Tax authority loses major court case on transfer pricing to Microsoft

Supreme Court verdict a slap in the face for SKAT

A case that has been going on for almost ten years has now come to an end, and the outcome has not been favourable to Danish taxpayers.

The SKAT tax authority took Microsoft to court because it felt the company had not abided by the rules governing transfer pricing during the period 2004-2007 and owed the state several hundred million kroner in taxes.

Transfer pricing is an accounting practice that allows for the price of goods and services (including intellectual property) to be exchanged among the subsidiaries and affiliates of a larger enterprise. It allows for tax savings for the companies, though tax authorities may contest these claims.

Cross-border fiddling
SKAT contended that Microsoft in Denmark ought to have received payments for the marketing of products in Denmark sold through Microsoft in Ireland, not least from computers that had been sold with Microsoft programs installed. These monies would have been taxable, reports DR Nyheder.

SKAT calculated that Microsoft Danmark’s income from 2004-2007 was 307 million kroner higher than that reported by the company.

In addition, SKAT argued that Microsoft Danmark had not drawn up adequate documentation covering the pricing agreements and how these prices had been worked out with the other companies in the concern.

No case to answer
The Supreme Court ruled that Microsoft had not broken the rules. They also found that SKAT’s basis for calculating the monies owed by Microsoft was not good enough.

However, the court also ruled that the taxable income for the years 2004-2007 should be recalculated by SKAT.

SKAT was also ordered to pay costs of 1.5 million kroner to Microsoft.