By Erik Koponen & Madeleine Thörning, transfer pricing specialists at Thorning Koponen Consulting, Sweden
The Swedish tax agency has adjusted the taxable income for the PUMA Group’s Swedish distributor, Puma Nordic AB, concluding that, for transfer pricing purposes, the Swedish distributor could not control the main risks in the Puma Group and therefore should not have carried the local market risks.
The adjustment, made in December 2019, was approximately 10 MEUR (100,075,000 SEK) for income years 2015-2017.
Puma Nordic AB
Swedish company Puma Nordic AB is a wholly-owned subsidiary to the German parent company PUMA SE of the PUMA Group, selling sports products under the brand “PUMA”.
Puma Nordic AB acts as a distributing company with the main functions of marketing and selling PUMA branded products on its local market.
Puma Nordic AB has two main intra-group flows, namely, the purchase of products from its affiliated sourcing company in Germany for resale on its local market and the use of the brand “PUMA” and related marketing material prepared by PUMA SE.
Puma Nordic AB pays a cost-based fee for the products to the German sourcing company as well as a license fee based on external revenue to PUMA SE for the use of the PUMA brand and related marketing material.
The applied transfer pricing model resulted in continuous losses in Sweden for Puma Nordic AB.
Transfer pricing risk
The Swedish tax agency stated that Puma Nordic AB should be appropriately compensated for its distribution activities performed in Sweden. Puma Nordic AB performs its main functions upon the strategies and directions of PUMA SE and is not involved in any decisions concerning product development, sourcing, design, nor overall marketing strategies.
In analysing important the risks, the Swedish tax agency followed the six-step approach stated in the OECD transfer pricing guidelines where two key value drivers for the Puma Group were identified based on information from the group’s annual report and the transfer pricing documentation. These elements were the ability to maintain a strong brand globally and the ability to develop new and innovative products.
To these key value drivers, the Swedish tax agency tied the most important risks for the Puma Group (i.e., market and product risk). The Swedish tax agency found the market and product risks were contractually assumed by Puma Nordic AB, while other affiliates that had all decision-making functions and, therefore, the capacity to assume the risks.
The fact that Puma Nordic AB had local marketing know-how was, according to the Swedish tax agency, not sufficient to deem Puma Nordic AB capable of assuming significant market risks.
The Swedish tax agency, therefore, argued that Puma Nordic AB should be considered a distributor that performs less strategic and complex functions in comparison to its counterparties. Thus, it should not carry the risk of being loss-making over several years.
Based on the conclusion that Puma Nordic AB should be considered a distributor only capable of assuming limited risks, the Swedish tax agency considered the applied intra-group pricing to be not in accordance with the arm’s length principle.
The Swedish tax agency applied the transactional net margin method and performed a comparability study according to which Puma Nordic AB’s results were adjusted to the lower quartile of the study.
In addition, Puma Nordic AB was subject to tax surcharge due to reporting incorrect information as the basis for taxation.
Puma Nordic AB has stated that they would most likely appeal the decision to the Swedish Administrative Court.
–Emiliha Ferrão contributed to this article.
Madeleine Thörning
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Erik Koponen
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Congratulations for the article, really well explained and detailed 🙂
Would be possible to have access to the case law?
Thanks Carlota! We have the decision but unfortunately only in Swedish (let me know if you still want it). In general, the Tax Agency uses para. 1.60 in OECD Guidelines (2017) as basis for their risk allocation analysis. It’s a great example that TP policies and documentations should reflect the overall control of the group value chain.
Will you be able to mail me the copy?
Indeed a great case. Does anyone have similar cases in mind? (where tax authorities analyse the real contribution to the value chain? Would be very helpful. Cheers.
Yes please..the decision in Swedish would also be of great help
No problem, send me an email and I’ll send it across. [email protected]