If a transaction involving a Swedish company results in an upward transfer pricing (TP) adjustment in another state, the question arises whether a corresponding adjustment downwards can be made in Sweden.
A multinational enterprise facing potential double taxation may rely on Article 9.2 of the OECD Model Tax Convention on Income and on Capital provided there is an active tax treaty containing said article in place with the other state (see this article for more information concerning the application of Article 9.2 in Sweden). However, if no active tax treaty exists, another question arises: whether there are any other remedies within the scope of Swedish internal law that could be applied to lower the result in Sweden.
Swedish legislation
For the purposes of this article, there are two provisions to consider.
The first is the general rule of deductibility, which stipulates that deductions can be made for business expenses aimed at acquiring and maintaining income.
For taxpayers engaged in cross-border transactions with related entities, the Swedish arm’s-length provision (the Correction Rule) is also relevant. This rule states that if a taxpayer engages in related-party transactions in which the conditions differ from what would have been agreed between independent parties, and the taxable result of the Swedish taxpayer has become lower as a result, then the result should be adjusted to the result that the taxpayer would have had if the non-arm’s-length terms had not existed.
Case law
The relationship between the general rule on deductibility and the Correction Rule has been addressed in old case law. The relevant cases, discussed below, have concerned situations where the Swedish Tax Agency (STA) has made upward adjustments related to non-arm’s-length transactions. The question in these cases, as far as it is relevant for this article, has been whether the transactions should be assessed based on the general rule on deductibility, the Correction Rule, or if both provisions could be invoked as alternative grounds.
In a 1991 judgment, the Swedish Supreme Administrative Court (SAC) suggested that the transactions could be tried both against the Correction Rule and the general rule on deductibility. In the end, the Correction Rule was applied by the SAC as both parties had presented arguments solely based on this provision. Nevertheless, the SAC indicated that another potential rule that could have been applicable in the case was the general rule on deductibility.
Two cases from 2004 and 2006, on the other hand, muddied the waters. Both cases involved charges for intragroup goods and services, where the STA argued that these should primarily be tried against the general rule on deductibility. However, the SAC held that the Correction Rule constitutes a special provision governing international relations, which takes precedence over general rules when calculating an enterprise’s taxable income. As such, the SAC only tried the transactions based on the Correction Rule.
Analysis
Based on the latter cases, it is evident that the Correction Rule shall take precedence over the general rule on deductibility in cases concerning upward TP adjustments. However, the STA has interpreted the cases as if the Correction Rule should take precedence in assessing both upward and downward adjustments. Hence, the STA argues, with reference to the Correction Rule, that a reassessment related to TP can only be granted if non-arm’s-length conditions have negatively impacted the Swedish taxable result. Any request for a reassessment based on the general rule of deductibility is surprisingly refused by the STA with reference to the Correction Rule’s precedence.
The position of the STA could be questioned, as one of the prerequisites for applying the Correction Rule is that the Swedish taxpayer’s result has become too low. If the Correction Rule is the only provision that can be applied within Swedish domestic law to assess a downward TP adjustment, this effectively means that a downward TP adjustment can never be granted if there is no active tax treaty in place. The authors consider this an unforeseen consequence, not intended by the SAC.
The STA also generally accepts deductions for arm’s-length intragroup charges based on the general rule on deductibility, as long as these are included in the accounts for the fiscal year concerned, thus showcasing inconsistency with its approach to reassessment cases. Hence, new precedent would be welcome on the matter, to bring certainty on which legal remedies exist for Swedish taxpayers potentially subject to double taxation.
