By Visa Randell, LL.M., M.Sc. (Econ.), Helsinki, Finland
Finlands’ Supreme Administrative Court on 2 April, decided two important Finland transfer pricing cases, both in favor of the taxpayer.
In one decision, the court allowed a sales company to take consecutive losses for years that the group figures had been positive. In the other case, the court rejected the tax authority’s reclassification of transactions that ignored the structure chosen by the taxpayer, saying that this is not allowed under Finland transfer pricing rules.
Loss-making sales company
The first case (2020:34), concerned a continuously loss-making Finland sales subsidiary of a profit-making multinational group. The lesson learned was that even consecutive losses are not sufficient evidence of erroneous transfer pricing of intra-group transactions if there are valid business reasons.
In addition, the tested party cannot be freely chosen by the tax authorities if the taxpayers’ choice is more reliable, based on the OECD transfer pricing guidelines.
Background
A Finnish subsidiary had operated as the marketing and sales company of a multinational group in Finland. With the exception of 2008, the Finnish company’s operations had been unprofitable every year between 2003–2011, while at the same time, the overall group figures were profitable. The sales company purchased products directly from intra-group contract manufacturers.
The transfer pricing method used in the group’s documentation for product purchases had been characterized as a modified cost-plus / transactional net margin method (TNMM).
The group to be tested were selected contract manufacturers belonging to the group, for whom four comparable independent companies had been found in a search of the Amadeus database.
According to the documentation, the EBITDA target for the group’s contract manufacturers was set at two percent.
Finland transfer pricing challenge
The Finland tax authorities considered, on the basis of the OECD’s 2010 transfer pricing guidelines (paragraphs 1.70–1.72), that in independent business transactions, the sales company would have agreed to continue only upon receiving related pricing aid or other equivalent support, such as subsidy, or credit, as an adjustment.
In addition, the tax authority considered in its analysis that the manufacturing companies’ benchmarked profitability could not be used with sufficient reliability to assess the situation of the sales company in relation to the long-term losses of the sales company’s operations.
Thus, the tax authority used the sales company as a tested party to determine the company’s arm’s length profitability level and reassessed the amount of taxable income reported by the company for the tax years 2007–2010 to the detriment of the taxpayer.
It was argued by the Finland tax authorities that these taxation measures did not concern the sales company’s losses per se, but that there was a supply, for which the sales company had not received sufficient consideration from the other group companies.
The ruling
The Supreme Administrative Court held that the loss-making nature of the sales company did not in itself indicate that the company had failed to collect a service fee or other consideration from another group company.
The court noted that, when determining the arm’s length nature of a loss-making group company’s transfer prices using the cost-plus or TNMM, the OECD transfer pricing guidelines require that the tested party is the company for which reliable data can be found for the most closely comparable transactions.
After considering the activities performed, risks borne, and assets owned by both the sales company and the group’s contract manufacturers, the court concluded that the appropriate tested party was the contract manufacturer (which the group had selected as the tested party in its transfer pricing documentation) and not the sales company.
The court said that the Finland tax authorities did not prove that the taxpayer’s transfer pricing diverged from the group’s transfer pricing documentation or that the independent companies referred to in the group’s transfer pricing documentation were not comparable.
Therefore, the court ruled in favor of the taxpayer, annulling and adjusting the tax authorities’ reassessment decisions
Finland transfer pricing and reclassification of transactions
The second case (2020:35), concerned a reorganisation of the financing function within a multinational group.
The Supreme Administrative Court ruled that the Finland tax authorities may not ignore a transfer of the group’s financing functions from a Finnish parent company to a Dutch subsidiary on the grounds that the Finnish parent continued to perform significant financing functions within the group even after the transfer.
Finland transfer pricing, as established in the Finnish Tax Procedure Act, does not allow for the reclassification of transactions, the court ruled.
The Supreme Administrative Court also said it would not allow the tax authorities to reassess the income of the taxpayer because the tax authorities did not argue that the general anti-avoidance clause should apply and that the reason for the reorganisation was tax evasion.
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Visa Randell, LL.M., M.Sc. (Econ.) is a tax professional based in HELSINKI, FINLAND
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