Swedish Administrative Court of Appeal ruling about transfer pricing
Ruling about transfer pricing
The Administrative Court of Appeal in Stockholm has reached a decision concerning questions related to the timing of data and information in a Benchmarking search that can be used to test whether the price is set at arm-length.
The Administrative Court of Appeal in Stockholm has reached a decision concerning questions related to the timing of data and information in a Benchmarking search that can be used to test whether the price is set at arm-length. The question is whether data and information from the year under review and previous years should be applied, or if years after the year under review may be relevant for the analysis of the pricing.
The Court also discusses the importance of applying the interquartile range in a Benchmarking search and if companies within the same Group operating in different jurisdictions can use different ranges in the Benchmarking search to set an arm's length price on the same transaction.
In the decision, the Administrative Court of Appeal finds support in the OECD Guidelines, for the timelines that can be used in a Benchmarking search. The Guidelines state that it is often necessary to access data and information from both the year under review and previous years. The Guidelines also state that information from years after the year under review may be relevant in the analysis of internal prices, but that you should be careful and avoid using hindsight (Sw: eftersyn).
The Court finds that the OECD Guidelines support to use several years of data when determining an arm's length price. It also considers that data and information from the year under review and previous years may be applied in the arm’s length analysis. According to the Court, this approach should be the starting point for the three years profit margins to be applied in the analysis of internal prices. The use of years after the year under review would according to the Court constitute hindsight (Sw: eftersyn), which is not supported by case law.
The interquartile range and the application of ranges in different countries
Another question raised by the Court was if the full range or if the interquartile range in the Benchmarking search’s final set should be used. The Court finds support in the OECD Guidelines for applying the full range. However, in this case the foreign Group Company had applied the interquartile range for testing the transaction in its transfer pricing documentation.
Since the use of the interquartile range is also supported by the OECD Guidelines and had been applied in the company's transfer pricing documentation, the Administrative Court of Appeal could not find any reason for using a different range. In addition, the Court stated that companies within the same Group should not use dissimilar ranges, on the same type of transaction in different jurisdictions, to set an arm's length price.
The Administrative Court of Appeal’s ruling is not surprising, even though transfer pricing and benchmark analyses in particular is not an exact science and some flexibility should be allowed. However, the statement made by the Court in relation to hindsight should be useful for tax payers going forward in relation to cases were the Tax Agency argue for hindsight.
The Administrative Court of Appeal stated that there is support in the OECD Guidelines to apply the full range in a Benchmarking search, but that is was not applicable in this specific case. The statement supporting the use of the full range is very useful since the STA in most other cases claims that the interquartile range should always apply.
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