According to Swedish tax legislation, surcharges should be levied in cases where a taxpayer has provided incorrect information in its tax return or otherwise, and this incorrect information has resulted in an erroneous tax assessment.
Information can be considered incorrect if the information provided is false or if relevant information has been omitted. If it is concluded that a taxpayer has provided incorrect information, and that this has resulted in an erroneous tax assessment, it is possible for the taxpayer to be granted an exemption from surcharges. Factors that should be considered when assessing if an exemption is appropriate include, inter alia, whether the taxpayer has misjudged a difficult question or if a surcharge would be disproportionate in relation to the error committed.
When the Swedish transfer pricing (TP) documentation rules were introduced, the government stated that TP often involves difficult assessments and that this should be considered in determining whether surcharges should be levied in TP audits. The government further stated that the fact that a taxpayer has prepared TP documentation should be considered when assessing whether the taxpayer has provided incorrect information and whether an exemption should be granted.
Following the statements made by the government, the Swedish Tax Agency (STA) issued a position statement, in which it expressed the view that surcharges should generally be reduced by half in TP audits, provided that a taxpayer has prepared contemporaneous TP documentation. With respect to cases where the taxpayer has misjudged a difficult question, the STA stated that it may be inappropriate to levy surcharges at all.
Consequently, the STA stated that if a taxpayer has both prepared contemporaneous TP documentation and misjudged what constitutes correct pricing, a full exemption from surcharges should be granted.
STA practice and court decisions
As TP audits generally concern difficult questions, it is easy to get the impression from the STA’s position statement that surcharges are not levied on a regular basis on adjustments in TP audits, as long as the taxpayer has prepared contemporaneous TP documentation.
However, in the authors’ views, it is more common that surcharges are levied. Moreover, it is not uncommon that the STA even fails in its decisions to include an assessment of whether there is a reason to exempt the taxpayer from surcharges on the basis that the taxpayer has prepared TP documentation. This is the case even for TP audits that concern questions that should generally be regarded as difficult, such as intellectual property (IP) valuations.
Moreover, there is little consistency in court decisions regarding how the exemptions are addressed. To illustrate this, two recent decisions delivered on February 11 2020 and May 12 2020 by the Administrative Courts of Appeal of Stockholm and Jönköping, respectively, can be considered. In both cases, the taxpayers argued that surcharges should not be levied since they had prepared contemporaneous TP documentation.
In the first case, the court made a thorough assessment of the possibility to exempt from surcharges and stated that it should be possible to receive a full exemption provided that the taxpayer had made a misjudgment of what constitutes correct pricing. However, in the case at hand, the taxpayer had prepared contemporaneous TP documentation, but in practice had not complied with the documentation in regards to allocating risk to the Swedish entity, whereby the court concluded that a full exemption could not be granted.
Conversely, in the second case, the court did not explain how it regarded the TP documentation when assessing whether there were grounds for exemption, but merely stated that it did not see “any reasons to grant exemption from the surcharges”.
In the authors’ opinions, it is not acceptable that a thorough assessment is not always made in TP cases regarding the appropriateness of surcharges. As stated above, TP cases often involve difficult questions and valuations and as such there should always be a thorough assessment of whether it is justified and proportional to levy a surcharge or whether an exemption should be granted. This should especially be the case if the taxpayer has properly explained and documented its view of what constitutes arm’s-length pricing in its TP documentation.
If the court decisions and STA practice remain inconsistent, it is important that the taxpayer continues to bring forward thorough arguments regarding surcharges and grounds for exemption. Hopefully, this will increase the chance that surcharges are not levied routinely on adjustments in TP audits, but that a more nuanced and thorough assessment is made taking the TP documentation into account.
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