Tax control of transfer pricing

This guidance will be updated.

The income taxes of the taxpayer are assessed based on the tax return filed by the taxpayer, information received from third parties and other relevant information obtained. After the taxpayer has fulfilled its declaring obligation, the tax authority and the taxpayer must, to the extent possible, participate in resolving the matter. The responsibility for clarifying the matter mainly lies with the party in a better position to do so.

Explanation of transfer pricing is obliged to be presented with the tax return annually

If the company is obliged to document its transfer pricing, it must provide, as part of its tax return, an explanation of transfer pricing of its related party transactions during the tax year (Form 78, Explanation of Transfer Prices) when the other party to the transaction has been a foreign related party. However, the company is not required to append its transfer pricing documentation to the tax return.

As a rule, the Finnish Tax Administration does not examine new transfer pricing matters while processing the annual tax return as the transfer pricing related matters usually require extensive examination.

Instructions on how to fill out the form
Read more about obligation to compile a transfer pricing documentation
Read more about transfer pricing documentation

Transfer pricing can be examined in a tax audit

The purpose of a transfer pricing tax audit is to examine all the essential facts and describe them in the tax audit report as they are. The Finnish Tax Administration may use the tax audit as a tax control means in matters concerning transfer pricing. This is usually the means used in cases where the Finnish Tax Administration has identified a risk of clear and extensive pricing errors which have recurred during several years or aggressive tax planning in the application of the arm's length principle.

The aim is to carry out the tax audit as soon as possible after the transfer pricing risk has been identified. As a result of risk analysis the Finnish Tax Administration may conclude that it is necessary to carry out a tax audit to examine whether a recently accomplished or planned transaction is in accordance with the arm's length principle.

Stages of a tax audit

The Finnish Tax Administration usually requests the company to present its transfer pricing documentation as the first stage of the tax audit. In connection with the request, the parties also agree on the start of the tax audit. Not all the requests to provide a transfer pricing documentation lead to a tax audit.

In the tax audit, the Finnish Tax Administration reviews the transfer pricing documentation and other material, may request additional information and limits the tax audit tentatively on a certain matter. The Finnish Tax Administration will also review the tax audit material of the audited company (such as minutes of the meetings) and, if necessary, accounting material, and interviews the staff of the company. A tax audit report based on the audit will be compiled and the company will have an opportunity to present its response to the report.

Since the examined entirety of the matters and material reviewed in tax audits concerning transfer pricing are often extensive and complicated, a tax audit often takes a long time. Where the audit is directed toward the company’s transfer pricing, the Taxation Unit conducts the audit.

The tax audit report contains a functional analysis of the company

The functional analysis concerning the examined matter is usually a pivotal part of the tax audit report. The functional analysis contained in the tax audit report is based on the company’s transfer pricing documentation and the functional analysis (as part of the documentation) compiled by the company. The functional analysis in the tax audit report is based on an extensive examination. In addition to the documentation, the Finnish Tax Administration may also request other written information from the company. The Finnish Tax Administration may examine the matter also by conducting interviews.

The functional analysis included in the tax audit report contains a description of the sub factors of the examined transaction and the factors affecting the pricing of the transaction (such as decision-making and control relationships), analysis of the value chains, allocation of the intangibles and allocation of the crucial risks. A carefully compiled functional analysis will provide a basis for the comparability analysis in which the arm’s length nature of the pricing is assessed.

Comparability analysis involves the assessment of the comparables and the suitability of the transfer pricing methods

In the comparability analysis the suitability of the transfer pricing methods and the comparability of the comparables are assessed. They can be used as a basis for verifying that the pricing applied is at arm's length. If necessary, the tax auditors compile a search for comparables and an economic analysis.

Taxation can be amended based on the tax audit

The taxpayer is always granted an opportunity to be heard if the tax audit report contains transfer pricing adjustment proposal. After the taxpayer has been heard concerning the tax audit report, the Transfer Pricing Unit of Large Taxpayers' Office will make the decision on the tax assessment. The decision shall be made based on the tax audit report, the taxpayer’s response and other information obtained.

Renewed legal provisions on tax adjustments and appeals have been valid from 1 January 2017. Under the new provisions, the Finnish Tax Administration may make adjustments to the taxpayer's taxation during a period of six years following the assessment if the adjustment is based on the transfer pricing adjustment referred to in section 31 of the Act on Assessment Procedure.