The Administrative Court of Appeal’s (“kammarrätten”) judgment contradicts the Swedish Tax Agency’s guidance on the significance of a company’s transfer pricing documentation for the decision on tax surcharges. We comment on the case below.
In the case, a parent company (“the Company”) whose primary business consists of owning and managing approximately twenty subsidiaries, provided shareholder and intragroup services to its subsidiaries, such as administration, IT, marketing etc. The intragroup services were not invoiced according to the correct allocation key. However, it is not a dispute regarding the allocation key (i.e. the transfer pricing) that is the focus of this article, but rather the role transfer pricing documentation plays in potentially reducing tax surcharges.
The Company had fulfilled its documentation requirement, and the Swedish Tax Agency consequently deemed it unreasonable to impose the full tax surcharge. However, the Swedish Tax Agency only granted a reduction to 50 percent as no other reason for further reduction was found. The Company did not agree with the Swedish Tax Agency’s view and claimed the right to full exemption or, alternatively, a reduction to 5 percent. The claim for further reduction was based on the Company having fulfilled its documentation requirement, which was also acknowledged by the Swedish Tax Agency.
In this context, it is worth noting that the government bill (Proposition 2010/11:165) states that “the fixed levels of partial exemption from tax surcharges is removed” and at the same time that “fixed reference points must exist for different types of cases” to achieve consistency in practice. In contrast to the government bill, the Swedish Tax Agency only granted a reduction to 50 percent, which was based on their guidance (“ställningstagande”) titled “The significance of a company’s transfer pricing documentation for decisions on tax surcharges”. In the guidance, the Swedish Tax Agency states that in the case of incorrectly submitted information in the income tax return, where transfer pricing documentation has been prepared and covers the transactions that the Swedish Tax Agency’s correction concerns, the tax surcharge can only be reduced to 50 percent.
The question of relevance for this article is whether there are grounds to grant exemption from tax surcharges by more than 50 percent, based on the fact that the transfer pricing documentation requirement had been fulfilled.
The courts’ decisions
In its judgment, the Administrative Court (“förvaltningsrätten”) elaborately discussed the importance of transfer pricing documentation and the potential exemptions from tax surcharges. The Administrative Court determined that the Company had fulfilled its documentation requirement. Further, the Administrative Court emphasised the importance of the Company’s prepared transfer pricing documentation, stating that “the law’s preparatory work indicates that the fact that documentation exists but an adjustment still has to be made, should be taken into account in the question of full or partial exemption from the tax surcharge”. The Administrative Court also stated that the legislator appeared to be of the opinion that it is particularly mitigating that the Company had not been careless with its transfer pricing documentation. Accordingly, the Administrative Court concluded that the tax surcharge should be reduced to 25 percent.
The Administrative Court of Appeal’s judgment was relatively short but in line with that of the Administrative Court: “According to the Administrative Court of Appeal, even if the tax issue [regarding the allocation key] cannot be considered difficult, the circumstances should be deemed such that it is reasonable to grant exemption from the tax surcharge down to one quarter.” Lastly, the Administrative Court of Appeal addressed the Swedish Tax Agency’s guidance, stating that “the fact that the Swedish Tax Agency’s guidance states something else [regarding the exemption from tax surcharges] does not give rise to any other assessment.”
The Administrative Court of Appeal thus concluded that it was reasonable to grant exemption from that tax surcharge down to 25 percent.
The judgment contradicts the Swedish Tax Agency’s guidance, and thus departs from the latter’s claim that tax surcharges can only be reduced to 50 percent, when incorrect information has been provided in the income tax return, and transfer pricing documentation has been prepared and covers the transactions that the Swedish Tax Agency’s correction concerns. We welcome the Administrative Court of Appeal’s judgment, and view positively upon its nuanced take in response to the Swedish Tax Agency’s restrictive view of the law’s preparatory work
The Swedish Tax Agency has not appealed the Administrative Court of Appeal’s ruling that has now entered into force. At the same time, we note that the Swedish Tax Agency has not updated their guidance with respect to the judgment.
In conclusion, our continued recommendation is that companies obligated to prepare transfer pricing documentation should fulfill their obligation and carry out this work thoroughly - especially since the quality of the Company's transfer pricing documentation was a prerequisite for reducing the tax surcharge to 25 percent.