New transfer pricing documentation rules and fiscal assessment procedure in Finland
31 October 2016
The Government issued a bill (HE 142/2016) to Parliament on 15 September 2016 to implement OECD BEPS Action 13 and the amendment to the EU administrative assistance directive concerning the exchange of information via Country-by-Country Reporting. This will be relevant for retail, food & beverage, and hotel & leisure businesses with operations in Finland who will need to determine whether the new rules apply to them.
The Government is expected to issue another bill later this year on the automatic exchange of tax rulings to enforce another change to the directive on administrative assistance. In addition to these international measures, new procedural acts on assessment of retail, food & beverage and hotel & leisure businesses for several types of taxes will generally take effect from 1 January 2017. These taxes include, but are not limited to, corporate and individual income taxation, payroll withholding, VAT, and gift and inheritance taxation.
- Transfer Pricing Documentation and Country-by-Country Reporting
The purpose of the bill is to implement the OECD recommendations regarding the transfer pricing documentation obligations for Master files and Local files, and the preparation and filing of Country-by-Country reports. Finnish law has required a Local file (ie, enterprise and transaction specific documentation) since 2007. The amendment merely updates the local law to follow Annex II of Chapter V of the Transfer Pricing Guidelines concerning the Local file. The main changes in the bill relate to the Master file requirements which will correspond with the requirements set in Annex I of Chapter V of the OECD Transfer Pricing Guidelines.
The exemptions from the local documentation requirements are very narrow. A complete Local file is required if the annual volume of controlled cross-border transactions of the local entity or branch with a non-resident related party exceeds EUR 0.5 million. If the annual controlled transactions with a local entity are less than EUR 0.5 million, the requirement for a detailed comparability and functional analysis is waived but the other parts of the Local file have to prepared.
A Master file will be required if the total amount of all cross-border transactions of the local associated taxpayer exceeds EUR 0.5 million with any non-resident related party. As the Finnish Tax Administration interprets the balance of intercompany payables or receivables with a local associated entity to be included in the EUR 0.5 million threshold, all other but merely small, passive local group entities or branches have to be documented.
Small and medium-sized taxpayers belonging to such groups (see 2003/361/EC) are exempted from the documentation requirement. The group meets the criteria if the number of its employees is less than 250 and either its consolidated sales are less than EUR 50 million or the balance sheet total is less than EUR 43 million.
The transfer pricing documentation has to be presented within 60 days, and the comparability analysis within 90 days, upon request by the Tax Administration. It cannot be requested before 6 months have elapsed from the end of the accounting period in question. An extension may be granted. Therefore, a Local and Master file complying with the new rules for a local entity, whose tax year is a calendar year, should be finalised by 30 June 2018.
The Country-by-Country reporting and the automatic exchange of information will be implemented based on the changes to EU administrative assistance directive.
The domestic group parent company, which is the ultimate parent company of the group, is required to prepare the Country-by-Country report if the consolidated financial statements of the group include at least one foreign enterprise or one foreign permanent establishment and the consolidated sales in the previous tax year amount to at least EUR 750 million. A domestic taxpayer may also be commissioned by the foreign parent company to file the report for the group. If the Finnish Tax Administration does not receive the data from the foreign country in question it may request an associated local entity or a branch to submit the Country by Country report. A Finnish taxpayer belonging to a foreign group is only required to file the data at its disposal if the ultimate foreign parent has refused to give the information and if the Tax Administration has been duly notified on this. The local entity has to notify the Finnish Tax Administration by the end of the tax year in question as to which group entity will provide the Country by Country report.
Documentation-related penalties for non-compliance will be extended to cover the Master file and Country-by-Country reporting obligations. The penalty may not exceed EUR 25,000. In addition, transaction related penalties, which can be significant, and interest may be imposed.
If the proposed bill is passed by Parliament in the current form, as expected, the new transfer pricing documentation requirements will be applicable for accounting periods ending on or after 1 January 2017. The Country-by-Country reporting will be required for accounting periods which started on 1 January 2016 or thereafter for retail, food & beverage and hotel & leisure Finnish groups whose consolidated turnover amounts to or exceeds EUR 750 million in 2015, or for local entities or branches associated with such foreign groups. Companies, whose tax year is a calendar year, should issue the reports on 31 December 2017, at the latest. Under a transitional rule, the local entity has to notify the Finnish Tax Administration by 1 June 2017 of the name of Country by Country reporting entity of the group.
- New Assessment Acts
A comprehensive reform of the tax assessment legislation covering almost all areas of substantive tax legislation will generally take effect from 1 January 2017. Car taxation and excise duties are excluded from the scope of the reform. The law package was to a large extent drafted by the Tax Administration due to a lack of resources at the Ministry of Finance. This is apparent in the outcome, which favours the interests of the revenue authorities over those of the taxpayers. Some of the most important changes concerning the statute of limitations which will affect retail, food & beverage and hotel & leisure businesses include:
- For taxpayers the statute of limitations in income taxation is shortened from 6 (5 + 1) years to three years as is already the case in VAT. For example, a company with a calendar year as an accounting period would have to file an appeal for FY 2016 on 31.12.2022, at the latest. Under the new law, the appeal has to be filed on 31.12.2019, at the latest. As the Tax Administration in this example would need to issue the ordinary assessment by the end of October 2017, the taxpayer will have just over two years to file the appeal.
- The statute of limitations for the tax administration in tax audit cases is shortened from 6 (1+5) years to three years, but it can be extended to 4, 6, or 10 years in certain cases which will be significant in practice. Examples of when the limitation period will be extended to 6 years include transfer pricing, corporate reorganizations, and intra-group financing. The taxpayer is barred from filing an appeal during the extended period. The Tax Administration has to adjust errors in the taxpayer’s favour during the extended period only if they discover them in the same matter. It can be expected that the concept will be controversial.
- The general three year statute of limitations for tax authorities under the new rules does not, for example, apply to transfer pricing cases, which remain open for a transfer pricing audit for six years.
- The transitional rules are strict. The new rules generally take effect on 1 January 2017 without a grandfathering period. For example, the statute of limitations – i.e the time to challenge the tax audit assessment for the tax years up to and including FY 2013 – is reduced to a mere 60 days from the date the taxpayer received the decision if the decision is issued on or after 1 January 2017. As the decisions of the tax courts and tax authorities are issued in the Finnish or Swedish languages, close coordination in international retail, food & beverage and hotel & leisure groups is needed not to miss the deadline for filing an appeal.