Iceland’s First Transfer Pricing Court Case: Key Lessons for Multinational Enterprises

In a landmark development, Iceland has delivered its first-ever court ruling on transfer pricing.

It is important to use consistent transfer pricing methods. Companies should also conduct proactive risk assessments. This is especially true for multinational businesses involved in controlled transactions.

This case shows how tax authorities around the world are raising standards. They want better compliance with the arm’s length principle. They also require more documentation and stricter transfer pricing rules. This is part of the OECD’s economic cooperation efforts.

Background: Setting the Scene

The taxpayer operated a processing plant in Iceland, harvesting and drying algae for its Irish parent company.

Between 2016 and 2020, the Icelandic entity reported repeated losses and critically lacked proper transfer pricing documentation.

Key facts:

• The taxpayer applied the Cost-Plus Transfer Pricing Method (CPM), using a 50% markup over variable production costs (excluding labor and depreciation).
• However, a separate benchmarking based on the Transactional Net Margin Method (TNMM) showed a very broad profit margin range (4.8%–93.8%) among comparable unrelated parties.

Observation 1:

The use of CPM for setting prices but TNMM for testing outcomes always requires attention.

Although commonly observed on the market, the difference between price setting and outcome testing methodology should be properly explained and justified. In practice, it will not always be possible to directly test the initial price setting – as an example, take profit split, where you have to apply some “rough justice” in the price setting phase (paying lump sums based on a budget, say), whereas the outcome testing will apply a different methodology (full reconciliation of consolidated profits).

Tax Assessment: The Adjustment

In 2021, Iceland’s Director of Internal Revenue Service (DIR) made a major transfer pricing adjustment:

• Increased taxable income by ISK 488 million (~USD 3.6 million),
• Applied significant penalties for non-compliance.

DIR argued:

• The operational structure aimed to shift profits away from Iceland, reducing taxable income improperly,
• The cost base should have included labor and depreciation, while maintaining the 50% markup.

Observation 2:

Expanding a cost base without adjusting the markup complicates comparability. It becomes extremely difficult to find comparable unrelated party transactions with financial data detailed enough for reliable benchmarking. This case highlights why TNMM is so popular as a method, as opposed to traditional methods that focus on gross margins, because net margins generally exhibit a much larger degree of consistency across various accounting conventions (GAAPs).

Appeal and Court Decision

The taxpayer contested the DIR’s adjustment, raising procedural and substantive challenges:

• Procedural: Claimed the DIR violated principles of proportionality.
• Substantive: Argued misclassification of costs, improper emphasis on labor/depreciation, and disregard for relevant comparable transactions.

Court Verdict:

• Procedural objections dismissed: The court upheld the tax authority’s methods under Icelandic law.
• Substantive objections rejected: The court agreed that more profit should be allocated to the Icelandic entity due to its critical role in functions, assets, and risks.

Observation 3:

The court shifted the burden of proof onto the taxpayer.

Remarkably, the tax authorities imposed an adjustment without presenting their own benchmark study—something that would face heavier scrutiny under transfer pricing rules in jurisdictions like the United States or broader OECD economic co-operation standards.

Lessons for Multinational Enterprises

This landmark decision offers important lessons:

1. Strong Transfer Pricing Documentation is Essential

Properly documenting controlled transactions and linking them to the arm’s length principle protects companies during audits and legal proceedings.

2. Proactive Transfer Pricing Risk Management

Given the rising aggressiveness of tax authorities, MNEs must conduct internal transfer pricing risk assessments and maintain updated transfer pricing documentation including master files, local files, and Country-by-Country Reports.

3. Understand Global Transfer Pricing Regulations

Tax environments are tightening. Ignoring evolving transfer pricing regulations across multiple tax jurisdictions risks penalties, adjustments, and reputational damage.

How Reptune Simplifies Compliance

Managing complex intercompany transactions, applying the right transfer pricing method, and ensuring audit-ready documentation demands modern, automated tools.

Reptune empowers multinational corporations by:

• Automating preparation of transfer pricing reports aligned with OECD guidelines,
• Centralizing management of functions, assets, and risks across legal entities,
• Generating compliant master file, local file, and Country-by-Country Report outputs,
• Supporting real-time transfer pricing risk assessment and documentation for global tax authorities.

In today’s environment, relying on manual spreadsheets is no longer sufficient. Automation ensures readiness for all audits and compliance reviews.

Conclusion

Iceland’s first transfer pricing court case demonstrates that tax authorities are becoming stricter in enforcing transfer pricing rules globally.

Multinational enterprises must adopt a structured, proactive approach to document controlled transactions and align operations with the arm’s length principle.

With solutions like Reptune, companies can efficiently manage intercompany transactions, maintain robust transfer pricing documentation, and confidently face the rising demands of global tax jurisdictions.

Book a demo today and future-proof your global transfer pricing compliance!