By Marianna Santamala, Associate, Bird & Bird Attorneys Ltd, Finland
New amendments to the Finnish transfer pricing adjustment clause included in section 31 of the Finnish Assessment Procedure Act came into effect on 1 January 2022 and apply to tax years beginning on that date or after. The Finnish Parliament accepted the new proposed amendments on 7 December 2021.
As a result of the proposed changes to the transfer pricing adjustment provision, transactions can be determined, and a transfer pricing adjustment made in line with the OECD transfer pricing guidelines, thereby enabling the application of the OECD transfer pricing guidelines in their full extent.
Background
Finnish transfer pricing legislation has faced pressure to change for some time. In recent years, the Finnish Supreme Administrative Court has ruled in several cases concerning transfer pricing. Some of the rulings in the past few years have focused on whether the tax administration has the authority to disregard and recharacterize a transaction under the transfer pricing adjustment clause.
The Finnish Supreme Administrative Court has stated that the assessment methods for the arm’s length principle determined in accordance with the OECD transfer pricing guidelines hold a significant role in the interpretation of an assessment of the arm’s length principle in terms of the implemented transaction. According to the Supreme Administrative Court, disregarding and reclassifying a transaction would require an explicit clause in the legislation, which – before the amendments – has been problematic, as such a clause did not exist in the Finnish transfer pricing legislation. These were the underlying reasons behind amending the transfer pricing adjustment clause.
Key amendments to the transfer pricing adjustment clause
Transactions between related parties must follow the arm’s length principle and, as such, be subject to the same pricing and other conditions as those that would have applied between independent parties in similar circumstances. The requirement to follow the arm’s length principle between related parties forms the basis of international transfer pricing. Furthermore, the arm’s length principle is stated in Article 9 of the OECD Model Tax Convention, which the tax treaties concluded by Finland generally follow.
One of the changes to the transfer pricing adjustment clause is to emphasize and clarify the importance of the arm’s length principle by mentioning that assessments in transfer pricing situations are made in light of the arm’s length principle. Moreover, the amended clause includes clarification of certain elements of the transfer pricing process.
Furthermore, the new legislation makes clearer, following the OECD transfer pricing guidelines, that the transfer pricing process includes, as a first step, determining the transaction according to its actual content. After this, in exceptional cases, it would also be possible to disregard a related party transaction and recharacterize the transaction, if the transaction differs from what independent, economically sound parties would have agreed in similar circumstances. Furthermore, disregarding a transaction would also require that a price that follows the arm’s length principle could not be determined for the transaction. However, it should be noted that disregarding a transaction can only be applied in exceptional circumstances.
Furthermore, the proposed amendments also take a stand on the temporal dimension of the OECD transfer pricing guidelines. Clarifications provided in future updates of the OECD transfer pricing guidelines may continue to be taken into account in the taxation of a taxpayer in the tax years preceding the update, provided that the clarifications do not contain fundamentally new interpretative recommendations.
In conclusion
The amendments expand the scope of application of the transfer pricing clause and widen the tax administration’s power to disregard and recharacterize transactions in exceptional circumstances in situations where the tax administration, due to the limitations of national case law, has not been able to address in the past.
According to the government’s proposal, the aim is to bring Finland’s domestic legislation in line with the provision of Article 9 of the OECD Model Tax Convention and, thus, give Finland the same level of taxing rights as other countries with which Finland has a tax treaty.
The best way for companies to take into account the amendments to the transfer pricing clause is by continuing to carefully document intra-group transactions. Furthermore, companies may ensure that the transfer pricing is at arm’s length by requesting pre-emptive discussions with the tax administration.
What’s the exact definition of the exceptional conditions? Please offering some examples.