Sweden: Commentary on transfer pricing documentation, country-by-country legislative proposals

Sweden: Transfer pricing documentation, CbC proposals

Sweden’s tax agency submitted draft legislation to the Ministry of Finance for purposes of implementing new documentation standards for transfer pricing and for the automatic exchange of country-by-country (CbC) reports, pursuant to the OECD’s base erosion and profit shifting (BEPS) Action 13.

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The draft law in Sweden includes proposals that would:

  • Clarify the concept of “unity of interests”
  • Introduce documentation requirements for foreign companies with a permanent establishment in Sweden, for Swedish enterprises with permanent establishments abroad, and Swedish partnerships
  • Specify which entities would be required to prepare documentation

An initial description of the proposals was provided in early May 2016. Read TaxNewsFlash-Transfer Pricing. The following discussion provides more detail about the proopsals and focuses on a number of measures.

Documentation

The proposals of Sweden’s tax agency are in line with the OECD’s recommendations, and provide that the documentation will be comprised of a Master file for the whole group, country-specific documentation for each country in which the company operates locally (the Local file), and a country-by-country (CbC) report.

The Swedish tax agency proposes that:

  • CbC reports would be filed by 31 December 2017, but would relate to fiscal years beginning on or after 1 January 2016
  • The new documentation requirements (Master file and Local file) would  apply for fiscal years beginning on or after 1 January 2017

The draft legislation also includes rules for governing the automatic exchange of CbC reports between EU Member States, and those countries that have signed the multilateral agreement for the exchange of CbC reports.

The proposals would extend the documentation requirements to include foreign enterprises with a permanent establishment in Sweden, Swedish enterprises with permanent establishments abroad, and Swedish partnerships.

A partnership would be required to have documentation only if it engages in transactions with a foreign enterprise, and the partnership’s earnings are taxed in the hands of a Swedish enterprise that shares a ”unity of interests” with both the partnership and the foreign enterprise. The duty to prepare documentation would be that of the partnership, not the partners.

”Unity of interests”

It is proposed that the term “unity of interests” be clarified and incorporated in Sweden’s tax procedure law—instead of a reference being made to Chapter 14, section 20 of Sweden’s income tax law. It has been proposed that the new definition of “unity of interests” would include “enterprises that are a parent and subsidiary or enterprise under largely the same management.” The term would cover both permanent establishments and Swedish partnerships. If the economic unity of interests can be attributed solely to the direct or indirect capital holdings that an enterprise has in one or more other enterprises, the transactions would only have to be documented if the stake at each stage exceeds a 50% interest.

Exemptions

Under the proposals, enterprises would be exempt from the documentation requirement if, during the preceding fiscal year, they belong to a unity of interests having fewer than 250 employees, and either having revenues not exceeding SEK 450 million or total assets of not more than SEK 400 million.

It is proposed that enterprises subject to the documentation requirement would not need full documentation for “immaterial” transactions—that is, transactions that are insignificant in cash terms or do not involve a risk of incorrect pricing. This exemption means the documentation would not need to include details of the transactions (e.g., a comparability analysis and a description of the chosen pricing method). However, the requirement to provide general information about the enterprise and its business would apply, as would the requirement to disclose transactions with other intra-group enterprises.

Whether transactions are “immaterial” would be assessed in each situation. Transactions relating to the enterprise’s main business or involving large values could not be considered immaterial unless they are below a threshold of SEK 5 million. The tax agency proposed that transactions involving sums of less than SEK 5 million would always be considered immaterial. Also, the exemption would not apply to transactions involving intangibles.

Swedish enterprises, partnerships or permanent establishments that do not need to prepare transfer pricing documentation nonetheless would have to set the price of all intra-group transactions at fair market rates.

Country-by-country (CbC) reporting

The purpose of CbC reporting would be to provide EU Member States with information so that each country could assess the risks of incorrect pricing by multinational groups of enterprises. The draft law in Sweden provides that multinational groups that have revenue in the preceding fiscal year exceeding SEK 7 billion would have to file certain information every year for each tax jurisdiction where they operate. The parent company of a multinational group would be required to file CbC reports with the tax authorities in the country where the group operates. The term “parent company” means an enterprise (entity) that directly or indirectly owns a stake in one or more enterprises such that it is required to prepare consolidated financial statements. The principles governing parent enterprises reflect those used in the Sweden’s annual accounting law.

If the country where the parent comapny is domiciled has no requirements for CbC reporting, or if the tax authorities in that country do not share CbC reporting with the Swedish tax agency, the Swedish subsidiary may be required to file the CbC reports—instead of the parent.

Note that under the legislative proposals, Swedish companies would notify the Swedish tax agency at the end of 2016 about which group company would be filing the CbC report for the group.

KPMG observation

Given the draft legislation in Sweden, foreign enterprises with permanent establishments in Sweden, Swedish companies with permanent establishments abroad, and Swedish partnerships need to review their transactions and consider whether they need to prepare transfer pricing documentation. The documentation requirements for permanent establishments would affect not only the income attributed to permanent establishments in Sweden—but also the computation of foreign tax and tax credit issues for Swedish enterprises with permanent establishments abroad.

Although Swedish enterprises, partnerships, and permanent establishments would not have to prepare transfer pricing documentation, all intra-group transactions would need to happen under fair market terms. It would still be possible for the Swedish tax agency to make adjustments to taxable earnings in instances when there is incorrect transfer pricing.

It is proposed that CbC reporting will apply as of FY 2016 and the new documentation requirements as of FY 2017. This time difference, notwithstanding, it is prudent that the transfer pricing documentation of multinational enterprises is reflected in the CbC reporting, and that the CbC reporting is reflected in the group’s Master file and Local files. The documentation package must form a consistent whole.

The OECD standard sets the threshold for exemption from the CbC reporting requirement at €750 million. It has been observed that Sweden’s proposals specify a fixed amount of SEK 7 billion, unrelated to the OECD threshold. A threshold fixed in Swedish kronor could render a Swedish parent of a group exempt from filing a CbC report if the group’s revenues are less than SEK 7 billion, whereas foreign subsidiaries (established in countries where the threshold is fixed in euros) would be required to file a CbC report if group revenues exceed €750 million. As of 24 May 2016, SEK 7 billion equals approximately €755 million.

The draft legislation does not reflect certain OECD definitions, and some have observed that it is essential that Sweden does not create its own definitions. There are still some ambiguities concerning the meanings of certain terms. For instance, the item “stated capital” is one as used in CbC reporting rules. Commentary on the draft legislation in Sweden provides that subscribed share capital or paid-up share capital are likely to be appropriate terms.

What’s next?

The Ministry of Finance began a consultation on the draft legislation in early May 2016, involving a number of government agencies and private sector entities. Consultation responses are to be submitted by 10 June 2016. The response time is short (according to soem, probably because of a desire for legislation to be enacted by 1 January 2017).

 

Read a May 2016 report prepared by the KPMG member firm in Sweden: Detailed Commentary on the Swedish Tax Agency’s Transfer Pricing and CbC Proposals

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