Court’s transfer pricing decision could cost taxman hundreds of millions of euros

Finland’s Tax Administration has lost a landmark court case on transfer pricing. The Supreme Administrative Court’s ruling means the taxman could now lose out on hundreds of millions of euros in tax.

The Finnish Tax Administration could lose out on millions of euros in tax from multinationals after a decision from the Supreme Administrative Court on transfer pricing. Transfer pricing is the practice whereby companies with operations in multiple countries buy and sell services and sometimes make loans between subsidiaries, sometimes with the aim of lowering their tax bill.

Finnish tax officials have been investigating transfer pricing by multinationals for more than a year, and now their work may have been in vain.

“The Supreme Administrative Court has taken a very clear stance on the boundaries of interpretation on transfer pricing and naturally the Tax Administration will follow this line in the future,” said the Tax Administration’s leading expert Jari Salokoski.

According to Salokoski no bills had yet been sent to companies over transfer pricing and therefore it will be easy for his officials to follow the court’s guidance. The decision relates to loans made between subsidiaries of companies with operations in Finland and abroad.

If a parent company based abroad loans money to a subsidiary based in Finland, the companies themselves have considered the interest on the loan to be tax deductible. The tax man has seen the issue differently, viewing the money as external capital that is not tax deductible.

The court has now ruled against the tax administration with one company happier than most. Fortum has asked for a 136 million euro tax bill to be corrected, and according to the company’s head of tax affairs Reijo Salo the firm now expects that request to be accepted.

“The court has ruled on all the questions of principle that we too had put forward,” said Salo. “In my opinion the decision is quite clear.”