Swedish Tax Agency proposes changed rules for transfer pricing documentation

The Tax Agency recently presented a proposal for changed rules for transfer pricing documentation. This proposal implies that the current rules for transfer pricing documentation will be adapted to the new OECD standards presented within the framework of BEPS Action 13 at the end of last year. Furthermore, the types of operations covered by this documentation obligation will be expanded but also, in certain cases, more limited.

The Tax Agency’s proposal implies that the documentation is to include two sections, a group-wide section (“Master File”) and a company-specific section (“Local File”). Furthermore, the proposal implies that groups with net sales in excess of seven billion krona are to provide additional information in a so-called Country-by-Country Report.

Companies subject to the documentation requirements

According to the Tax Agency’s proposal, the type of entities to be covered by the obligation of documentation is to be expanded, implying that also Swedish partnerships and foreign companies with a permanent establishment in Sweden, as well as Swedish companies with a permanent establishment abroad, are proposed to incur the obligation to prepare transfer pricing documentation.

Furthermore, it is proposed that small and medium-sized companies be exempt from the obligation to prepare documentation. By small and medium-sized companies is meant companies with fewer than 250 employees and who either have net sales less than SEK 450 million or a balance sheet total less than SEK 400 million. In other words, the following companies will be obliged to prepare transfer pricing documentation report:

• companies belonging to groups with more than 250 employees,
• companies belonging to groups who have fewer than 250 employees, but with either net sales in excess of SEK 450 million or a balance sheet total in excess of SEK 400 million.

Insignificant transactions will be exempt for those companies to be covered by the documentation requirement. By insignificant transactions is meant transactions less than SEK 5 million. However, licensing and transfer of intangible assets will always be covered by the documentation requirement, provided such licensing or transfer is not deemed insignificant to the operations.

Master File/Local File

A group’s Master File is to contain an overview of the group and its operations, which, for example, is to include important factors affecting profit generation, a description of the group’s products with the highest turnover, a specification of important geographical markets, a description of important group-wide service functions and details regarding intangible assets. Furthermore, a Local File is to be prepared for each legal entity. In each Local File, the focus is on a more detailed description of the company’s business strategy, detailed information regarding intra-group transactions which the company has undertaken during the year, details on functional and comparative analyses and a description of the applied pricing method.

The rules regarding the Master File/Local File are proposed to come into effect for the financial year beginning after 31 December 2016 and the documentation is to be in place when the income tax return is presented, and is to be presented to the Tax Agency on request.

Country-by-Country Report

Country-by-Country reports are to include, for example, information on revenues, profit before tax, paid income tax, number of employees and tangible fixed assets for each country in which the group undertakes operations. The information is to be compiled and presented to the Tax Agency each year. According to the major rule, the parent company in the group is responsible for presenting the report, but a subsidiary can be obliged to present the report if the reporting is not undertaken by the parent company. The Tax Agency estimates that approximately 75 Swedish groups will be obliged to present their reports to the Swedish Tax Agency.

The first reports are to be presented for the financial year following 31 December 2015. The reports are to be presented to the Tax Agency within one year from the end of the financial year to which the report refers. If groups fail to present reports, the rules on order for discovery and penalties for non-compliance will apply. Information shall be exchanged between countries based on an automatic exchange of information within 15 months from the end of the financial year in question.

Comments

For groups covered by the proposed new rules, it is important that they already now begin to prepare for the more extensive obligation of documentation. A first step can be comprised of a review of the current documentation in order to analyse how it needs to be adapted to be in line with the new requirements.

For the smaller groups who will no longer need to prepare transfer pricing documentation, it should be noted that even if the documentation does not need to be prepared annually, it will continue to be important, as it is today, to ensure that all intra-group transactions are upholding the arm’s length principle (i.e. priced at market level). Our recommendation is that smaller groups also continue to have documented transfer pricing policies describing that transactions are done at arm’s length basis.

It is also important for Swedish groups to determine if they are covered by the obligation to present a Country-by-Country Report. The groups included in this requirement should also review the internal systems in place in order to analyse if they can produce the required data. Furthermore, the groups covered by the Country-by-Country Report should analyse how the compiled information can be interpreted in those countries in which the group operates.