The provisions in articles 72 and 80 of Council Directive 2006/112/EC of 28 November 2006 (the VAT Directive) allow EU member states to put anti-avoidance and anti-evasion measures in place with respect to the re-valuation of the supplies of goods or services between related parties. These provisions have been implemented in the Swedish VAT Act.
During the past decade, the Swedish Tax Agency (STA) has decisively, aggressively, and –unfortunately – quite successfully re-valued supplies between related parties where the recipient of the supplies is not in a full VAT recovery position.
A case in Sweden’s Supreme Administrative Court
A parent company’s sole, fully taxable economic activity was to actively manage its partially exempt subsidiaries. It provided services within business management, finance, property management, investment, IT, and HR, which were valued using a cost-plus method.
The parent company incurred VAT on the costs of providing those services. It also incurred VAT on accounting, audit, costs of raising equity capital, and other shareholders’ costs, which it treated as general overheads and did not include in the valuation of its supplies. The parent company recovered VAT in full on all costs where VAT was incurred.
The STA argued that the parent company should have valued its supplies, on a market value basis, by reference to its whole cost base since:
Given the unique nature of the parent company’s services to its subsidiaries, as a principle, there were no comparable services that could be obtained under normal market conditions; and
The taxpayer could not disconnect some of its costs from the tax base of the supplies as it had a single economic activity.
The taxpayer objected to the STA’s arguments on the basis that:
The different service elements, comprising the tax base of its supplies, were not unique to its group and could have been outsourced on an arm’s-length basis;
The cost-plus method used to calculate the supplies’ consideration was in line with the market practices between independent suppliers;
The equity capital raising, and other shareholders’ costs, pertained to the group’s shareholders, and had no connection to the subsidiaries’ management; and
The argument advanced by the STA would result in a disproportionate application of the re-valuation rules.
The Supreme Administrative Court’s decision
The Supreme Administrative Court requested a preliminary ruling from the Court of Justice of the European Union (CJEU) on the following two questions:
Is it compatible with articles 72 and 80 of the VAT Directive to consider, when applying national regulations on valuation of the tax base, that when a parent company provides its subsidiaries with the type of services at issue in the case, they are always unique supplies whose market value cannot be determined by such a comparison as provided for in the first paragraph of Article 72?
Is it compatible with articles 72 and 80 of the VAT Directive to consider, when applying national provisions on the valuation of the tax base, that a parent company's entire cost base, including capital acquisition and shareholder costs, constitutes the company's cost for the services provided to its subsidiaries, when the parent company's only activity consists of active management of the subsidiaries and the company has made deductions for all included VAT attributable to its acquisitions?
KPMG’s commentary
KPMG’s view is that it is not compatible with the VAT Directive to apply the rules on re-valuation in the way that the STA does.
The STA's principled approach leads to an extensive and routine application of the re-valuation rules in the case of the provision of services between parent companies and subsidiaries where the latter have limited, or no, right of deduction. In practice, the STA's approach means that Article 72(1) of the VAT Directive becomes null and void for Swedish purposes.
The referral is significant from the standpoint of providing legal certainty in Sweden in this area of VAT. KPMG believes that the value of supply should be determined on objective, rather than principled, criteria. It is hoped that the CJEU judgment in this case will provide the necessary clarity in this area.
