Transfer pricing is the pricing of transactions between related parties (e.g. two group companies). The sale of goods and services, financing or compensation paid for intangibles are examples of such transactions.
The cornerstone of transfer pricing is the arm's length principle. This means that when two related parties trade with each other, they need to set prices, terms and other conditions as if they were unrelated parties.
Transfer pricing considerations are relevant for a company that is part of a group of companies. The arm's length principle applies to intra-group transactions as well as to transactions between companies and their permanent establishments.
The arm's length principle is included in Article 31 of the Assessment Procedure Act. Transfer pricing documentation rules are included in Articles 14a-14c of the Assessment Procedure Act, and Articles 14d-14e contain rules about Country-by-Country reporting.
In case a company has an obligation to prepare and maintain transfer pricing documentation, it also has to submit Form 78, "Explanation of Transfer Prices".
The Finnish Tax Administration follows the approach of the OECD Guidelines for Transfer Pricing.
A company is obliged to maintain transfer pricing documentation if at least one of the following is true:
- The company employes at least 250 employees
- Net sales are 50M€ or more AND balance sheet total is 43M€ or more
- The company is not a small or medium-sized enterprise as per EU Commission's definition.
Please note that the figures used in calculating these are the consolidated figures of the whole group. Thus, the documentation obligation often applies to fairly small companies operating in Finland if they are part of a large international group.
The transfer pricing documentation needs to be submitted to the Finnish Tax Administration only upon request.
Even if a company is not obliged to compile a full documentation referred to in the Act on Assessment Procedure, it is recommendable for a multinational enterprise to always document its related party transactions, at least in a free-form manner. Carefully documented information is useful if the company compiles a full documentation or discusses transfer pricing matters with the tax authorities afterwards.
In case a company has an obligation to maintain transfer pricing documentation, it has to submit Form 78 together with its annual tax return.
Intangibles can create a significant part of a company's value. Therefore the transfer pricing considerations for intangibles are often relevant. It is important to note that the intangibles to be considered for transfer pricing purposes are not always recognised as intangible assets for accounting purposes. Intangibles may be generated in research and development activities, production and manufacturing as well as in sales and marketing. Patents, trademarks, copyrights, business names, design rights, know-how and trade secrets are typical intangibles.
When considering transfer pricing, it is important to recognize whether the intangibles generate any such business benefits for which an independent enterprise would be willing to pay.
In general, the owner of the intangibles is typically entitled to the income generated by intangibles. However, along with the legal owner of the intangibles, also other group companies may have been involved in the development, enhancement, maintenance, protection and exploitation ("DEMPE-functions") of the intangibles. It is important to identify all group companies involved in the DEMPE-functions of the intangibles.
Two common examples of intra-group transactions involving intangibles are licensing and sale. A company may grant another company a right to utilize its intangibles (a license). The licensee typically pays the licensor compensation for the license as running royalty. In the sale of intangibles, the seller transfers its rights in the intangibles and all the profits they will generate in the future. In both examples, it is important to consider whether independent parties would agree on similar pricing, terms and other conditions in similar circumstances.
You can read more about the transfer pricing of intangibles from here.
You can find more information about transfer pricing from here.
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