1 Summary
The Swedish Tax Agency considers that an income tax adjustment made due to the special rules on transfer pricing between related companies or profit allocation to permanent establishments affects the value added tax under certain circumstances. This applies when the adjustment can be linked to a specific or to a group of specific sales or acquisitions where value added tax has been reported or should have been reported when the transaction was carried out.
If it is an adjustment which means that the seller receives an additional compensation or gives a price reduction, the adjustment affects the value added tax in such a way that the tax base must be increased or decreased. If it is a price reduction, the reduction must reduce the tax base if the parties have not agreed to the contrary.
In the event that the adjustment can be linked to a specific or to a group of specific turnovers or acquisitions but the adjustment cannot be seen as an additional compensation or a price reduction, the adjustment can still affect the value added tax because the adjustment can be an indication that the original tax base should be reassessed.
2 Background and question
In terms of income tax law, there are special rules which mean that a company’s business results must be adjusted due to incorrect transfer pricing or profit allocation.
Transfer pricing deals with prices and other conditions that are agreed between related companies that carry out cross-border transactions. The rules are based on the so-called arm’s length principle, which in short means that these prices and conditions that are agreed must correspond to the prices and conditions that had been agreed between independent companies in a comparable situation. When applying the arm’s length principle, as a general rule, each transaction must be treated separately. This main rule can be waived if there are several transactions that are strongly connected to each other, so-called combined transactions. In Swedish legislation, the arm’s length principle is expressed in the so-called correction rule in ch. 14. Section 19 of the Income Tax Act (1999:1229), IL.
Water allocation to fixed operating locations takes place with the support of ch. 3. Section 18 3 or 6 ch. 11 § 1 IL. There are no rules in the Income Tax Act that specify how the income allocation to permanent establishments should be done. Guidance on wind allocation can normally be obtained from OECD wind allocation reports. Profit allocation is done so that the result to be attributed to a permanent establishment must be the arm’s length result that the permanent establishment would have had if it were a separate and independent company that conducted activities of the same or similar kind under the same or similar conditions.
The question is in which situations such as a company’s adjustments or the Tax Agency’s decision on adjustments that are made due to the special rules on transfer pricing between related companies or profit allocation to permanent establishments under income tax law, affect the value added tax in such a way that the taxable base must be increased or decreased.
In the position statement, the concept of permanent establishment is used when it refers to such property allocation that takes place due to income tax rules. This is done despite the fact that fixed place of business is not used in the VAT context, but instead the concept of fixed place of establishment is used.
3 Applicable law, etc
Value added tax must be paid to the state for such turnover within the country of goods or services that is taxable and is made by a taxable person in this capacity to the extent that the taxable person is not exempt from tax on the turnover (chapter 1 § 1 first paragraph 1 Value Added Tax Act [ 1994:200], ML, compare Article 2.1 a and ci Council Directive 2006/112/EC on a common system of value added tax, the VAT Directive).
3.1 Turnover
It is a question of turnover of a good when a good is handed over for compensation or when a good is claimed by withdrawal (ch. 2 § 1 first paragraph ML, compare article 14.1 of the VAT Directive).
It is a question of turnover of a service when a service is performed, handed over or otherwise provided to someone for compensation or when a service is claimed by withdrawal (Chapter 2 § 1 third paragraph ML, compare Article 24.1 of the VAT Directive).
There must be a direct connection between the service provided and the consideration received for a service to be deemed to have been provided. It is a question of such a direct connection if there is a legal relationship between the service provider and the recipient of the service that involves a mutual exchange of services. The remuneration received by the provider constitutes the actual consideration for the service provided to the recipient (C-94/19, San Domenico Vetraria, paragraph 21).
The fact that an economic transaction takes place at a price that exceeds or falls below the prevailing market price is irrelevant to the qualification of a transaction as a transaction that takes place for consideration (C-263/15, Lajvér, paragraph 45).
In the case of a transaction from a main establishment to a branch, it must be clarified whether such a branch can be considered independent and, in particular, whether it bears the financial risk associated with its activities (C-812/19, Danske Bank, paragraph 21).
A permanent establishment which does not constitute a legal entity separate from the company to which it belongs and to which services are provided by this company shall not be considered to constitute a taxable person because of the costs allocated to the establishment as a result of said provision (C-210/04 , FCE Banks, para 41).
A company’s main establishment that is part of a VAT group and this company’s branch shall, when these are established in different Member States, be considered to constitute separate taxable persons when the main establishment provides services to the branch and allocates the costs thereof to the branch (C-812/19 Danske Bank paragraph 36 and HFD 2021 note 28 point 19).
3.2 Basis of taxation
The tax base must be calculated based on the remuneration. Compensation means everything that the seller has received or will receive for the service from the buyer or a third party. Value added tax is included in the compensation. The basis for taxation is the compensation reduced by value added tax (Chapter 7 § 2 first paragraph, § 3 § 1 and § 3 c ML, compare, among other things, Articles 73 and 78 of the VAT Directive).
If the taxpayer and his customer have not agreed to the contrary, bonuses, discounts or other reductions in the price that the seller gives after the provision of the goods or services has taken place reduce the taxable amount (Chapter 7 § 6 first paragraph 3 and second paragraph ML, compare Article 90.1 of the VAT Directive).
The tax base must be calculated based on the market value if
- the compensation is lower than the market value
- the buyer does not have full right of deduction or refund
- the seller and the buyer are connected to each other
- the taxpayer cannot make it probable that the compensation is market-based (Chapter 7, Section 3a ML, compare Article 80 of the VAT Directive).
The tax base must be calculated based on the market value if
- the compensation is lower than the market value and the turnover is exempt from tax liability with the support of certain exceptions
- the seller does not have full right of deduction or right to refund and the right to deduction/refund that exists is based on the distribution key turnover
- the seller and the buyer are connected to each other
- the seller cannot make it likely that the compensation is market-based (Chapter 7, Section 3 b ML, compare Article 80 of the VAT Directive).
By market value is understood the entire amount that the buyer of a good or service, at the same stage of sale as that where the turnover of the good or service takes place, at the time of turnover and in free competition, would have to pay to an independent seller in the country for such a good or service. If no comparable turnover of goods or services can be determined, the market value is used
- in the case of goods, of an amount not less than the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time of the transaction, or
- in the case of services, of an amount that does not fall below the taxable person’s cost of performing the service (ch. 1 § 9 ML).
The compensation is the subjective value, i.e. what the seller actually receives in each concrete case, and not an estimated value determined according to objective criteria. The compensation must be able to be expressed in money (C-258/95 Julius Fillibeck Söhne paragraphs 13-14 and C-40/09 Astra Zeneca UK paragraphs 28-29).
The conditions of application found in Article 80.1 of the VAT Directive are exhaustive. The basis for taxation cannot be the market value of the transaction in cases other than those stated in this provision. Thus, the market value of the transaction cannot be applied when the service provider, supplier or buyer is entitled to full VAT deduction (C-621/10 and C-129/11, Balkan and Sea Properties and Provadinvest, paragraph 51).
4 Assessment
4.1 Taxable sales or acquisitions
An income tax adjustment made due to the rules on transfer pricing between related companies or profit allocation to permanent establishments may affect the value added tax. In order to determine this, it must first be clarified whether there is a turnover or an acquisition to which the adjustment can be attributed.
An adjustment as a result of incorrect transfer pricing or profit allocation always refers to a specific transaction or a group of specific transactions. Thus, there must always be a specific transaction or a group of specific transactions to which the adjustment relates.
However, it is not enough that the adjustment concerns a specific transaction or a group of specific transactions for there to be an impact on VAT. The specific transactions to which the adjustment relates must also be turnovers or acquisitions where value added tax has been reported or should have been reported either by the seller or by the buyer. It must therefore be a question of taxable sales or acquisitions that have taken place within the country.
Since the adjustment must be able to be linked to a specific or to a group of specific sales or acquisitions, where value added tax has been reported or should have been reported when the transaction was carried out, this means that adjustments made within a legal person e.g. between a head office and its branch in another country cannot normally result in the adjustment affecting VAT. The exception is the cases where the adjustment can be attributed to intra-union transfers of goods to Sweden where value added tax has been reported or should have been reported when the acquisition was carried out.
Furthermore, there may be an impact on VAT when the adjustment is made within a legal entity when either the head office or the branch, when these are located in different countries, are part of a VAT group because the part that is part of the VAT group is normally seen as another taxable person, namely the VAT group. From a value added tax perspective, under such conditions it is a question of an adjustment between two different taxable persons.
4.2 Basis of taxation
An adjustment made due to income tax law rules on transfer pricing between related companies or profit allocation to permanent establishments located in different countries but within a legal entity indicates that the price of the good or service has changed. This may mean that the tax base must be increased or decreased.
If the adjustment can be attributed to a specific or to a group of specific turnovers or acquisitions where value added tax has been reported or should have been reported, the Swedish Tax Agency considers that the adjustment affects the value added tax if it is an adjustment which means that the seller somehow receives an additional compensation or gives a price reduction.
If it is a question of such an adjustment made by the company and which is booked as income, it may be an additional compensation which means that the tax base must be increased. If it is instead a question of a price reduction that is booked as a cost, it may be a price reduction that reduces the tax base. If the parties have not agreed to the contrary, the reduction shall reduce the taxable amount. If it is instead an adjustment that is made solely as a declaration item or similar (tax adjustments), then it is not an actual compensation between the parties. In such a case, the tax base is not affected.
In the event that the adjustment can be linked to a specific or to a group of specific turnovers or acquisitions but the adjustment cannot be seen as an additional compensation or a price reduction, the adjustment can still affect the value added tax. In such a case, it may be an indication that the compensation does not correspond to the value-added tax market value and that it may therefore be appropriate to reassess the tax base. For revaluation to become relevant, it is not enough that the compensation does not match the market value. The conditions that must be met for revaluation to become relevant can be seen in the Swedish Tax Agency’s Legal Guidance.
Source: skatteverket.se
