By Madeleine Thörning & Erik Koponen of Thorning Koponen Consulting discuss the Swedish
Sweden’s Supreme Administrative Court on June 19 ruled in favor of Swedish company, The Absolut Company AB (Absolut), in a transfer pricing dispute, agreeing with Absolut that the full range of results in a benchmarking study could be applied and a multiple year analysis of the tested party data could be used to support an arm’s length result.
The case highlights the importance of having transfer pricing routines and documentation in place to provide support for adjustments made after the fiscal year.
Background
Absolut, a Swedish company and as of 2008 a subsidiary of the French group, Pernod Ricard, manufactures, distributes, and markets wine and spirits and is also the owner of a number of brands, including absolute Vodka.
In 2007, the company sold products related to the Absolut Vodka brand to its US subsidiary, The Absolut Spirit Company, Inc., which had the right to distribute these products in the US market.
The Swedish Tax Agency adjusted Absolut’s taxable income for the fiscal year 2007, claiming that Absolut underpriced the products sold to its US subsidiary.
Absolut’s multiple year analysis
Absolut argued that a multiple year analysis covering 2007-2008 should be used to determine the arm’s length nature of the intra-group transactions since Absolut had announced in 2006 that it would be acquired by an external party in 2008 which affected the US subsidiary’s profit in 2007.
Absolut made a corresponding pricing adjustment in 2008 as a result of the US subsidiary’s increased profit in 2007.
During the two-year period (2007-2008) the US subsidiary earned a weighted average operating margin within the full range of results as illustrated by comparable companies in a benchmarking analysis.
US subsidiary’s local file
The Swedish Tax Agency challenged this treatment, though, based on their analysis of the US subsidiary’s local file for fiscal year 2007, where the comparable profits method (transactional net margin method in the OECD transfer pricing guidelines) was applied to analyze the intra-group transaction.
The US subsidiary’s three-year (2005–2007) weighted average operating margin was above the upper quartile of the benchmarking analysis and it was therefore concluded in the US local file that the subsidiary had not paid higher prices than what would have been applied between independent parties.
The Swedish Tax Agency, therefore, concluded that the subsidiary had not paid an arm’s length price for the products and increased taxable income in Sweden for the fiscal year 2007.
Multiple year analysis and arm-length range
The issues raised in the dispute between the Swedish Tax Agency and Absolut were i) the possibility of using a multiple year analysis to determine the arm’s length nature of the transaction under review, and ii) whether the full range or the interquartile range of results of the comparable companies identified in a benchmarking study should be applied.
The Swedish Tax Agency has an increased burden of proof in supplementary taxation cases, as compared to ordinary taxation cases, and is required to prove that the transfer pricing applied by a taxpayer would differ from what would be agreed between independent enterprises.
Swedish burden of proof
The Swedish Supreme Administrative Court concluded that the Swedish Tax Agency did not fulfill the burden of proof and ruled in favor of the taxpayer.
Referring to an earlier ruling by the Supreme Administrative Court, the Court concluded that multiple year analyses could be applied. The Court said that the appropriateness of a multiple year analysis is determined on a case-by-case basis.
The Court also concluded that the Swedish Tax Agency did not prove that the comparable companies, relied upon by Absolut in the benchmarking analysis, that had operating margins outside the interquartile range did not indicate an arm’s length pricing.
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