In Norway, trade between companies within the same group must be priced on arm’s length terms, in line with the so-called arm’s length principle. The regulations apply regardless of whether the parties have a financial incentive to misprice transactions, and for larger groups, this triggers extensive documentation and reporting requirements to the tax authorities. Many businesses are unsure about which requirements apply to them, and what happens if these requirements are not met. A lack of, or inadequate, documentation may result in the tax authorities making a discretionary assessment and increased risk during a tax audit. This article provides an overview of what transfer pricing is, why it is considered a risk area, and the methods used to set prices between related companies. You will also find answers to when documentation is required and who the regulations apply to.
In short: Intra-group transactions must be priced as if the parties were independent of one another – both in terms of price and other contractual terms. The size of the group and the transactions determine whether you must submit a form attachment with your tax return, and whether you must also prepare full transfer pricing documentation. The regulations apply not only to group companies, but also to other related parties where there are ownership interests or control.
Transfer pricing refers to the pricing that takes place in transactions between companies within the same group. This may involve the sale of goods, services, loans or intellectual property rights between, for example, a Norwegian company and its sister companies, both Norwegian and foreign. Globally, a considerable proportion of world trade takes place between group companies, and a significant proportion of Norwegian businesses’ trade occurs in the same way. The regulations also apply to activities subject to resource rent tax, such as petroleum and aquaculture.
Both the Tax Act and the Companies Act require that intra-group transactions take place on arm’s length terms. This encompasses not only price, but also other contractual terms. Even if the price in a transaction is at arm’s length, the agreement will contravene the regulations if the buyer waives their normal right to make a claim in case of a fault in the delivery. Taken as a whole, the terms must correspond to what independent parties would have agreed. It is therefore not sufficient to have the correct price alone.
Also read: What about transfer pricing when doing business in Norway
When companies within the same group trade with one another, they lack the usual conflict of interest that normally exists between supplier and customer. This creates a financial incentive to set prices that shift profits to countries with lower tax rates.
Example: A Norwegian company sells a product to its US sister company. Corporation tax is 22 per cent in Norway and 25 per cent in France. The group therefore has an incentive to set a high price from Norway, as the income is taxed at a higher rate in Norway, whilst the deduction in France reduces tax in a country with a higher rate. By setting the price high, the group can save a significant amount of tax, even though the underlying economic realities are identical regardless of the pricing.
Intra-group transactions can be priced in several ways. The methods fall into two main categories: traditional transaction-based methods and transaction surplus methods.
The CUP method compares the price between the related parties with the price in comparable transactions between independent parties under similar circumstances.
The resale price method is based on the price at which the related party buyer resells the goods to an independent third party and adds a specified gross margin.
The cost-plus method takes the costs incurred by the manufacturer or service provider as its starting point and adds a mark-up that yields a reasonable profit.
The transaction-based net margin method (TNMM) takes as its starting point the net profit margin achieved by a party in the controlled transaction and compares this with the net margin achieved by independent parties in comparable transactions.
The profit split method divides the total profit from the controlled transactions between the enterprises involved, based on the value of the functions, risks and assets each has contributed. The profit is allocated between the related parties in a way that reflects what comparable independent parties would have agreed upon.
Also read: Transfer pricing: Deciding factors when choosing a method
The reporting requirements depend on the size of the transactions and the group:
| Requirement | Exempt from the requirement if |
| Forms to be attached to the tax return | During the tax year, the company has conducted controlled transactions with a value of less than NOK 10 million and has outstanding balances with related companies of less than NOK 25 million at the end of the tax year. |
| Full transfer pricing documentation | Groups where related parties have fewer than 250 employees and neither have sales revenue not exceeding NOK 400 million nor a balance sheet total not exceeding NOK 350 million. |
The full documentation must describe the company, the group, the intra-group transactions and how pricing has been conducted. The documentation must be kept up to date on an ongoing basis, and the tax office may require it to be produced at short notice.
Even businesses not subject to the documentation requirement should take a proactive approach to the pricing of intra-group services, with sound underlying documentation. This reduces the risk of surprises during a tax audit.
The regulations also cover transactions with related parties, other companies, entities or individuals in which there is an ownership interest, or over which the company otherwise exercises control or authority. The range of companies and parties covered may therefore be considerably wider than might appear at first glance.
If you have intra-group transactions or transactions with related parties and are unsure whether you meet the documentation requirements, please contact us. We can assist with assessing pricing, preparing transfer pricing documentation and providing advice during tax audits.