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Finnish transfer pricing (TP) legislation is based on the arm’s length principle and follows the OECD guidelines.
The arm’s length principle is contained in section 31 of the Act on Assessment Procedure, and it is also included in the tax treaties concluded by Finland (typically in Article 9).
Provisions on the documentation obligation are contained in section 14 a of the Act on Assessment Procedure and provision regarding the content of the documentation are contained in section 14 b. Provisions on the presentation of the documentation and additional supplementing information are contained in section 14 c of the Act on Assessment Procedure.
The transfer pricing documentation must be presented to the tax authorities at their request.
Taxpayers with the obligation to prepare transfer pricing documentation need to fill the form number 78 “Explanation of transfer prices” with their corporate income tax return.
The transfer pricing adjustment rule (§ 31 of the Act on Assessment Procedure) has been amended in January 2022 to reflect the OECD Model Tax Agreement and the OECD Transfer pricing guidelines for the interpretation of tax agreements.
Transfer pricing in Finland is largely based on OECD's transfer pricing guidelines
Transfer pricing methods
The methods of the OECD's transfer pricing guidelines are applied. Those methods include comparable uncontrolled price method (CUP), resale price method (RPM), cost plus method, transactional net margin method (TNMM) and profit split method.
Transfer pricing documentation
Preparation of transfer pricing documentation
Transfer pricing documentation is a document compiling the transactions between companies belonging to the same group and the dealings between a company and its permanent establishment.
In Finland, there are three types of transfer pricing documentation: 1) master file, 2) local file and 3) country-by-country report (CbCR)
The documentation obligation applies to large companies that meet at least one of the following conditions: the company employs at least 250 people; the company's turnover is more than EUR 50 million and its balance sheet total more than EUR 43 million; and the company is not a small or medium-sized enterprise, as defined in the Commission recommendation 2003/361/EC.
On the grounds of the Commission recommendation, when the number of employees, the turnover and the balance sheet total are assessed, the group level key ratios must be considered. In practice, this means that the consolidated turnover and the balance sheet total of the ultimate parent company and the number of employees in the whole group must be considered.
A company will be liable to compile a transfer pricing documentation if the threshold for the number of employees or turnover and the balance sheet total is exceeded on the balance sheet date in two consecutive financial years. The documentation obligation only applies to the latter year.
The documentation obligation ceases if the number of employees or turnover and the balance sheet total remain below the thresholds in two consecutive financial years. The documentation must, however, be compiled for the first year, for which the figures remain under the threshold.
The number of employees, turnover and the balance sheet total are calculated based on the figures of the most recent balance sheet. The turnover is exclusive of value added tax and other indirect taxes.
If the total amount of related-party transactions is more than EUR 500 000, transactions must be extensively documented.
Country-by-country reporting applies to multinational group companies with a consolidated turnover/net sales of at least EUR 750 million.
A company with a documentation obligation must present its transfer pricing documentation within 60 days of the tax authority's request. However, the transfer pricing documentation for a particular tax year shall not be requested earlier than six months from the end of the month in which the financial year ends. A company must submit the additional information supplementing the transfer pricing documentation within 90 days of the tax authority's request. The tax authority may extend the deadlines on request.
Master and local file
The documentation obligation of master and local file is based on the OECD guidelines. Documentation obligation of master and local file applies to large companies (conditions mentioned above). Thus, small and medium-sized companies are exempt from the documentation obligation.
Some risk factors for challenge
Persistent losses in the entities.
Transactions with parties resident in low tax jurisdictions.
A punitive tax increase of a maximum of EUR 25,000 may be imposed on a company with a documentation obligation if the company has not presented its transfer pricing documentation or the additional information supplementing it in the set period of time. The punitive tax increase may also be imposed if there are essential inadequacies or errors in the transfer pricing documentation supplied by the company with a documentation obligation.
Economic analysis and how to demonstrate an arm’s length result
The arm's length principle is based on the separate entity approach. Under the approach, group companies are considered as independent companies for taxation purposes.
In order to determine the arm's length price, one of the parties to the transaction must be selected as a tested party.
There are number of different methods for verifying that transfer pricing is at arm's length. The different methods are described in the transfer pricing guidelines of the OECD
Advance Pricing Agreements (APAs), dispute avoidance and resolution
There is no separate legislation regarding APA in Finland. Finland can conclude an advance pricing agreement with states with which it has a tax treaty (a treaty for the avoidance of double taxation with respect to taxes on income and capital gains).
An APA is based on the mutual agreement procedure laid down in the tax treaties between Finland and other states under which international double taxation can be eliminated between the state parties to the treaty. The mutual agreement procedure is based on Article 25 of the Model Tax Convention published by the OECD.
A company seeking to receive advice and guidance in its transfer pricing matter can contact the Finnish Tax Administration directly, seek a preliminary ruling from the Finnish Tax Administration or submit an application for an advance pricing agreement (APA) to the competent authority.
Advance rulings issued by the Finnish Tax Administration or the Central Tax Board do not eliminate the risk of international double taxation.
The mutual agreement procedure (MAP) is a means through which the competent authorities of two or more countries can negotiate with one another. Its purpose is to resolve disputes regarding interpretations and to eliminate double taxation. In transfer pricing issues the MAP procedure can either be based on the articles of Finland’s income tax treaty with the other country (article no 25 of the OECD model tax treaty), or on the provisions of the EU Arbitration Convention (90/436/EEC), or alternatively, on the tax dispute resolution mechanisms in the European Union under Directive EU 2017/1852.
The documentation obligation does not affect to small or medium-sized enterprises.
Even if the company is not obliged to compile a full documentation referred to in the Act on Assessment Procedure, it is recommendable for the multinational enterprises to always document their related party transactions, at least in a free-form manner.
The OECD guidelines regarding COVID-19 are followed.
For further information on transfer pricing in Finland please contact: