Foreign tax assessment not in line with the terms of the tax treaty
Date of issue:
In force until further notice
If the foreign tax relates to dividend, interest, or royalty income, any excess tax is usually refunded if the taxpayer submits more information to the payer or to the tax authority in the source country. Also in other situations involving a simple misunderstanding, or lack of information, any excessively paid taxes are usually refunded.
Too much tax on dividend, interest or royalty income
Most countries have a 25%–30% withholding rate on dividend, interest and royalty paid out to a non-resident beneficiary. However, international tax treaties often prescribe a lower rate, such as 15%, to be withheld from residents of the other treaty country. The taxpayer has to give evidence in the source country that he is entitled to the benefits of the tax treaty. If the evidence is sufficient, in some countries the payer can directly implement the lower rate in the tax treaty. But very often the payer always has to use the higher withholding rate, and the taxpayer must afterwards submit an application for tax refund. In the source country there usually are special forms to be used for these applications.
Example: A Finnish-resident Mr. Järvinen had to pay 28% tax at source in Denmark on dividends from a Danish company, even though the tax treaty only prescribes 15% tax. For instructions as to how the matter can be put right, Mr. Järvinen can contact the Danish payer of dividend or the tax administration of Denmark. Mr. Järvinen can also go to the Nordisk e-tax Website at www.nordisketax.net to examine Danish guidance materials regarding refunds of excess tax on dividends.
When taxpayers ask for refund in the source country, very often a Certificate of Tax Residence must be enclosed to the application. If a Finnish resident needs such a certificate, he can turn to the local tax office in Finland.
Too much tax on other types of income
Similarly, wage income can sometimes be taxed in the source country not in accordance with the tax treaty. In most cases this is due to lack of necessary information on facts and circumstances on the employer’s part. Any excess amounts of tax are usually refunded if the taxpayer submits more information to either the employer or to the foreign tax authority.
Example: A Finnish-resident Mr. Korhonen worked 9 months for a Swedish university. He worked 5 months in Finland and 4 months in Sweden. The salary for 9 months was taxed in Sweden even though the tax treaty allows a Swedish tax only to salary earned when working in Sweden (the 4-month period). Mr. Korhonen should contact the Swedish university and explain that part of the work was done in Finland. The university may be unable to refund the excess tax withheld, but they can probably give Mr. Korhonen instructions how to proceed. If necessary, Mr.Korhonen can also contact the Swedish Tax Agency.
Another example concerns royalties. A Finnish company may have been taxed on receipts of royalty income in a foreign country, but as indicated by the company, the income should be regarded as business income instead of royalty income. The company considers that the source country does not have any taxing rights on the income, because no permanent establishment has existed in that country.
Example: A Finnish enterprise has received income in ‘A’ state net of 10 % tax collected at source by the payer, because the payer had classified the income as copyright royalty, and the Article on royalties would apply to it. However, the Finnish enterprise considers the income as business income (not royalty income), and demands tax refund of the authorities of ‘A’ state. If the appeals board in ‘A’ comes to the conclusion that the income indeed is not considered royalty income, the Finnish enterprise will be entitled to a refund in ‘A’.
Situations where appeals in the source country have not brought results
Sometimes the facts are not cleared up in the source country sufficiently or tax authorities in the source country have classified certain income types differently from the Finnish interpretation. If the appeal in the source country brings no results, the Finnish taxpayer should contact the local tax office in Finland. The Finnish Tax Administration can examine the legal reasoning in the decision given in the source country. If the Finnish tax authorities can find the reasoning acceptable, it is possible to reassess the Finnish taxes and eliminate the double taxation.
Mutual agreement procedure
Finland’s tax treaties also contain a provision concerning the Mutual agreement procedure. In special cases the competent authorities (Ministry of Finance, or the tax administration) in both countries, can negotiate (usually by correspondence) in order to eliminate double taxation
/ or taxation not in accordance with the treaty. The result of such negotiations can be that one or the other country or both countries will give up their tax or part of it. The countries do not however have any binding obligation to give up any of their taxes. If the taxpayer has made an application to an appeal instance, Finland will start the negotiations only after the instance has given its decision.
In a mutual agreement procedure, the tax authorities of both countries can exchange opinions and try to find a solution to a specific tax issue. Correspondence may often span a few years, and the outcome may simply be a recommendation given to the taxpayer to submit an appeal, or an application for tax refund, in the source state. This means that the mutual agreement procedure cannot be regarded as a primary tool that would give better results than the usual taxpayer-submitted refund applications or requests for correction of an error. Instead, mutual agreement procedure will typically only be practicable in situations where the other country has been unable to implement a tax adjustment even though the taxpayer has lodged an appeal in that country.
In order to ask for a mutual agreement procedure to be started a Finnish-resident taxpayer can send a free-text letter to the Finnish Tax Administration (”Request to start a mutual agreement procedure within the meaning of an international tax treaty”). Some of Finland’s treaties include deadline clauses regarding latest possible start dates of mutual agreement procedures. Some specific cases include treaty provisions that the competent authority should be the Finnish Ministry of Finance. If this requirement is valid, the Finnish Tax Administration will transfer the procedure to the Ministry of Finance. Prior to presenting the official request, the taxpayer should be in contact with the Finnish Tax Administration to first investigate the feasibility of mutual agreement procedure.
Sometimes it is clear that the other country has the taxing rights, but the taxpayer wants to raise an appeal because for example some tax deductions have not been accepted in that country. These cases do not involve taxation against the tax treaty. The question is only whether tax rules in the other country have been correctly applied. Mutual agreement procedure has not been designed to deal with these kinds of cases.