The Finnish Supreme Administrative Court confirms that the business model chosen by parties must be respected in transfer pricing context
The Finnish Supreme Administrative Court published on 13 September 2017 precedent 2017:145 that further clarifies the scope of application of the Finnish transfer pricing adjustment provision (Act on Assessment Procedure (“AAP”) Section 31).
In its previous landmark precedent KHO 2014:119 the Supreme Administrative Court stated that the so-called re-characterization of related-party transactions described in the OECD Transfer Pricing Guidelines was outside the scope of application of the Finnish transfer pricing adjustment provision. In the said decision, the Supreme Administrative Court stated that transfer pricing adjustments can only cover the terms and conditions of the transaction as agreed and implemented by the parties. In addition, the Supreme Administrative Court has confirmed in its more recent precedent KHO 2017:128 that disregarding the legal form of the transaction by replacing it with another transaction is not allowed under the transfer pricing provision unless the prerequisites of Section 28 of the AAP (the anti-avoidance provision) are fulfilled simultaneously.
In its new precedent the Supreme Administrative Court further clarified its position by stating that the transaction chosen by the related parties must be respected, i.e., that the transfer pricing adjustment provision’s scope of application covers only the assessment of the terms and conditions of the chosen transaction according to its form. In the case at hand, the tax authorities had substituted the business model chosen by parties (covering of costs through service fees charged to group companies) with an alternative model (sharing of costs within the group companies as incurred).
The ruling has significance to companies that are contemplating to implement new intra-group business models, further strengthening the principle of taxpayers’ freedom of choice. In addition, the ruling has significance in several ongoing tax disputes where the business or pricing model applied by related parties has been substituted with another model by the tax authorities. It is now evident that not only the transaction form itself but also the business or pricing model chosen by the parties must be respected at all times. The ruling is a long-awaited continuation to the precedent 2014:119.