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Introduction to transfer pricing in Sweden
Transfer pricing rules
- The arm’s length principle is laid down in Chapter 14, Section 19 of the Swedish Income Tax Act (1999:1229) and is often referred to as the 'adjustment rule' (Sw: Korrigeringsregeln). The adjustment rule is based on Article 9 of the OECD Model Tax Convention on Income and Capital and is interpreted in accordance with the principles presented in the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
- The adjustment rule provides support for the Swedish Tax Agency (STA) to adjust a company’s profit upwards, thereby increasing the company’s taxable income in Sweden where such profit has been reduced due to incorrect transfer pricing in cross-border transactions with related parties.
- The adjustment rule applies to Swedish taxpayers who engage in cross-border transactions with related parties. This also includes foreign companies with permanent establishments in Sweden, Swedish companies with permanent establishments abroad and Swedish unlimited partnerships.
- The Swedish tax laws on transfer pricing are normally interpreted based on the principles laid down in the OECD Guidelines. This is not explicitly stated in the Swedish legislation but is based on statements made by the Swedish Supreme Administrative Court (RÅ 1991 ref. 107).
- The preparatory work to the transfer pricing regulations also refers to the transfer pricing methods described in the OECD Guidelines. The authority guidelines issued by the STA also include references to the OECD Guidelines.
Transfer pricing methods
- The most appropriate pricing method providing the most reliable measure of an arm’s length result in each case should be selected on a transaction by transaction basis. The current OECD methods, namely the Comparable Uncontrolled Price Method, the Resale Price Method, the Cost Plus Method, the Transactional Net Margin Method and the Transactional Profit Split Method are all accepted methods according to the Swedish legislation. The method used must reflect the functional- risk-, and asset profile of the parties in the transaction. Other methods are allowed and can be used if deemed appropriate from an arm’s length perspective.
- There is no set hierarchy in applying the different methods. Swedish case law, however, refers to the OECD Guidelines where it is stated that, if the Comparable Uncontrolled Price Method (CUP Method) and another transfer pricing method can be applied in an equally reliable manner, the CUP method is to be preferred (paragraph 2.3).
- Sweden has a self-assessment regime where the corporate taxpayer is responsible for reporting the correct taxable income for the company in the corporate tax return. Transfer pricing is not specifically covered in the tax return but in order to mitigate the risk for tax penalties in case of an income adjustment, the taxpayer should enclose the transfer pricing documentation together with appropriate references made to specific sections in the documentation where the pricing issue subject to uncertainty is clearly described. The STA has issued a position paper (Dnr: 202 251680-18/111) covering the effect of transfer pricing documentation with respect to the decision to levy tax penalties, please see more under 'Penalties'.
Transfer pricing documentation
Preparation of transfer pricing documentation
- The Swedish documentation requirements generally follows the OECD Guidelines and state that transfer pricing documentation in Sweden shall consist of a Master file, a Local File and a Country by Country report (for larger groups).
- The deadline for preparing the Master File is the tax return filing date for the group parent company and the deadline for preparing the Swedish local country file is the tax return filing date for the Swedish company. There is no statutory filing requirement for transfer pricing documentation so the documentation should only be presented to the STA upon request. There are no penalties for non-compliance but, the taxpayer can get a relief from tax penalties if the transfer pricing documentation is attached to the corporate income tax return when filed, under certain circumstances, please see more under 'Penalties'.
- The purpose of the documentation is to provide the STA with the necessary information in order for the STA to conduct tax enforcement and transfer pricing risk assessment. Therefore, the documentation shall include information demonstrating that the taxpayer’s cross-border, intra-group transactions satisfy the arm’s length principle.
- The documentation can be prepared in Swedish, Danish, Norwegian or English.
- Sweden has also introduced Country by Country Reporting regulations which are effective for groups with revenues exceeding SEK 7 billion.
Master and local file
- Under the Swedish transfer pricing documentation regulation in the Swedish Tax Procedure Act (2011:1244) (STPA), the documentation shall consist of a Master File (Sw: 'koncerngemensam del') and a Local File (Sw: 'företagsspecifik del'), STPA Chapter 39, Section 16 b. More details on what shall be included in each transfer pricing documentation file is covered in the Swedish Tax Procedure Decree (2011:1261) (STPD), Chapter 9, Section 9 – 18.
- The Master File shall provide an overview of the group and its business operations (STPA Chapter 39, Section 16 b) and shall include the following (STPD Chapter 39, Section 10-14):
- Information about the group and its business operations, if necessary, described by each line of business;
- Organisational chart showing ownership structure and in which country each entity is domiciled and doing business;
- A general description about the group’s business operation(s), including:
- Important profit drivers
- A description of the transactions in the supply chain for the group’s five most sold products or services and other products or services for which the sales totals more than five percent of the group’s turnover.
- A description of the most important geographical markets for the products or services sold
- A list and brief description of important service arrangements between members of the group, other than research and development (R&D) services, including a description of the capabilities of the principal locations providing important services and transfer pricing policies for allocating services costs and determining prices to be paid for intra-group services
- A general functional analysis describing group member’s contributions to value creation including important functions, risks and assets used
- A general description of the group’s strategy on development, ownership and exploitation of intangible assets and location of R&D facilities and R&D management
- A list of intangible assets or groups of intangible assets which are important for transfer pricing purposes as well as which entity is the legal owner of such assets
- A list of important intra-group agreements covering intangible assets such as cost contribution agreements, R&D agreements and license agreements
- A general description of the group’s transfer pricing policy for R&D and intangible assets
- A general description of important transfers or license of intangible assets between related parties, which country the parties are domiciled and the total compensation for such transfers or licenses
- A general description of how the group is financed, including important financing agreements with independent lenders
- The identification of group members providing central financing functions for the group, including the country in which such members are domiciled and their effective place of management
- A general description of the group’s transfer pricing policy for financial transactions between related parties
- Group financial statements for the relevant financial year; and
- A list and brief description of any unilateral APAs and other tax rulings relating to the allocation of income among countries.
- The Local File shall provide information about the Swedish entity involved in the cross-border intra-group transaction(s) and about the transactions as such (STPA Chapter 39, Section 16 b) and shall including the following (STPD Chapter 9, Section 15-17):
- A description of the Swedish entity’s management, an sorganizational chart for the entity and information about to whom the local management reports and where these persons are employed
- A detailed description of the business operations, the entity’s business strategy, information about any business restructurings, transfer or license of intangible assets during the last 2 years and how such transactions (if any) have affected the company;
- Information about competitors
- The following information about each intra-group cross-border transaction:
- A description of the transaction and in which context they are entered
- Total amount of the transaction
- Parties to the transaction and how they relate to each other
- Copies of important agreements between the parties
- A detailed functional, asset and risk analysis together with a comparability analysis
- Information about the most appropriate transfer pricing method and why that method has been chosen
- Information about which companies that has been chosen as comparables and why these companies have been chosen
- A summary of important assumptions that have been made when applying the transfer pricing method
- An explanation why a multiple year analysis has been performed (if applicable)
- A list and description of selected internal or external comparable uncontrolled transactions, if any, and information on relevant financial indicators for independent enterprises relied on in the transfer pricing analysis, including a description of the comparable search methodology and the source of such information;
- A description of any comparability adjustments performed, and an indication of whether adjustments have been made to the results of the tested party, the comparable uncontrolled transactions, or both
- An explanation of why the transaction is deemed to be at arm’s length when applying the chosen transfer pricing method
- A summary of the financial information used when applying the transfer pricing method
- Copies of APAs and other tax rulings involving the transactions at hand in which the STA not is part.
- Financial statements for the relevant financial year
- A description of how the financial information used when applying the transfer pricing method is shown in the financial statements
- A summary of relevant financial information for the comparables that has been used in the analysis of the transaction and the source of such information.
- Information contained in the Master File does not need to be stated in the Local File if a reference is made in the Local File to the Master File (STPD Chapter 9, Section 18).
- Transfer pricing documentation must be preserved until the latest of seven years from the end of the accounting period (STPD Chapter 9, Section 19).
Some risk factors for challenge
- Persistent losses in 'low risk' entities (including permanent establishments in Sweden) will constitute a risk from a Swedish tax perspective. The STA will most likely analyse the transfer pricing policy of the Swedish entity, including the existence of Significant People Functions and may challenge loss-making positions if not fully supported by the functions-, risk- and asset analysis of the transaction.
- There are no penalties for not preparing transfer pricing documentation per se. Should a company be scrutinized by the STA resulting in additional tax for the taxpayer, penalties totaling 40% of the additional tax levied generally apply. However, STA is of the opinion that the penalties may be reduced in part or in full if the transfer pricing documentation together with a description of the intra-group transactions, the methods used and other relevant information about the specific transactions undertaken (open disclosure) has been provided to the STA when the company filed its corporate income tax return. STA’s opinion is stated in the position paper Dnr: 202 251680-18/111.
- STA’s view is that having transfer pricing documentation should result in relief of potential tax penalties by half if the following requirements are met:
- The taxpayer must submit transfer pricing documentation that fulfills the Swedish content requirements upon the STA’s request
- The documented transfer pricing policy should not deviate significantly from common international transfer pricing standards
- The taxpayer must have applied the documented policy and methods in practice.
Economic analysis and how to demonstrate an arm’s length result
- - Sweden follows the guidance contained in the OECD Guidelines regarding comparability analysis.
- There is no preference in Sweden for domestic comparables over foreign comparables.
- The use of an arm’s length range and/or statistical measure for determining arm’s length remuneration is commonly used.
- The STA does not use secret comparables for transfer pricing assessment purposes. There are no TP “safe harbors” or norms in the Sweden.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- Advance Pricing Arrangements (APAs) are mutual agreements between the STA (the Swedish Competent Authority is part of the STA) and a foreign jurisdiction’s competent authority, covering the pricing of cross-border intra-group transactions. The procedure is initiated by the taxpayer by sending a written application to the STA. The taxpayer will be given the opportunity to a meeting with the STA to discuss the APA prior to sending the application, should the taxpayer want to.
- Only bilateral and multilateral APAs are accepted in Sweden and the arrangements are entered under the Mutual Agreement Procedure (MAP) regime in the applicable tax treaty/treaties (OECD Model Tax Convention, Article 25). Thus, APAs are only available if there is a tax treaty in force between Sweden and the foreign tax jurisdiction(s).
- An APA application will be accepted and an APA may be reached if
- the application does not only cover issues of less complexity or minor transactions
- the transactions at hand can be analysed separately from other transactions that are not covered by the application
- the taxpayer provides the information necessary for the MAP and for a correct APA
- the necessary information can be provided by the foreign tax jurisdiction
- the transfer pricing method described in the APA, after potential adjustments, can be deemed to give an arm’s length result.
- Unilateral APAs are not accepted in Sweden.
- The charge for an APA is SEK 150,000 per country involved for the first application. The charge is reduced for any additional applications.
- Sweden has an extensive treaty network, and the MAP regime can be available if double tax occurs.
- There are exemptions from the transfer pricing documentation rules for smaller groups. For financial years starting on 1 April 2017 or later, a company is not liable to prepare transfer pricing documentation in accordance with the Swedish rules if, in the financial year prior to the tax year subject to review, the company is part of a group of related companies which has:
- less than 250 employees
- either has a turnover not exceeding SEK 450 million
- total assets not exceeding SEK 400 million.
- Further, transactions that are considered insignificant does not need to be documented. An assessment of whether a transaction is to be regarded as insignificant shall be done on a case-by-case basis. However, if the aggregated transaction value for all transactions between the Swedish entity and the foreign affiliate during the financial year under review has been less than SEK 5,000,000, the transactions are always considered insignificant. For intangible assets, the foregoing is true only if the intangible assets involved in the transaction do not pertain to the company’s core business.