Insights/18 Jun 2014

Stay in the loop

More than 60 percent of world trade takes place within multinational enterprises. That is why the fiscal authorities are taking an ever closer look at multinationals’ transfer pricing - and you should too.

Text Terhi Rauhala
Photos Attorneys at law Borenius, Shutterstock

BORENIUS FINLAND - Globalisation and the downslope of world economy have brought about a stricter attitude toward the interpretation of transfer pricing provisions by governments. In June, the European Union acted to close a loophole, namely hybrid loan arrangements within cross-border company groups. The European Commission has identified such arrangements as a harmful tax planning tool.

– Fiscal authorities are pressed to find ways to keep their tax base from eroding. In Finland the authorities have acquired an exceptionally aggressive approach to interpreting these rules, says Jarno Mäkelä, Senior Associate at Attorneys at law Borenius’ tax group.


In late 2013, major tax reassessment rulings were issued for eleven established Finnish multinationals, amounting to EUR 892 million in total. This was followed by a heated public debate over their justification.

– From a legal perspective these companies had managed their transfer pricing issues well and there was nothing to reprimand for in their documentation either. The issue was pricing, not shortcomings in paperwork. Basically, the companies have utilized legal tax planning tools, but the authorities have tightened their approach, says Mäkelä.

– The tax authorities are wrong in suggesting that utilising existing mechanisms, which offer a chance for tax relief, would automatically count as tax avoidance. Legitimate tax planning should not be addressed with residual taxes afterwards, says Janne Juusela, Partner at Attorneys at law Borenius’ tax group.

– The conversation in Finland is slightly out of proportion. Giant foreign multinationals, such as Google, have influenced public opinion with their fierce tax planning. You cannot find similar examples among Finnish corporations, he continues.

The Finnish companies in question have complained and the processes are still open. At the same time 30 more reassessment processes are under way.

Argue your case thoroughly

Partner Janne Juusela from Borenius

Juusela and Mäkelä find the tax authorities biased view on business operations problematic.

– The assessment starts from the premise that a corporation’s business model automatically requires for the majority of the profit to be repatriated into the Finnish parent company. There is no consideration over cases where the foreign subsidiary holds significant assets and carries considerable business risks – also of losses – and thus is eligible for a share of the profit, Juusela describes.

– From the company’s perspective it is difficult to see how the tax authority would comprehend their business better than the company itself. There ought to be a genuine dialogue over industry specific characteristics, adds Mäkelä.

Working hands on with their customers' tax audits, Mäkelä and Juusela have also witnessed negligence on the fiscal authorities’ part.

– There have been clear misconducts. For example, interviews with company staff have been left undocumented, or companies have been subject to information phishing. They have spent months trying to gather the requested data from abroad, and in the end it makes no difference in the final assessment. This is very problematic from the company's viewpoint and weakens the legal protection of the taxpayers, says Juusela.

Both tax experts emphasize the significance of legal expertise in a tax audit process.

– We can see from early on, what the tax authorities are after. Thus we are able to argue our client’s case in real time. All arguments should be brought to the table in the beginning of the process. When something is left unrectified, it is always more difficult to change the officials’ minds later, says Mäkelä.

Further restrictions

External tax advisors and professors alike have also stated that the policy has indeed changed. The change will also reach legislative level in the near future. Last summer the OECD launched its Action Plan on Base Erosion and Profit Shifting (BEPS), which addresses the perceived flaws in the international tax rules and will influence national tax regulation as well as transfer pricing issues.

– For example OECD guidelines for managing immaterial assets will change. Presently, they can be owned through simple dormant companies. The OECD presents that in the future these companies must have more substance, i.e. R&D operations should in principle take place in the company that holds the immaterial assets. Legal and accepted tax planning opportunities will be further restricted, says Mäkelä.

The application of market price principle will also face considerable changes.

– To demonstrate the fulfilment of market price principle, companies will be required to document and report on their whole value chain in much more detail than before. Thus we advise our customers to prepare for the new regulation and audit their tax planning well beforehand to make the necessary updates, concludes Juusela.

Be prepared

  • Pay even closer attention to transfer pricing issues, especially when restructuring business operations. Document everything well. The tax audit may occur after several years.
  • In case of a tax audit, engage transfer pricing experts into the process from early on, before submitting the preliminary audit report. In tax audit defenses, points of order play a central role. An attorney’s office has the best expertise in these matters.
  • Tax audits are very elaborate when it comes to immaterial assets or financing arrangements, for example. Borenius has a wide range of specialists in different fields to help. Borenius is also independent from the audit and can provide assistance even when your company’s own auditor is incapable.
  • As a member of the international Taxand network Borenius can offer tax advice through a trusted partner network.

Senior Associate Jarno Mäkelä and Partner Janne Juusela are among the many tax specialists at Borenius (Finland).

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