Thursday 18 April 2019

Microsoft wins Danish transfer pricing case

Microsoft CEO Satya Nadella
Microsoft CEO Satya Nadella
Donal O'Donovan

Donal O'Donovan

Microsoft has won a court battle on transfer pricing against Danish tax authorities ,according to a release by Denmark's Eastern High Court. The case could have implications for other multinationals operating here and serving markets elsewhere in Europe.

Danish tax authorities had requested that the Danish unit of Microsoft should pay about DKK308m (€41m) in extra taxes for 2004-2007 for products sold in co-operation with Microsoft in Ireland.

The Danish tax authorities had demanded the tax, saying Microsoft had not been properly paid for performing marketing activities in the country - and thereby flattering its lower taxed Irish profits at the expense of profits at a Danish subsidiary.

Such intercompany accounting, or transfer pricing can be complex, but plays a huge role in determining where tax liabilities fall.

Microsoft in Ireland is one of the country's biggest private sector employers, and serves as the base for a much wider European market.

The case was a second big Danish tax case for the US multinational.

In 2013 the country launched its then biggest-ever tax case, in connection with Microsoft's acquisition of the Danish IT group, Navision. Demark's tax authorities demanded $1bn (€809m) from Microsoft.

The tax authority said Microsoft had sold the rights to Navision's successful business planning software, now under the name of Dynamics NAV, at below market value to a subsidiary in Ireland.

As a result the tax authority claimed back taxes and interest from sales of Dynamics NAV.

At the time the Danish corporate tax rate was 25pc - more than double the prevailing rate here - although that has since been cut.

The cases come against a background in much of Europe of national and EU authorities wanting technology companies to pay more tax.

A European Commission report last year found that technology businesses pay around half the corporation tax of traditional so-called bricks and mortar businesses, in part due their internationalised sales and service structures.

A controversial plan to impose a 3pc levy on the sale of some digital businesses, proposed by the European Commission, but opposed by Ireland, is aimed in part at closing that apparent taxation gap. (Additional reporting Bloomberg)

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