From 1999 to 2001 a couple of critical articles in the Danish weekly business Magazine “Mandag Morgen”8(MM) dealing with TP issues in Denmark were published. The main point of these articles was that the Danish Treasury is loosing billions of DKK each year due to MNCs alleged abusive use of artificially high internal prices attempting to transfer funds from their Danish subsidiary to more advantageous – in tax terms – units of the MNC (MM, Nr. 21, 2001). This conclusion quickly found its way into the conventional mass media and, thus, contributed in sparking off an unprecedented and widespread debate about MNCs role and behavior in Denmark.
Adding to this, in 2002, the Danish broadcaster DR2, which is regarded as a highly reliable, serious broadcaster, launched a program called “The Tax Acrobats”9. This programme disclosed that subsidiaries of huge MNCs like Coca Cola, Nestl and most international oil companies operating in Denmark had not paid tax, or paid very little in a range from 5 to 10 consecutive years. With the amount of publicity a program of this caliber created, the Parliament was forced to address this issue.
Within a month the government had worked out a report on issues to assess and determine the extent and proliferation of the possible transfer of “would-have-been” Danish tax revenue to other countries. This section will depict the current shape of the Danish issues and debate over TP. It will do so by incorporating the issues clarified in the previous sections to Denmark, e. g. apply the theoretical findings to a real life example. How much is the Treasury losing and how is it being estimated? Is it a one-way problem or are funds being funneled via TP into Denmark as well?
How much of a factor is the corporate tax rate in these matters, and how has it changed in recent times? What initiatives has the government introduced to hinder any misuse of the rules? Consequently, this brings the attention to the international level to put the Danish issues into perspective vis vis issues in other selected OECD countries. And what can be learned from other countries dealing with TP-issues. These are some of the issues that will be addressed in the following section.
It seems like Denmark must be one of the worlds most competitive and difficult markets to operate in. How else can some of the worlds most profitable MNCs have subsidiaries in Denmark with continuous deficits and thus, not paying anything in corporate tax? This seems to be the general reply from MNCs in explaining the lack of tax payments in a series of articles in MM starting in 1999 (MM, Nr. 31 and 32, 1999). The articles display figures from Danish subsidiaries, of large MNCs from Nestli?? and Unilever to oil companies like Statoil, Q8 and Hydro Texaco.
Interestingly, these numbers indicate some quite unprofitable businesses, despite revenues in the billions of DKK. Unilever has lost DKK 127 million on their Danish activities from 1991 to 2000 from revenue of DKK 16 billion, and thus have only paid DKK 2 million in tax. This is quite varying from their average European profits that accounted for 11 % in 1998 (MM, Nr. 31, 1999) Except Shell who has paid DKK 678 million in tax in six years (1995-2000), the remaining four other big oil companies operating in Denmark have altogether paid DKK 70 million out of a revenue of DKK 100 billion.
From an economist’s point of view one would expect such unprofitable subsidiaries to either drastically restructured or even be divested. Advisory tax auditor, Christen Amby, one of the most prominent tax experts says: “When a number of companies display consecutive running deficits of this magnitude, it can only mean that the companies are either driven by poor businessmen or that revenue is consciously funneled out of the country. I assume no one would accuse these companies of being unprofessional (MM, Nr. 21, 2001). ” A common explanation of the unprofitability of these companies is that they have invested heavily in various assets.
This point is indeed a valid one, since companies’ heavy investments will affect their financial figures. However this will only postpone the payment – not make them disappear, and thus, taxes should figure in future statements. This view is shared by Si?? ren Bo Nielsen, economic advisor and CBS professor, who notes that “… [i]f this does not happen within a five to ten year time horizon, then I would have difficulties relating it to investments (MM, Nr. 25, 2001). ” 5. 2 The Extent of the Problem One of the most complex issues concerning TP is to measure the extent and proliferation of the abusive TP.
Not surprisingly, economists, politicians and companies differ substantially in their various estimations on the subject. In a survey from 1999 of the top 300 foreign and domestic companies operating in Denmark, 46 % of the 67 foreign MNCs had profits lower than the government bond interest rate (MM, Nr. 13, 1999). Interestingly, the number of “below bond rate-profits” was less than 33 % for all 300 Danish and foreign companies. One of the more qualified attempts to quantify the issue was presented by a group of economic advisors, headed byren Bo Larsen, in an article in MM Nr. 21 in 2001.
Using figures from 1995-97, it was establish that the income generated within the borders of the country apparently topped the income registered by the Danish tax authorities by DKK 20-40 billion. With a corporate tax rate of 30 % this result in a deficiency of 7-14 billion in the Treasury in those years. However this estimate should be seen with caution, since there are several uncertain variables, for instance Danish individuals not registering their purchase of foreign securities. “But the main part of the explanation of the amount probably refers back to transfer pricing in a broad sense (MM, Nr. 21, 2001)”, Siren Bo Larsen notes.
Representatives from the Ministry of Finance, on the other hand, have indicated that the revenue lost by the Danish Treasury is marginal (K, have to find it… ). Indeed they are uncertain that there is even talk of a net loss. They point at the reduction in the Danish corporate tax level, which is currently below the OECD and approximately averaging the EU-level10 (Politiken, 2004), which would indicate that funds could just as well be transferred into the country instead of funds leaving the country. However, one should also be cautious acknowledging this argument since the abstractness of such an argument makes it relatively inconclusive.
Moreover, government politicians can be perceived as biased, in the sense that they have an incentive to defend the existing tax rules and regulations. 5. 3 The Danish Corporate Tax Level During the last decades Denmark has followed the international trend of gradual corporate tax rate reductions. Thus, the Danish tax rate has fallen 20 %-points from 50 % in 1986 (OECD, 2003) to the current level at 30 %. Two interdependent factors can be contributed to these changes. The main reason for this general trend in the world of corporate tax should be found in the continuous attempts by countries to compete to attract foreign investments.
Equally important is the fact that countries, despite drastic tax rate reductions, have been able to avoid reductions in the tax revenues because of increases in the size of the tax base. The latter point has made the former economically feasible. Interestingly, Denmark has gone from being one of the highest corporate tax level countries to being slightly below OECD average. Moreover, Denmark’s current level is substantially lower than several countries in its geographical proximity like Germany (40 %), Holland (35 %) and Belgium (39 %).
These countries are some of Denmark’s principal trading partners. Assuming the often-cited argument that MNCs allocate profits to the most advantageous countries, the corporate tax level would per se not indicate a net outflow of cash. This particular argument suggests that the funds transferred out of the country are offset by an equal – or even higher – amount of ingoing funds. However, only looking at the tax level merely gives an indication, since it excludes other important factors such as the investment milieu, interest rates, depreciation regulations/possibilities etc.
Transfer Pricing Center In 1998 Danish tax authorities were criticised for not handling cases where companies were accused of abusing TP regulations very well. Consequently, it was decided to centralise the top Danish TP experts in one Transfer Pricing Center. Furthermore, new regulations, inspired by the newly ratified OECD guidelines, concerning corporate tax were implemented. The most significant of them being the one on TP, where MNCs now have to provide documentation, that their transactions have occurred in accordance to the ALP.
The role of this TP-center is to competent and approving authority in cases of potential abusive behavior concerning TP. Furthermore, they are dialoging in conflicts between Danish subsidiaries in other countries and the tax authorities in that country. After only a few years the TP-center employing 16 tax experts were investigating approximately 200 cases of suspected Danish subsidiaries of foreign MNCs. These cases vary substantially in magnitude – most of them are in the two-digit million DKK scale, but a small handful of companies have received additional tax bills in the three digit million scale (MM, Nr.
21, 2001). Still the pace and results of the TP-center has been criticised from various sides. The reason for this is two-fold. First, the center has experienced difficulties and keeping their employees. The tax experts have become valuable to MNCs and auditing firms, who have been successful in attracting the experts with higher salaries. Thus, only five of the initial 16 employees were still employed after three years of operation. Second, the TP-center has allocated considerable resources in helping Danish MNCs who are facing similar tax demands from foreign tax authorities.
Here the MNCs are accused of transferring profits from their foreign subsidiaries to Denmark. Thus, the TP-center assists in assessing their demands and if they are found unjustified, the TP-center might help the MNCs file a case against the foreign tax authorities. If, however, the TP-center agrees with the demands of the foreign tax authorities, they will have to give the Danish MNC a corresponding tax exemption in order to live up to the standards in the OECD Model Tax Convention on double taxation (Hansen et al, 2004 and Eden, 2001).
Thus, the TP center plays a crucial role in the interaction between other tax authorities and the MNC in question. It is here that the APA’s mentioned above arise as the obvious tool to prevent or solve disagreements. These agreements are also done by the TP center. The fact that considerable resources are being allocated to assist Danish subsidiaries in foreign countries supports the view presented earlier in the section that considerable profits are being transferred into Denmark as well. This two-edged role of the TP-center can, from the Danish tax authority’s point of view, be seen as a way of “profit maximisation”.
To support that, research shows that government resources spent on TP-issues indeed provide the highest return in terms of tax payments. A UK-report shows that one GBP spent controlling TP-issues provides a return of GBP 240,-, whereas VAT-control for example only came back 10 fold (MM, Nr. 32, 1999). See figure 5. 3. (ibid) Clearly, this indicates that there is indeed a sound rationale from the Danish tax authority’s point of view, to introduce initiatives like the TP-center followed by tighter regulations on TP-issues.