By Emiliha Ferrão & Madeleine Thörning, Transfer pricing specialists at Thorning Koponen Consulting in Stockholm, Sweden
The Swedish Administrative Court in Stockholm ruled on 26 March against the Swedish company Flir Commercial Systems AB, concluding that the company must pay tax penalties of 70M EUR (USD 76.4M) because it did not meet its obligation to provide the Swedish tax agency with correct information.
A lesson to be drawn from this case is that taxpayers in Sweden must be accurate and precise in their references to additional information to open disclosures in their tax returns in order to mitigate risks of tax penalties.
Flir Systems – background
In 2012, Flir Systems transferred one of its business divisions along with related intangible property (IP) to its permanent establishment (PE) in Belgium.
Nine months later, the entire Belgian PE business, including the related IP, was sold to an affiliated company in Belgium for which Flir Systems received shares of corresponding value.
Flir Systems claimed a tax credit in Sweden against capital gains related to the sale in Belgium based on the regulations in the Council Directive 2009/133/EC of 19 October 2009.
Swedish tax agency challenge
In its final tax assessment, the Swedish tax agency refused the tax credit based on the view that Belgium did not have any taxing rights from the sale of the IP.
As part of the claim, the Swedish tax agency referenced a previous advance ruling requested by affiliated Flir Systems companies where it was concluded that no taxing rights on the sale existed according to Belgian domestic law, as well as the tax treaty between Sweden and Belgium.
This ruling was obtained by the Swedish authorities from the Belgian tax authorities through exchange of information with the Belgian tax authorities.
The Swedish tax agency claimed that incorrect information had been provided by the company and, therefore, the agency imposed tax penalties. Flir Systems appealed the decision, claiming that it should be overruled and that any tax penalties should be removed.
The ruling
To evaluate the taxing rights in Belgium, the Court used the tax treaty as the main source for its assessment.
The Court agreed with the Swedish tax agency, concluding that Belgium’s taxing rights were limited to profits or income attributable to the PE in Belgium, which in this case would comprise any profit from the sale of the IP from the PE to the Belgian related company.
To determine that the PE was entitled to any profit, the PE had to be deemed equivalent to a separate and hypothetical company, which was done based on the performed functional and risk analysis of the PE. The functional and risk analysis showed that the PE performed all key decision-making functions, had the necessary risk-assuming capacity relating to the relevant IP, and the allocation of the IP was considered a ‘dealing’ between Flir Systems and the PE.
Any related income or profits from the IP sale should, therefore, be allocated to the Belgian PE only to the extent that value was added to the IP between the dealing and sale of IP. According to applicable guidelines and regulations, a dealing with a PE should be priced at arm’s length in the same manner as between two entities.
When the IP was sold to the related Belgian company nine months later, the pricing of the IP was set at arm’s length and this assessment was not challenged by either party.
The Court stated that no information was provided showing any increase in IP value while the IP was held by the PE. According to the Court, it was evident that the same pricing had been applied at the point of the transfer of IP to the PE as at the point of sale to the related Belgian company. Hence, the PE made no profit on the sale to the related Belgian company that could have been subject to tax in Belgium.
The Court concluded, in line with the Swedish tax agency’s decision, that no tax credit could be granted due to the conclusion that the PE had no profits to tax. Flir Systems did not provide sufficient information to the Swedish tax agency to establish the correct tax liability for the relevant income year, the Court said.
Hence, the Court upheld the Swedish tax agency’s decision to impose tax penalties of over 70M EUR (40% of 180M EUR in claimed tax credit).
The Court concluded that the additional information provided by Flir Systems accompanying the tax return, such as a note about the restructuring and the annual report, was insufficient to avoid or reduce the imposed tax penalties.
Moreover, the information provided to the Swedish tax agency from previous years’ taxation could not be considered (automatically) available for later years’ tax assessment.
Comments
From a transfer pricing perspective, the main issue was whether any additional value had been generated in the PE.
The Swedish tax agency referred to a ruling provided by the Belgian tax authorities, where the Belgian affiliated company stated that no value had been created after the point of transfer from Sweden. The Swedish Tax Agency had requested the ruling from the Belgian tax authorities.
Despite the fact that the Court rejected the ruling as decisive evidence in the case, this is an example of where the tax authorities use the possibility of exchange of information to obtain information that was not provided by the taxpayer.
Despite the fact that the Court rejected the ruling as decisive evidence in the case, this is an example of where the tax authorities use the possibility of exchange of information to obtain information that was not provided by the taxpayer.
Based on recent case law in Sweden concerning tax penalties, it is not sufficient to merely refer to annual reports and/or transfer pricing documentation as additional information to the tax return.
To meet the open disclosure obligations, and hence avoid tax penalties, the taxpayer is required to identify the specific information in the referenced documentation, not only refer to the documents in general.
One conclusion that can be drawn from this case is that taxpayers in Sweden must be accurate and precise in their references to additional information in their tax returns.
The Swedish tax agency is not obliged to review information (that may be relevant) that has been provided previous years if this is not specifically referred to in the open disclosure by the taxpayer.
This judgment was delivered in the first instance of administrative courts in Sweden. We can expect an appeal to the Swedish Administrative Court of Appeal (the second instance).
Emiliha Ferrão
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Madeleine Thörning
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