International Tax Planning and Transfer Pricing Planning: Sweden from a US perspective

• Author: Professor Dr. Rainer Zielke
• Profession: Professor in business economics at Østfold University College, Halden, Norway
• Updated at: April 2017

Contenido 1 Abstract tax planning 2 Abstract transfer pricing planning 2.1 Introduction 2.2 The high tax country Sweden in the OECD context 2.3 Transfer pricing rules of Sweden 2.3.1 Laws and rules 2.3.2 Arm's length principle 2.3.3 Transfer pricing methods 2.3.4 Definition of related companies 2.3.5 Reporting requirements 2.3.6 Documentation requirements 2.3.7 Cost sharing 2.3.8 Business restructuring 2.3.9 Interaction between customs valuation and transfer pricing 2.3.10 Dispute resolution 2.4 Calculation of the case studies in international tax planning between Sweden and the USA 2.4.1 Design of the tables 2.4.2 The treaty Sweden-USA in brief 2.4.3 BEPS Project progress 2.4.4 Sweden in brief 2.4.5 The USA in brief 2.4.6 Design of case studies 2.4.7 Case study 1: Dividends from Sweden to the US 2.4.8 Case study 2: Interests from Sweden to the US 2.4.9 Case study 3: Royalties from Sweden to the US 2.4.10 Case study 4: Management and technical service fees from Sweden to the US 2.4.11 Case study 5: Capital gains with Sweden as asset country to the US as seller country 2.4.12 Case study 6: Dividends from the US to Sweden 2.4.13 Case study 7: Interests from the US to Sweden 2.4.14 Case study 8: Royalties from the US to Sweden 2.4.15 Case study 9: Management and technical service fees from the US to Sweden 2.4.16 Case study 10: Capital gains with the US as asset country and Sweden as seller country 2.5 Concluding remarks 3 Notes

Abstract tax planning

According to the International Monetary Fund, Sweden confirms in 2016 with a gross domestic product (GDP) of US$ 517,440 million the seventh-highest GDP of Europe. In Sweden, the corporate income tax is imposed at a flat rate of 22.00%. Taxation of corporate profits follows the classical system. Thus. individual shareholders pay an extra income tax on their dividend income. Thus, Sweden is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Sweden has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Sweden economic growth has been strong, but is projected to decline. Shortages of qualified labor and constructible land will slow residential investment, while uncertainty about global demand will slow business investment. Modest real wage gains will continue to damp consumption. The unemployment rate is levelling off as difficult-to-hire low-skilled workers make up a rising share of jobseekers. Labor market tightening will help lift inflation gradually. This chapter provides a survey on the actual tax law frame conditions in Sweden and practical support in international tax planning and transfer pricing planning between Sweden and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Sweden applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method, the cost plus method, the profit split method, and the transactional net margin method. I The method that gives the most reliable result must be applied. In order for the adjustment provision to be applicable, the contracting parties must be in a community of interest. The adjustment provision is based on article 9(1) of the OECD Model Tax Treaty. Companies are regarded as related under following conditions: when a company, directly or indirectly, participates in the management or control of another company, or owns a part of the capital of the other company, or when two companies are managed or controlled by the same persons, or they own a part of the capital in these companies. There are no specific reporting, but documentation requirements. Cost sharing is allowed and business restructuring possible according to OECD standards. There is an interaction between customs valuation and transfer pricing. The tax authorities may adjust the taxable income. Bilateral or multilateral advance pricing agreements applicable for three to five years are available.

Introduction

International tax planning and transfer pricing planning between Sweden, the seventh-richest country in the world in terms of GDP (gross domestic product) per capita and a high standard of living and export-oriented mixed economy and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, ^[1] Sweden confirms in 2016 with a gross domestic product (GDP) of US$ 517,440 million the seventh-highest GDP of Europe. In Sweden, the corporate income tax is imposed at a flat rate of 22.00%. Taxation of corporate profits follows the classical system. Thus. individual shareholders pay an extra income tax on their dividend income. Thus, Sweden is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in lower taxing countries by means of tax planning measures. Sweden has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, ^[2] in Sweden economic growth has been strong, but is projected to decline. Shortages of qualified labor and constructible land will slow residential investment, while uncertainty about global demand will slow business investment. Modest real wage gains will continue to damp consumption. The unemployment rate is levelling off as difficult-to-hire low-skilled workers make up a rising share of jobseekers. Labor market tightening will help lift inflation gradually. The current very expansionary monetary policy stance is a response to persistently below-target inflation, but has also fueled a long housing boom, which increasingly poses risks. Stronger macro-prudential policy, such as a debt-to-income cap, is called for to reduce financial and macroeconomic vulnerabilities. Easing planning and rental regulations and reforming housing taxation would help stabilize house prices, increase labor market mobility and improve equality. Sweden has substantial fiscal space, as public debt is low and the budget is near balance. There is little need for further economic stimulus given the strength of the economy. However, the use of fiscal space to accommodate temporary migration-related costs is welcome.

According to Orbitax, ^[3] (Daily Tax News Digest of 23 September 2016) on 20 September 2016, the Budget for 2017 was presented to the Swedish parliament. The tax related changes are relatively minor and include:

• Increasing the individual income tax lower bracket threshold to SEK 438,900 and the upper threshold to SEK 638,500;

• Abolishing deductions for interest on certain subordinated loans;

• Amending the calculation for interest on advance tax payment accounts so it may be reduced to 0% - with the current calculation the lowest rate is 0.5625%, which some taxpayers are taking advantage of by making excessive tax payments given the low Swedish interest rate (currently negative);

• Introducing an SEK 30,000 turnover threshold for VAT registration; and

• Bringing minor repair services for bicycles, shoes, clothes, etc. within the scope of the reduced 12% VAT rate (standard 25%).^[4]

The pivotal question is therefore, how groups of affiliated companies with group companies in Sweden and in the US can – before the background of ant-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

Therefore and first of all the high tax country Sweden is to be reviewed in the OECD context (see section 2) – also with respect to the transfer pricing rules of Sweden (see section 3), and constructive hereon 10 case studies in international tax planning between Sweden and the US are to be calculated (see section 4). Finally the results of this survey are to be compiled in concluding remarks (see section 5), especially with respect to the deduction of strategies in international tax planning between Sweden and the US.

This article had been written based on the following sources:

• Orbitax^[5], Orbitax Country Analysis Sweden and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,

• the Swedish Income Tax Act, ^[6]

• the Swedish Tax Reform 2017, ^[7]

• the US Internal Revenue Code^[8],

• the Double Taxation Convention between Sweden and the USA signed 1 September 1994 and effective from 1 January 1996, ^[9] and

• the protocol signed 30 September 2005. ^[10]

The high tax country Sweden in the OECD context

International tax planning and transfer pricing planning between Sweden and the US based on cross-border case studies is of central importance. In Sweden, the corporate income tax is imposed at a flat rate of 22.00%. Taxation of corporate profits follows the classical system. Thus. individual shareholders pay an extra income tax on their dividend income. Thus, Sweden is a high tax country. Sweden has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

Between OECD Member States, especially Sweden and the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the corporate income tax burden of any country are the statutory corporate income tax rates. ^[11] Furthermore in many OECD Member States there are – in addition to the statutory corporate income tax rates –...