By Ville Alahuhta, Counsel, Attorney at Law, M.Sc (ECON), Bird & Bird Attorneys Ltd, Finland
The Finnish tax administration has clarified its position on the retroactive effect of updates to the OECD transfer pricing guidelines and the effects of COVID-19 restrictions on certain established fundamentals of international taxation, including permanent establishment, in two statements published on 21 April and 19 April, respectively.
Both statements provide additional insight and clarification for taxpayers that have operations in Finland. Nevertheless, open questions remain.
COVID-19 restrictions and taxation of foreign entities
The Finnish tax administration’s 19 April statement considers the impact of COVID-19-related restrictions on the interpretation of tax-treaty articles concerning permanent establishments and change of fiscal residence. The statement appears to be in line with the updated recommendations released by the Secretariat of the OECD concerning the appropriate interpretation of treaty articles under the current circumstances.
According to article 5 of the OECD model tax convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Established interpretation of tax treaties requires that permanent establishments must have a certain degree of stability both geographically and in terms of time.
It is specifically acknowledged that exceptional and temporary changes arising from the COVID-19-pandemic do not automatically mean that a permanent establishment would be formed with respect to a foreign enterprise in Finland.
As provided in the statement, a home office may constitute a permanent establishment, should an employee or a director of a foreign enterprise work from home in Finland on a permanent basis. In addition, a permanent establishment may also be formed in a situation where an individual is authorized to represent the foreign enterprise and to enter into contracts on its behalf in Finland and this authorization is habitually exercised.
However, neither of these situations is stated to be treated as factors generating a permanent establishment in Finland provided that working from home in Finland is caused solely due to the COVID-19-related restrictions or public health measures and such arrangement will not be continued after the restrictions have been lifted.
In addition, the statement issued by Finnish tax administration also addresses situations where the permanent establishment would be formed as a result of a construction site or a construction or installation project provided that the activity lasts longer than the time threshold laid down in the tax treaty applicable.
Generally, temporary interruptions do not interrupt the calculation of the specific time threshold. However, if the interruption of a building site in Finland is caused by the COVID-19-related restrictions, the period of interruption can be reduced from the calculation of the time threshold, which hence constitutes an exception to the main rules.
Lastly, the Finnish tax administration pointed out that as of 2021 a foreign company can become a resident taxpayer in Finland based on its place of effective management. Potential dual-residence situations are solved pursuant to the applicable tax treaty, and tie-breaker rules also often refer to the place of effective management.
According to the statement, if the transfer of the place of effective management to another location is due to exceptional circumstances relating to the COVID-19-pandemic, such transfer may be disregarded.
Regarding all aspects discussed above, the Finnish tax administration emphasized that taxpayers must duly document the effects of the COVID-19-pandemic and its effects with respect to the particular exception. In other words, sole general-level references to the pandemic or the existence of restrictions would not be deemed sufficient.
In practice, it remains slightly unclear what the required level of sufficient evidence of effects of COVID-19-pandemic is under the application of the statement.
Updates to OECD transfer pricing guidelines as a source of interpretation
The Finnish tax administration’s has on 21 April published a statement concerning the position on updates to OECD’s transfer pricing guidelines as a source of interpretation.
As provided in the statement, consistent with the established practice regarding interpretation of tax treaties in the light of the OECD model tax convention, updates to the OECD transfer pricing guidelines can be used as a source of interpretation when considering the application of the arm’s length principle (as provided in section 31 of the Act on Assessment Procedure) in the assessment of a transaction pertaining to a time preceding the update, if the question in the relevant update is about clarification of the interpretation of the existing guidance and not about fundamental new interpretation recommendation. This distinction shall be made on case-by-case basis.
The statement does not shed light on how to distinguish between interpretations of existing guidance and new interpretation recommendations that are considered fundamental.
Further, the tax administration acknowledged that the transfer pricing guidelines can be utilized in the interpretation of section 31 of the Act on Assessment Procedure only to the extent they are not contrary to the precedents issued by Finnish Supreme Administrative Court. Basically, this limits, for example, the possibility of reclassification of a transaction (see, e.g., SAC 2014:119 and SAC 2020:35).
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Ville Alahuhta is an attorney at law at Bird & Bird Attorneys Ltd, Finland
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