Indicating an increased focus on transfer pricing in 2012, the tax authorities will strengthen the transfer pricing staff by 15 new professionals—an increase of approximately 23% in personnel resources.
A transfer pricing-status report from the tax authorities does not describe any particular reasons for the dramatic increase in income adjustments, but the intensified focus on transfer pricing during the recent years and the increasing income adjustments must be viewed in connection with each other.
The Norwegian tax authorities follow closely the transfer pricing developments in the OECD and in other jurisdictions—both in terms of new regulations and areas of focus.
The following discussion provides an update of transfer pricing-related activities in Norway.
From the income year 2011, companies must report if they take part in a cash pool arrangement. This is a change due to the court of appeals decision in the ConocoPhilips case. In brief, the court of appeals concluded that a company in a cash pool must receive a reasonable interest on its deposits, and there must also be a balance of benefits from the cash pool. If the cash pool does not offer any advantages for the Norwegian company, it will be regarded as an income reduction.
In addition, the Directorate of Taxes has requested the Ministry of Finance to consider new regulations which may limit the deductibility of interest expenses.
Areas of focus
In the report for 2011, the tax authorities point out three areas of special focus in 2012.
- Transfer pricing of dry gas
- Foreign banks and permanent establishment in Norway
- Companies with persistent deficits
In addition, the Norwegian tax authorities will continue to focus on financial transactions, business restructurings, and intra-group transactions concerning intangible assets.
Regarding permanent establishment (PE) of foreign banks, the tax authorities will focus on:
- The size of distributable reserves
- Allocation of loan debtors
- The interest rate on loans to the PE, with reference to credit rating
- Intra-group services
Regarding companies with “persistent deficit,” the tax authorities will view persistent deficits as an indicator for increasing income to an arm’s length level, based on benchmarking analysis.
In their report, the tax authorities refer to the OECD Guidelines sec. 1.70 –
...an independent enterprise would not be prepared to tolerate losses that continue indefinitely. An independent enterprise that experiences recurring losses will eventually cease to undertake business on such terms. In contrast, an associated enterprise that realizes losses may remain in business if the business is beneficial to the MNE group as a whole.
The opinion of tax professionals in Norway is that there is a significant risk that companies with persistent deficits for recent years will be subject to further tax investigations.
MAPs / APAs
The Norwegian competent authorities settle a total of eight Mutual Agreement Procedures (MAP) during 2011.
It is expected that the tax authorities will enter into “pilot” advance pricing agreements (APAs) during 2012.
- The Norwegian Supreme Court in December 2011 concluded in Dell that the Norwegian subsidiary did not constitute a permanent establishment, and therefore set aside re-assessments made by the tax authorities. See TaxNewsFlash-Transfer Pricing: Marketing activities of Norwegian subsidiary held not to be agency permanent establishment of Irish sales company
- The Supreme Court in June 2011, in Allseas, concluded that the total gross income of a Swiss company from activities on the Norwegian continental shelf was taxable under the Norwegian petroleum tax regulations—i.e., the income was allocated to the Norwegian permanent establishment (PE). The Supreme Court rejected the contention that costs could be split between the headquarters in Switzerland and the Norwegian PE.
- The court of appeals in March 2012, in the Total case did not disagree with a re-assessment made by the Oil Taxation Office with regards to the transfer price of “wet gas” (LPG and butan). In this case, the tax authorities used secret comparables in its re-assessment, and the taxpayer argued that it was not given an adequate opportunity to defend its own position and that such an approach was not in adherence with the adversarial principle.
Transfer pricing remains an important area of focus for the Norwegian tax authorities. For instance, the significant increase in the total amount of transfer pricing adjustments from 2010 to 2011 serves to illustrate just how important it is for taxpayers to comply with the transfer pricing documentation rules.
The tax authorities’ report for 2011 clearly indicates that a further increased focus on transfer pricing will follow in 2012, and tax professionals expect that the number of transfer pricing court cases will also increase during 2012 and 2013.
For more information, contact a member of KPMG’s Global Transfer Pricing Services group in Norway:
Marius Basteviken, Tax Director
+ 47 4063 9032
Per Daniel Nyberg, Tax Manager
+ 47 4063 9265