The Swedish Ministry of Finance and the Swedish Tax Agency have drafted new rules regarding the mandatory automatic exchange of advance rulings concerning cross-border tax issues, revised rules on transfer pricing documentation and the introduction of country-by-country reporting in the spring of 2016.
Exchange of information in advance rulings concerning cross-border tax issues
The proposal entails an increased exchange of information concerning advance rulings in cross-border tax issues, and advance rulings concerning pricing. The proposal has been submitted to transpose the EU Directive 2015/2376 regarding the mandatory automatic exchange of information on taxation in Swedish law. The Directive means that the competent authorities of Member States provide information on advance rulings concerning cross-border tax issues and advance rulings concerning pricing through automatic exchange to the competent authorities of other Member States and to the European Commission.
The obligations imposed by the Directive include some basic information that is to be provided to the competent authorities of all Member States. The Commission is to be a part of a limited set of basic information which does not include the identity of the applicant. A Member State must, upon request, in accordance with existing rules, be able to obtain additional information, including the full text of an advance ruling. Disclosures from advance rulings concerning cross-border tax issues that exclusively apply or cover one or more private individual's tax matters are not covered by the exchange.
Bilateral or multilateral advance rulings on pricing with countries outside the European Union are in some cases excluded from this exchange. Subject to certain exceptions, information must also be exchanged if the ruling was issued in the last five years prior to the entry into force of the proposal. The information will be provided in a specially created central directory that is accessible to all Member States and the Commission. Through this central directory, the Swedish Tax Agency gets to learn about the advance rulings of other Member States which has meant that Swedish companies have benefited favourably at the expense of the Swedish tax base. An automatic exchange in turn allows greater transparency and makes it possible to cut cross-border tax evasion, aggressive tax avoidance and harmful tax competition across the European Union. The regulations proposed take effect from 1 January 2017.
Revised rules for transfer pricing documentation
The Swedish Tax Agency's proposals for revising the rules for internal pricing documentation means that the current rules for documentation have been adapted to suit the new OECD standard which was presented in the framework of BEPS Action 13 at the end of 2015. Moreover, activities covered by the obligation to provide documentation are both expanded and restricted. The Swedish Tax Agency's proposal means that the documentation must contain two parts: a Group-wide portion ("Master File") and a Company-specific portion ("Local File"). Additionally, the proposal means that groups with sales exceeding seven billion Swedish crowns are to provide additional information using Country-by-Country Reporting.
According to the Swedish Tax Agency's proposal, the area that is covered by the documentation requirement is to be expanded, which means that Swedish partnerships and foreign companies with a permanent establishment in Sweden as well as Swedish companies with a permanent establishment abroad are also covered by the proposal to be required to prepare transfer pricing documentation. Moreover, small and medium-sized enterprises are proposed to be exempted from this documentation obligation. Small and medium-sized enterprises are defined as companies employing less than 250 employees and that either have a turnover below SEK 450 million or a balance sheet total below SEK 400 million. Consequently, the following companies are covered by the documentation requirement:
- companies that are members of groups that have more than 250 employees,
- companies that are members of groups that have less than 250 employees and either a turnover exceeding SEK 450 million, or a balance sheet total exceeding SEK 400 million.
For those companies that will be covered by the documentation requirement, insignificant transactions will be exempted. Insignificant transactions refer to transactions of less than five million Swedish crowns. However, the tenure and transfer of intangible assets will always be covered by the documentation requirement, unless such a tenure or transfer is deemed to be insignificant for the business.
A group's Master File should contain an overview of the Group and its activities, which includes crucial factors affecting profit generation, the description of the group's most traded products, key geographic markets, a description of critical corporate service functions as well as detailed information on intangible assets. Additionally, a Local File needs to be prepared for each legal entity. Each Local File focuses on a more detailed description of each individual company's operations that is to contain information such as the Company's management structure, a detailed description of the Company's business strategy, detailed information about intercompany transactions that the Company has completed in the financial year, a detailed functional and comparability analysis and the applied pricing method.
The rules regarding Master File/Local File are proposed to come into effect for financial years beginning after 31 December 2016, and the documentation must be in place at the time the tax return is submitted, and must be submitted to the Swedish Tax Agency on request.
Country-by-Country reporting is to contain information such as revenue, profit before tax, income tax paid, number of employees and property plant and equipment for each country in which the Group operates. The information is to be compiled and submitted to the Swedish Tax Agency annually. The rule is that the Parent Company of the Group is responsible for submitting the report, but a subsidiary may be required to submit the report if reporting is not handled by the Parent Company. The Swedish Tax Agency estimates that approximately 75 Swedish groups will be required to submit this report.
The initial reports will be submitted for financial years beginning after 31 December 2015. The reports must be submitted to the Swedish Tax Agency within one year of the end of the financial year covered by the report. If groups fail to submit the report, the rules concerning procedure and financial penalties will become applicable. The information must be exchanged between states through automatic exchange within 15 months of the financial year end.
One consequence of the proposed new rules on the exchange of advance rulings concerning cross-border tax issues, there may be fewer requests for advance rulings concerning legal issues and pricing, in that the advance rulings will no longer be confidential in relation to the competent authorities of other Member States. However, the Swedish Ministry of Finance believes that the proposal will not mean any significant reduction in the number of applications for advance rulings.
For groups covered by the proposed new rules on transfer pricing documentation, it is important to start preparing now for the more comprehensive documentation obligation. An initial step could be to review the existing documentation in order to analyse how it needs to be adjusted to fall in line with the new requirements.
For those smaller groups that no longer need to establish transfer pricing documentation, it should be noted that even if the documentation does not need to be prepared annually, it is equally important moving forwards as it is today that all intercompany transactions are priced and documented using prevailing market conditions. One recommendation is therefore that smaller groups continue to have a documented transfer pricing policy.
It is also vital for Swedish groups to map out whether they are covered by the obligation to submit Country-by-Country Reporting. Groups that are covered should also review their internal systems to analyse whether they can produce the required data. Moreover, the groups covered by Country-by-Country Reporting need to analyse how the aggregated information could be interpreted in the countries in which the Group operates.