s GDP in 2014 was approximately DKR 2000 bn. That means that SKAT’s transfer pricing assessments are totaling roughly 1% of GDP per year.

So the answer is yes, that is a lot. According to the OECD Danish corporate income taxes totaled 3.28% of GDP in 2013. This implies that the potential exists for corporate tax collections to rise by as much as one-third simply as a result of enhanced transfer pricing enforcement. Or put another way, if an enforcement push in the US were to have similar results, total transfer pricing adjustments made by the IRS would be running close to $200 billion per year.

For multinationals, news like this is a reminder that when it comes to figuring out their international tax and transfer pricing positions, they can’t just worry about how they are doing things in the big economics and assume that their positions in smaller countries will just fall into place. Transfer pricing is a problem that multinationals must address on a global basis, considering its impact in each and every country that they do business in.

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