What is transfer pricing?

Transfer pricing means pricing of business transaction between companies of same group. These kind of intra-group transactions are for example transactions with goods, provision of services, payment of fees for immaterial rights, and the provision of financial services.

No deviations from the arm's length principle

The usability to the arm's length principle is internationally recognized. Intra-group transactions should be priced without deviations from the arm's length principle - the same conditions and amounts should be used that would be used in the case of transactions between independent, non-associated parties. The purpose of the arm's length principle from the point of view of tax administration is that taxable incomes are accumulated and accounted for in the country where they are actually generated.

OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations” is used as a source of reference in matters that require interpretation. Furthermore, not only the recommendations of the OECD but also the internal legislation of Finland requires that associated parties (including subsidiaries of the same consolidated group of companies) follow the arm's length principle.

It should be noted that from Finland's point of view, it will be considered a domestic business entity for tax purposes if a foreign company has a permanent establishment in Finland.  

If the tax authorities observe deviations from the arm's length principle, they may reassess the income tax of the company and make an income-tax adjustment. Taxation will be carried out as if the arm’s length principle has been followed.

Documentation requirement

There is a requirement to retain and file descriptive documentation on the transactions between associated companies. The deadline for the preparation of documents is six months of the closing of the tax year.

Avoidance of double taxation

When transfer pricing involves incomes that are generated in two or several tax jurisdictions or countries, careful documentation may prevent international double taxation. If desired, the Finnish business entity can file a request to the Finnish Tax Administration for an advance ruling on the tax treatment of its transfer pricing. If double taxation has occurred, and the company has had to pay double tax internationally because of its transfer pricing, the company should primarily turn to the officials of the other country to request readjustment. Alternatively, the company may lodge an appeal against the tax decision concerning its operations.

International tax treaties include provisions on a reassessment process called mutual agreement procedure. If the company is a Finnish tax resident, it should send the Finnish Tax Administration a letter to request this procedure. Some of the existing tax treaties include provisions with time limits restricting the period when a mutual agreement procedure can be started. Before the company files its official requests, we recommend that it contacts the Finnish Tax Administration to examine the situation together with a specialist, and to make conclusions as to whether or not the requirements of a mutual agreement procedure are fulfilled.