Swedish tax agency clarifies DAC6 transfer pricing hallmarks

By Emiliha Ferrão, Transfer pricing specialist at Thorning Koponen Consulting,  Stockholm, Sweden

In November and December 2020, the Swedish tax agency published guidance clarifying Sweden’s legislation implementing Council Directive 2018/822 (DAC6), including issuing three clarifying positions related to the hallmarks for transfer pricing.

DAC6 is an EU directive requiring the reporting of cross-border arrangements for tax purposes. DAC6 reporting is triggered when a “hallmark” exists.

One of the transfer pricing hallmarks is intended to reach cross-border transfers of hard-to-value intangibles. In its position, the Swedish tax agency states that a hallmark in the Swedish DAC6 law includes licensing of rights to intangible assets.

Hence, royalty payments concerning hard-to-value intangibles made to or from Sweden set up after 25 June 2018 could be reportable under the Swedish DAC6 law.

Hence, royalty payments concerning hard-to-value intangibles made to or from Sweden set up after 25 June 2018 could be reportable under the Swedish DAC6 law

To support its position, the Swedish tax agency refers to Chapter VI of the OECD transfer pricing guidelines on intangibles, paragraph 6.189, where the “transfer of intangibles or rights in intangibles” is addressed.

According to the Swedish tax agency, existing royalty payments would not be reportable unless the terms and conditions have changed significantly. Significant changes that would trigger reporting may include, for example, amended or updated royalty rates or additional or new products subject to the transfer.

The agency also clarifies how the term “related parties” in the transfer pricing hallmarks should be interpreted.

The Swedish tax agency clarifies that even though the hallmarks refer to “transfer pricing,” they are not limited to transactions between legal entities; the law also covers dealings and profit allocation arrangements to permanent establishments.

The Swedish tax agency clarifies that even though the hallmarks refer to “transfer pricing,” they are not limited to transactions between legal entities; the law also covers dealings and profit allocation arrangements to permanent establishments.

The hallmark on transfers of hard-to-value intangibles explicitly refers to the defined term “associated companies,” which indicates, according to the agency, that this hallmark should only apply to companies.

The term “transfer” in the hallmark on the transfer of functions, risks, and assets refers to an “intra-group transfer,” focused on the effect on the transferring party’s taxable results. Based on the wording of the provision, this hallmark could therefore only cover legal entities, according to the agency.

The hallmark on safe harbour rules implies that the mere use of safe harbour rules triggers the hallmark application.

Hence, the reporting obligation under the transfer pricing hallmark on safe harbour rules may be triggered by the mere possibility of using a safe harbour rule in, for example, a profit allocation to a permanent establishment.

Finally, a clarification was published by the agency addressing the three-year period during which the EBIT result should be calculated when applying the transfer pricing hallmark on transfer of functions, risks, and assets.

The agency acknowledges that a restructuring may be completed over a period of time, in which case the three-year period should start after the transfer is fully completed and has had an effect on the transferring party’s EBIT.

For example, if a restructuring agreement is signed in April, the restructuring begins in June, and is fully completed in September, the three-year period starts in September and not the first day of the financial year following the year of restructuring.

Practical experiences in the DAC6 process

 More than six months have passed since DAC6 on cross-border reportable arrangements was required to be implemented in European Union member states’ national law.

Pending further guidance and practical experience, taxpayers subject to the new rules have begun working on internal processes and establishing new routines to ensure compliance with DAC6.

In 2020, Thorning Koponen Consulting has assisted multinational companies in building internal processes and administrative routines to ensure compliance with DAC6. Naturally, internal DAC6 processes differ between different companies; however, Thorning Koponen Consulting identified a few important factors common for companies managing their DAC6 compliance.

The first factor is the ability to maintain a degree of central control in the internal DAC6 process, generally performed from the company’s headquarters. In these cases, central control is not only performed in relation to practical aspects and tough deadlines but also in relation to knowledge of what kind of information about the company that should be included in the DAC6 reports.

In combination with central control, engaging and educating local personnel close to the business is a second factor that was proven to be helpful to ensure DAC6 compliance, not least in relation to the 30 days-deadline.

The third crucial factor identified is related to the hallmark assessments and refers to identifying frequent or typical transactions potentially reportable under DAC6.

The general definition of frequent or typical transactions are those transactions that occur or are expected to occur more frequently than other transactions in the organization. Given the lack of practical experience and further guidance from tax authorities, identifying typical transactions has been a useful tool during hallmark assessments.

The work interpreting the new DAC6 rules and achieving comfort in processes and routines continues for taxpayers, starting with the first arrangements to be reported in Sweden at the end of January 2021.

–Emiliha Ferrão is a Transfer pricing specialist at Thorning Koponen Consulting,  Stockholm, Sweden.

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Emiliha Ferrão

Transfer Pricing Specialist at Censio Tax

Emiliha is an authorized tax advisor who has worked with tax and transfer pricing for six years at several international advisory firms in Stockholm. Emiliha is a frequently engaged transfer pricing lecturer and has during recent years gained extensive in-house transfer pricing experience at large multinational companies. Censio Tax aims to simplify transfer pricing and always strives to translate theory into sustainable solutions. We are an independent full-service transfer pricing advisory firm working with consultancy as well as interim in-house solutions across the Nordics.

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