The Swedish Branch of Yazaki Europe Ltd had been heavily lossmaking for more than five years. The Branch only had a limited number of customers in Sweden and where it acted as a simple information exchange provider. The branch had limited risks, as all risk related to R&D functions were located outside Sweden.
Excerpt from the Judgement of the Court
“…the District Court finds that the branch has had limited opportunities to influence the costs of the products, the choice of suppliers and service providers regarding the development of the products in the projects run in collaboration with the Swedish customers, and price to the customer. Furthermore, the branch has been referred to make purchases in the currencies that result from the group structure.
The branch states that…the work done by the branch has been of such scope and importance that significant people functions are to be considered in the branch for virtually all risks that can be associated with production and development. – the sale of the goods and services sold from the branch. The branch also states that the branch’s Branch Manager was the CEO and certified part of the Electronics & Instrumentation Business Unit (EIBU), a collaboration between various business units within YEL. The branch relies on a statement from expert Roberto Bernales Soriano.
…The job descriptions, agreements and protocols, as well as the investigation in general, do not, in the opinion of the Administrative Court, support any decisive decision in the branch or that the head office’s role should have been limited to such passive decision-making as is discussed in the expert opinion cited by the branch. The investigation does not therefore support that it is in the branch that most of the risks and assets associated with the production for the sale in the branch have been handled.
Deloitte’s functional analysis and benchmarking study as well as other studies were conducted in 2015, ie. in retrospect. …The Court of Appeal considers that the value of the functional analysis and the new benchmarking study as well as other studies is limited.
… the District Court considers that the branch was primarily responsible for sales to Swedish customers, have been collectors and intermediaries of information to and from customers and other units. The TP documentation and other investigations show that the branch has not borne the risks posed by the branch. In view of the activities carried out in the branch, the limited functions that existed in the branch and the limited risks borne by the branch, there is clear support for the notion that the branch has been a service provider, which should have reported a stable profit during the years that is now in question and not such a risk-bearing entity as the branch thinks. It is clear from the investigation that the losses were incurred as a result of the day-to-day sales operations in the branch and not because the branch has taken such risks as an entrepreneur takes. Thus, it is clear that the reported profit does not reflect the financial result the branch would have had if it had been an independent company.
In order to be able to estimate the result in this case, a discretionary assessment must be made. …The Swedish Tax Agency has taken into account the existing investigation and made relevant comparisons. In the light of what is stated in the TP documentation on the Group’s remuneration levels for the production units , for management and for design and development services, the profit assessed by the Swedish Tax Agency – the margin of 2 per cent for the branch in the current year, is considered prudently estimated.“