FAQ

Transfer pricing refers to the pricing of cross-border transactions (supply of goods, provision of services, licensing and transfers of intangibles and financing) between associated enterprises. Swedish and global transfer pricing rules require that terms and conditions entered into between associated enterprises are aligned with the arm’s length principle. In essence, when entities within a Multinational Group transact with one another it must be ensured that marketable prices are applied.

Transfer Pricing is a focus area for tax authorities around the world. When transfer pricing does not reflect market forces and the arm’s length principle, the tax liabilities of the associated enterprises and the tax revenues of the host jurisdictions can be distorted. Incorrect management of your transfer pricing can lead to lengthy tax audits and legal processes, income- and tax adjustments, penalties, interest and double taxation.

From a transfer pricing perspective, profit allocation is determined based on the functions performed, the risks assumed and the assets employed and contributed by the associated enterprises to an intra-group transaction. The more value-adding functions performed, the more risks assumed and the more assets contributed, the more of the profits/losses from the sales to external customers should be allocated to that entity(ies).

When allocating profits/losses and pricing intra-group transactions, it is essential to understand the group’s key value drivers and who controls them. A transfer pricing analysis therefore begins with identifying who does what and where, what significant risks the entities are exposed to and who controls them, and what valuable intangibles and other assets that are contributed.

Several transfer pricing methods can be used to price intra-group transactions. The selection of transfer pricing method is based on the value created by the parties to an intra-group transaction. Accepted transfer pricing methods are:

• The Comparable Uncontrolled Price Method,
• The Cost Plus Method,
• The Resale Price Method,
• The Transactional Net Margin Method, and
• The Transactional Profit Split Method.

In Sweden, companies that carry out transactions with associated enterprises must, in certain circumstances, prepare transfer pricing documentation. The documentation must be prepared annually and finalized by the Swedish income tax return filing deadline, but is only submitted to the Swedish Tax Agency upon request.

Small and medium-sized entities are exempt from transfer pricing documentation requirements but must still adhere to transfer pricing regulations. The exemption applies to companies that have:

• Fewer than 250 employees, and either
• An annual turnover not exceeding MSEK 450, or
• A balance sheet total not exceeding MSEK 400.

Groups with more than MEUR 750 in annual turnover must also prepare and submit a country-by-country report (CbCR). Swedish entities part of such groups must also submit an annual CbCR notification to the Swedish Tax Agency,

Evidencing that you have applied arm’s length transfer prices is key irrespective if you are exempt from documentation requirements. Preparing a simplified transfer pricing documentation and maintaining relevant intra-group agreements and other materials supporting your transfer pricing policy are therefore recommended and will assist you in a potential audit.

A tax audit starts with the receipt of an audit notice in which the subject matter of the audit, e.g. transfer pricing, is detailed. The Swedish Tax Agency typically requests some initial materials, and a first meeting is held with the Swedish Tax Agency during which it gathers both written and oral information. The Swedish Tax Agency thereafter generally conducts a desktop review of relevant materials, such as annual reports, transfer pricing documentation, intra-group agreements and other supporting material. The Swedish Tax Agency verifies that the submitted material reflects the actual conduct of the parties and that the applied transfer pricing method is reasonable, typically through follow-up questions and, when necessary, interviews with relevant personnel.

Tax audits are often triggered by changes in financial performance, ownership changes or when the Swedish Tax Agency receives information about reportable cross-border arrangements.

Transfer Pricing plays a critical role in integration planning, the realization of acquisition synergies and in the post-acquisition strategy. Integration of acquired entities into your operating model can lead to shifts in decision-making with either a gradual or immediate transfer of intangibles and ultimately where value is deemed to be created. Being aware of the tax effects caused by changes and planning ahead is key to mitigate tax risks.

Furthermore, business restructurings, value-chain transformations or transfers of intangibles can significantly affect your transfer pricing model. New intra-group transactions may arise, the roles and responsibilities of the associated entities may change, and any transfer of assets must be priced at arm’s length.

Our experts can assist you in fulfilling transfer pricing documentation requirements, designing transfer pricing models and developing tax strategies, pricing of financial transactions, managing restructurings and transfers, tax audit support and elimination of double taxation. We also offer advisory services fully adapted to your needs. For more information about our service offering, please refer to the Services section.