International Tax Planning and Transfer Pricing Planning: Finland from a US perspective

Autor:Professor Dr. Rainer Zielke
Cargo del Autor:Professor in business economics at Østfold University College, Halden, Norway
Actualizado a:April 2017
 
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Contenido
  • 1 Abstract tax planning
  • 2 Abstract transfer pricing planning
    • 2.1 Introduction
    • 2.2 The high tax country Finland in the OECD context
    • 2.3 Transfer pricing rules of Finland
      • 2.3.1 Country-per-Country (CbC) reporting
      • 2.3.2 Laws and rules
      • 2.3.3 Arm's length principle
      • 2.3.4 Transfer pricing methods
      • 2.3.5 Definition of related companies
      • 2.3.6 Reporting requirements
      • 2.3.7 Documentation requirements
      • 2.3.8 Cost sharing
      • 2.3.9 Business restructuring
      • 2.3.10 Interaction between customs valuation and transfer pricing
      • 2.3.11 Dispute resolution
    • 2.4 Calculation of the case studies in international tax planning between Finland and the USA
      • 2.4.1 Design of the tables
      • 2.4.2 The treaty Finland-USA in brief
      • 2.4.3 BEPS Project progress
      • 2.4.4 Finland in brief
      • 2.4.5 The USA in brief
      • 2.4.6 Design of case studies
      • 2.4.7 Case study 1: Dividends from Finland to the US
      • 2.4.8 Case study 2: Interests from Finland to the US
      • 2.4.9 Case study 3: Royalties from Finland to the US
      • 2.4.10 Case study 4: Management and technical service fees from Finland to the US
      • 2.4.11 Case study 5: Capital gains with Finland as asset country to the US as seller country
      • 2.4.12 Case study 6: Dividends from the US to Finland
      • 2.4.13 Case study 7: Interests from the US to Finland
      • 2.4.14 Case study 8: Royalties from the US to Finland
      • 2.4.15 Case study 9: Management and technical service fees from the US to Finland
      • 2.4.16 Case study 10: Capital gains with the US as asset country and Finland as seller country
    • 2.5 Concluding remarks
  • 3 Notes
Abstract tax planning

According to the International Monetary Fund, Finland confirms in 2016 with a gross domestic product (GDP) of US$ 239,186 million the fourteenth-highest GDP of the European Union. In Finland, The corporate income tax rate is 20.00%. Finland applies a classical double taxation system, under which corporate income is first taxed in the hands of the company and dividends are subsequently taxed in the hands of the shareholders at the appropriate rates. Thus, Finland is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Finland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, in Finland, rising private consumption and investment growth have pulled the economy out of recession. However, output growth is projected to remain sluggish over the coming years, as domestic demand growth is projected to weaken again, although export growth will rise significantly as external demand edges up and competitiveness improves. Unemployment will decline modestly and inflation will pick up only slowly. Substantial progress has been made on implementing the government’s reform program. The social partners have agreed on a Competitiveness Pact, which lowers labor costs in 2017, and on wage moderation over the following years. This chapter provides a survey on the actual tax law frame conditions in Finland and practical support in international tax planning and transfer pricing planning between Finland and the US based on cross border case studies.

Abstract transfer pricing planning

With respect to transfer pricing Finland applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale minus method, the cost plus method, the transactional net margin method, and the profit split method. There is no hierarchy between the methods. Companies are regarded to be related, or associated, when conditions described in the tax law are met: a company has an ownership exceeding 50% of either the shares or the voting rights of the other company, or a company has direct or indirect rights to nominate more than half of the members of the board of directors of the other company, or a company has a powerful position in respects of the other company due to other circumstances. There are reporting and documentation requirements. Cost sharing is allowed and business restructuring possible. There is no interaction between customs valuation and transfer pricing. There are regulations on advance pricing agreements.

Introduction

International tax planning and transfer pricing planning between Finland, with per capita output equal to that of other European economies such as France, Germany, Belgium, or the UK, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2016 3rd place of the most populous countries in the world (4.40% of the world population).

According to the International Monetary Fund, [1] Finland confirms in 2016 with a gross domestic product (GDP) of US$ 239,186 million the fourteenth-highest GDP of the European Union. In Finland, The corporate income tax rate is 20.00%. Finland applies a classical double taxation system, under which corporate income is first taxed in the hands of the company and dividends are subsequently taxed in the hands of the shareholders at the appropriate rates. Thus, Finland is a high tax country. Especially for multinational enterprises, it is therefore interesting to realize profits in low taxing countries by means of tax planning measures. Finland has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.

According to the OECD, [2] in Finland, rising private consumption and investment growth have pulled the economy out of recession. However, output growth is projected to remain sluggish over the coming years, as domestic demand growth is projected to weaken again, although export growth will rise significantly as external demand edges up and competitiveness improves. Unemployment will decline modestly and inflation will pick up only slowly. Substantial progress has been made on implementing the government’s reform program. The social partners have agreed on a Competitiveness Pact, which lowers labor costs in 2017, and on wage moderation over the following years. Enhancing labor market flexibility would raise the employment rate further. Health care reform is also moving forward, with the decisions to shift some responsibilities from municipalities to newly-created regional institutions in 2019 and reform funding mechanisms. After easing in 2016, the stance of fiscal policy is set to be broadly neutral in 2017-18. The room offered by Finland’s low government deficit and debt should be used to support the economy through the tax and social contributions cuts linked to the Competitiveness Pact and through investments in infrastructure. There is room to spend more than currently planned on tertiary education and public R&D, and to provide fiscal incentives for private investment in R&D and staff training.

According to Orbitax, [3] (Daily Tax News Digest of 28 December 2016),

the Finnish parliament has reportedly approved the country's budget measures for 2017. Some of the measures include:

  • The mandatory requirement to file tax returns electronically (including value added tax (VAT) returns);
  • An increase in the thresholds for quarterly and annual VAT return filing from annual revenue of EUR 50,000 and EUR 25,000 to annual revenue of EUR 100,000 and EUR 30,000 respectively (standard default VAT return period remains monthly);
  • The introduction of a cash basis accounting option for VAT payers with annual revenue below EUR 500,000; and
  • Adjustments to the individual income tax brackets and rates.

Additional details will be published once available.

According to Orbitax, [4] (Daily Tax News Digest of 14 December 2016), the Finnish Tax Administration has published[5] the individual income tax rates and brackets for earned income for 2017:

EUR 16,900 up to 25,300 - 6.25%; over EUR 25,300 up to 41,200 - 17.50%; over EUR 41,200 up to 73,100 - 21.50%; over EUR 73,100 - 31.50%.

In comparison to 2016, the bracket thresholds are increased overall, while the rates remain the same except for the top rate, which is reduced from 31.75% to 31.5%. Also noted are the capital gains tax rates, which are maintained at a base rate of 30% and an increased rate of 34% for gains exceeding EUR 30,000.

The pivotal question is therefore, how groups of affiliated companies with group companies in Finland and in the US can – before the background of anti-avoidance legislation and other tax law frame conditions – optimize their strategies of international tax planning based on cross-border case studies.

This chapter had been written based on the following sources:

  • Orbitax[6], Orbitax Country Analysis Finland and USA, Orbitax Cross-Border Calculation Tools, Orbitax Transfer Pricing Tool,
  • the Finnish Income Tax Act, [7]
  • the Finnish Tax Reform 2017, [8]
  • the US Internal Revenue Code, [9]
  • the Double Taxation Convention between Finland and the USA signed 21 September 1989 and effective from 30 September 1990[10], and
  • the Protocol signed 31 May 2006. [11]
The high tax country Finland in the OECD context

International tax planning and transfer pricing planning between Finland and the US based on cross-border case studies is of central importance. In Finland, The corporate income tax rate is 20.00%. Finland applies a classical double taxation system, under which corporate income is first taxed in the hands of the company and dividends are subsequently taxed in the hands of the shareholders at the appropriate rates. Thus, Finland is a high tax country.

Between OECD Member States, especially Finland and the US, and other countries and also within the OECD there exists – also in 2016 – a considerable tax differential. Here from there results the incentive to international tax planning and to shift the taxable basis into lower taxing OECD Member States and other countries outside the OECD. Primary parameters of the...

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