Assessment of taxes that are contrary to the provisions of the tax treaty
The tax authorities of the country of source may have moved away from the provisions of the tax treaty with Finland, burdening your income with taxes that are not in line with the treaty. If this has happened, you as the taxpayer will need to turn to the authorities of that country to ask for adjustment or refund. If your foreign-sourced income has consisted of dividends, interest or royalties, you will be eligible to refunds of any excessively paid taxes if you give more information of your actual circumstances either to your payer or to the foreign tax authorities of the country where the income is sourced. Similarly, it is usually easy to obtain a refund in other comparable situations where the authorities have deviated from the tax treaty as the result of a misunderstanding or too little information.
Excess tax on dividend, interest or royalty income
Most countries have a 25%–30% withholding rate on dividend, interest and royalty paid out to a nonresident 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 must give evidence in the source country that he is entitled to the benefits of the tax treaty, otherwise the payer will normally be compelled to withhold tax at the full rate. If the evidence is sufficient, in some countries the payer can directly implement the lower rate in the tax treaty. But very often, when making a payment, the payer always has to use the higher withholding rate, and the taxpayer must afterwards submit an application for tax refund. Special forms are normally provided in the source country for making these applications.
Taxpayers must normally enclose a Certificate of Tax Residence with the application letter when requesting a refund from the source country. Finnish residents can obtain the certificate from the local tax office in Finland.
Excess tax on other types of income
Similarly, wage income can sometimes be taxed in the source country in a manner contrary to the tax treaty. In most cases this is due to lack of necessary information on the employer’s part regarding facts and circumstances. Any excess amounts of tax are normally refunded if the taxpayer submits more information to either the employer or to the foreign tax authority.
Where appeals in the source country have not brought results
Sometimes the matter remains unresolved in the source country even after appeal. Necessary information may not have been obtained, or tax authorities in the source country may have interpreted certain income types differently from the Finnish authorities.
If the appeal in the source country fails to bring 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 find the reasoning acceptable, they may reassess the Finnish taxes and eliminate the double taxation.
Exceptional situations may require a special procedure
Finland’s tax treaties also contain a provision concerning the mutual agreement procedure. In special circumstances, the competent authorities in both countries (normally the ministry of finance or the tax administration) can negotiate (usually by correspondence) in order to eliminate double taxation or taxation contrary to the treaty. The result of such negotiations may be that one or other country, or both, will forgo their tax, either wholly or in part. However, it should be noted that the countries do not have a binding obligation to do so. If the taxpayer has made an application to an appeal authority, Finland will only start negotiations after the authority has given its decision on the appeal.
In a mutual agreement procedure, the tax authorities of both countries will exchange opinions by correspondence and attempt to find a solution to a specific tax issue. The correspondence may span several years, and the final outcome may simply be a recommendation to the taxpayer to submit an appeal or an application for tax refund to the source state. This means that the mutual agreement procedure cannot be regarded as a primary tool for achieving better results than the normal refund applications or requests for correction submitted by the taxpayer. Instead, the mutual agreement procedure will typically only be practicable in situations where the other country has been unable to implement a tax adjustment even after an appeal.
The Finnish Tax Administration should be contacted first
To request a mutual agreement procedure a Finnish-resident taxpayer can send a free-form letter to the Finnish Tax Administration headed “Request to start a mutual agreement procedure within the meaning of an international tax treaty”. Some of Finland’s treaties include deadline clauses regarding the 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. In these cases, the Finnish Tax Administration will transfer the procedure to the ministry. Before presenting the official request the taxpayer should contact the Finnish Tax Administration to establish the feasibility of a mutual agreement procedure.
Sometimes it is clear that the other country has taxing rights, but the taxpayer is dissatisfied, and wishes to raise an appeal for a specific reason, e.g. because certain tax deductions have not been accepted in that country. Here the question is not about taxation contrary to the tax treaty, but of whether tax rules in the other country have been applied correctly. The mutual agreement procedure has not been designed to deal with these kinds of cases.