Maersk Oil and Gas A/S (later TotalEnergies EP Danmark A/S) continued to make operating losses, although the group’s combined oil and gas operations were highly profitable. Following an audit of Maersk Oil, the tax authorities considered that three items did not comply with the arm’s length principle. Maersk Oil incurred all the expenses for preliminary studies of where oil and gas could be found, but the results of these investigations and discoveries were handed over to the newly established subsidiaries free of charge. Licence agreements were signed with Qatar and Algeria for oil extraction. These agreements were entered into with the subsidiaries as contracting parties, but it was Maersk Oil that guaranteed that the subsidiaries could fulfil their obligations and committed to make the required technology and know-how available. Expert assistance (time writing) was provided to the subsidiaries, but these services were remunerated at cost with no profit to Maersk Oil. An assessment was issued where additional taxable income was determined on an aggregated basis as a share of profits from the activities – corresponding to a royalty of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decision and Maersk Oil and Gas A/S subsequently appealed to the High Court. In 2022, the High Court held that the subsidiaries in Algeria and Qatar owned the licences for oil extraction, both formally and in fact. In this regard, there was therefore no transaction. Furthermore the explorations studies in question were not completed until the 1990s and Maersk Oil and Gas A/S had not incurred any costs for the subsequent phases of the oil extraction. These studies therefore did not constitute controlled transactions. The Court therefore found no basis for an annual remuneration in the form of royalties or profit shares from the subsidiaries in Algeria and Qatar. On the other hand, the Regional Court found that Maersk Oil and Gas A/S’ so-called performance guarantees for the subsidiaries in Algeria and Qatar were controlled transactions and should therefore be priced at arm’s length. In addition, the Court found that technical and administrative assistance (so-called time writing) to the subsidiaries in Algeria and Qatar at cost was not in line with what could have been obtained if the transactions had been concluded between independent parties. These transactions should therefore also be priced at arm’s length. The High Court referred the cases back to the tax authorities for reconsideration. An appeal was then filed by the tax authorities with the Supreme Court. Judgement of the Supreme Court The Supreme Court decided in favour of the tax authorities and upheld the original assessment. The court stated that the preliminary exploration phases in connection with oil exploration and performance guarantees and the related know-how had an economic value for the subsidiaries, for which an independent party would require ongoing payment in the form of profit share, royalty or the like. They therefore constituted controlled transactions. Furthermore, the court stated that Maersk Oil and Gas A/S’ delivery of timewriting at cost price was outside the scope of what could have been achieved if the agreement had been entered into at arm’s length. Finally, the transactions were considered to be so closely related that they had to be assessed and priced on an aggregated basis and Maersk Oil and Gas A/S had not provided any basis for overturning the tax authorities’ assessment. Click here for English translation Click here for other translation ...

A Danish parent in the Maersk group’s oil and gas segment, Maersk Oil and Gas A/S (Mogas), had operating losses for FY 1986 to 2010, although the combined segment was highly profitable. The reoccurring losses was explained by the tax authorities as being a result of the group’s transfer pricing setup. “Mogas and its subsidiaries and branches are covered by the definition of persons in Article 2(1) of the Tax Act, which concerns group companies and permanent establishments abroad, it being irrelevant whether the subsidiaries and branches form part of local joint ventures. Mogas bears the costs of exploration and studies into the possibility of obtaining mining licences. The expenditure is incurred in the course of the company’s business of exploring for oil and gas deposits. The company is entitled to deduct the costs in accordance with Section 8B(2) of the Danish Income Tax Act. Mogas is responsible for negotiating licences and the terms thereof and for bearing the costs incurred in this connection. If a licence is obtained, subsequent expenditure is borne by a subsidiary or branch thereof, and this company or branch receives all revenue from extraction. Mogas shall ensure that the obligations under the licence right towards the State concerned (or a company established by the State for this purpose) and the contract with the independent joint venture participants are fulfilled by the local Mogas subsidiary or permanent establishment. Mogas has revenues from services provided to the subsidiaries, etc. These services are remunerated at cost. This business model means that Mogas will never make a profit from its operations. It must be assumed that the company would not enter into such a business model with independent parties. It should be noted that dividend income is not considered to be business income.” According to the tax authorities Mogas had provided know-how etc. to the subsidiaries in Algeria and Qatar and had also incurred expenses in years prior to the establishment of these subsidiaries. This constituted controlled transactions covered by the danish arm’s length provisions. Hence an estimated assessment was issued in which the additional income corresponded to a royalty rate of approximately 1,7 % of the turnover in the two subsidiaries. In 2018, the Tax Court upheld the decisions and Mogas subsequently appealed to the regional courts. Judgment of the Regional Court The Regional Court held that the subsidiaries in Algeria and Qatar owned the licences for oil extraction, both formally and in fact. In this regard, there was therefore no transaction. Furthermore the explorations studies in question were not completed until the 1990s and Mogas had not incurred any costs for the subsequent phases of the oil extraction. These studies therefore did not constitute controlled transactions. The Court therefore found no basis for an annual remuneration in the form of royalties or profit shares from the subsidiaries in Algeria and Qatar. On the other hand, the Regional Court found that Mogas’s so-called performance guarantees for the subsidiaries in Algeria and Qatar were controlled transactions and should therefore be priced at arm’s length. In addition, the Court found that technical and administrative assistance (so-called time writing) to the subsidiaries in Algeria and Qatar at cost was not in line with what could have been obtained if the transactions had been concluded between independent parties. These transactions should therefore also be priced at arm’s length. As a result, the Court referred the cases back to the tax authorities for reconsideration. Excerpts “It can be assumed that MOGAS’s profit before financial items and tax in the period 1986-2010 has essentially been negative, including in the income years in question 2006-2008, whereas MOGAS’s profit including financial items, including dividends, in the same period has been positive, and the Regional Court accepts that income from dividends cannot be regarded as business income in the sense that dividends received by MOGAS as owner do not constitute payment for transactions covered by section 2 of the Tax Act. However, the Regional Court considers that the fact that MOGAS’s profit before financial items and tax for the period 1986-2010 has been essentially negative cannot in itself justify allowing the tax authorities to make a discretionary assessment.” “As stated above, the performance guarantees provided by MOGAS and the technical and administrative assistance (timewriting) provided by MOGAS constitute controlled transactions covered by Article 2 of the Tax Code. The performance guarantees, which are provided free of charge to the benefit of the subsidiaries, are not mentioned in the transfer pricing documentation, and the Regional Court considers that this provides grounds for MOGAS’s income relating to the performance guarantees to be assessed on a discretionary basis pursuant to Section 3 B(8) of the Tax Control Act currently in force, cf. Section 5(3).” “Already because MOGAS neither participates in a joint venture nor acts as an operator in relation to oil extraction in Algeria and Qatar, the Court considers that MOGAS’ provision of technical and administrative assistance to the subsidiaries is not comparable to the stated industry practice or MOGAS’ provision of services to DUC, where MOGAS acts as an operator. Against this background, the Regional Court considers that the Ministry of Taxation has established that MOGAS’ provision of technical and administrative assistance (timewriting) to the subsidiaries at cost price is outside the scope of what could have been obtained if the agreement had been concluded between independent parties, cf. tax act Section 2 (1).” Only part of the decision have been published. Click here for English translation Click here for other translation ...

The implication for the behaviour of the tax administration and the taxpayer of the rules governing burden of proof should be taken into account. For example, where as a matter of domestic law the burden of proof is on the tax administration, the taxpayer may not have any legal obligation to prove the correctness of its transfer pricing unless the tax administration makes a prima facie showing that the pricing is inconsistent with the arm’s length principle. Even in such a case, of course, the tax administration might still reasonably oblige the taxpayer to produce its records that would enable the tax administration to undertake its examination. In some countries, taxpayers have a duty to cooperate with the tax administration imposed on them by law. In the event that a taxpayer fails to cooperate, the tax administration may be given the authority to estimate the taxpayer’s income and to assume relevant facts based on experience. In these cases, tax administrations should not seek to impose such a high level of cooperation that would make it too difficult for reasonable taxpayers to comply ...

Like examination practices, the burden of proof rules for tax cases also differ among OECD member countries. In most jurisdictions, the tax administration bears the burden of proof both in its own internal dealings with the taxpayer (e.g. assessment and appeals) and in litigation. In some of these countries, the burden of proof can be reversed, allowing the tax administration to estimate taxable income, if the taxpayer is found not to have acted in good faith, for example, by not cooperating or complying with reasonable documentation requests or by filing false or misleading returns. In other countries, the burden of proof is on the taxpayer. In this respect, however, the conclusions of paragraphs 4.16 and 4.17 should be noted ...

GW Logistics was engaged in the activity of transport management (shipping and Logistics) and a member og the German Gebrüder Weiss Group. The tax authorities carried out an audit of the tax returns for the years 2010-2011 and increased GW Logistics’s taxable profit by HUF 189 159 000 for 2010 and by HUF 53 373 000 for 2011, because of the difference between the consideration paid by the applicant for related party transactions and the open market price. Since GW Logistics had not prepared transfer pricing documentation for its maritime transport activities in 2010 and 2011, the tax authority imposed a default fine of HUF 1 500 000. The tax authority applied the TNMM method to determine the arm’s length profitability. In the course of the audit, the tax authority informed GW Logistics that the data provided were not suitable for obtaining transaction-level profitability information. According to GW Logistics, its controlling system was not capable of providing the breakdown requested for each transaction and, as a result, the tax authority concluded that there was insufficient data to determine accurately the amount of related expenses attributable to the turnover from related parties. The tax authorities therefore applied an estimation procedure to determine the deviation from the arm’s length price. Not agreeing with the assessment GW Logistics filed an appeal. It argued that the tax authority failed to take into account all the facts and circumstances relating to the activity under investigation and thus failed to fulfil its obligation to make a factual assessment. The court of first instance decided in favor of the tax authorities. GW Logistics then filed an appeal with the Court of Appeal claiming among other issues that a correct reference to the legal basis for the estimated assessment was missing in the decision. Judgement of the Court of Appeal The Court remanded the case to the court of first instance. Excerpts “Estimation is a method of proof which, in accordance with the law, establishes a probable basis for the actual tax or budgetary support. The tax authority shall prove that the conditions for the application of the estimate are met and that the data, facts and circumstances on which the estimate is based and the methods used in the estimate are likely to provide a basis for the tax [old Art. 108 (1) to (2)]. Paragraph 108(3)(a) to (e) of the old Art. specifies the cases in which an estimate may be used, such as when the tax or budget support base cannot be established; when the data, facts or circumstances available to the tax authority, which may be considered significant because of their number or content, give rise to reasonable grounds to believe that the taxpayer’s records are not suitable for establishing the actual tax or budget support base; or when the individual has made false, incomplete or omitted to make a declaration or declaration, etc.” “In the application for review, the defendant argued that the limits of the application had been exceeded in the judgment of the court of first instance. Although the legal basis for the estimate was indeed disputed by the applicant in its application, it did not challenge the lack of a legal basis in this regard. However, it is of primary importance that the content of the final decision of the tax authority clearly states why the tax authority considered that there was a legal basis for the estimate and that the final decision also describes in detail the method of the estimate. Therefore, the Curia is of the opinion that the mere absence of a reference to the provisions of Article 108 (3) of the old Art. 339 (1) of the Old Law, the Court of First Instance has no jurisdiction to set aside the nullity of the final decision of the Court of First Instance only in the case of a procedural violation affecting the merits of the case, whereas the procedural violation referred to did not affect the merits of the present case in any way.” “As a result of the above, the Curia set aside the final judgment on the basis of Article 275 (4) of the old Civil Code and ordered the court of first instance to initiate new proceedings and issue a new decision. In the new proceedings, the court of first instance must review the final decision of the tax authority on the merits. It must rule on whether the tax authority chose the correct method for determining the arm’s length price. It must also determine whether, in determining the arm’s length price for transactions with related undertakings, the tax authority lawfully chose to examine separately the road haulage activity and the multi-modal sea and air transport activity, whether the legal basis for the estimate in this area existed and whether the method of estimation complied with the legal requirements, and whether, on the basis of all of these factors, a default penalty was lawfully imposed.” Click here for English translation Click here for other translation ...

The implication for the behaviour of the tax administration and the taxpayer of the rules governing burden of proof should be taken into account. For example, where as a matter of domestic law the burden of proof is on the tax administration, the taxpayer may not have any legal obligation to prove the correctness of its transfer pricing unless the tax administration makes a prima facie showing that the pricing is inconsistent with the arm’s length principle. Even in such a case, of course, the tax administration might still reasonably oblige the taxpayer to produce its records that would enable the tax administration to undertake its examination. In some countries, taxpayers have a duty to cooperate with the tax administration imposed on them by law. In the event that a taxpayer fails to cooperate, the tax administration may be given the authority to estimate the taxpayer’s income and to assume relevant facts based on experience. In these cases, tax administrations should not seek to impose such a high level of cooperation that would make it too difficult for reasonable taxpayers to comply ...

Like examination practices, the burden of proof rules for tax cases also differ among OECD member countries. In most jurisdictions, the tax administration bears the burden of proof both in its own internal dealings with the taxpayer (e.g. assessment and appeals) and in litigation. In some of these countries, the burden of proof can be reversed, allowing the tax administration to estimate taxable income, if the taxpayer is found not to have acted in good faith, for example, by not cooperating or complying with reasonable documentation requests or by filing false or misleading returns. In other countries, the burden of proof is on the taxpayer. In this respect, however, the conclusions of paragraphs 4.16 and 4.17 should be noted ...