Transfer Pricing

Transfer pricing and the related documentation are not just a tax reporting process but, when properly implemented, also a strategic tool. They support business efficiency and risk management. It is advisable for companies to regularly assess whether their internal pricing is at arm’s length and whether their existing documentation reflects reality, or whether it should be updated to better match current circumstances.

Transfer pricing refers to the determination of prices used in transactions between group companies. Pricing must be at arm’s length: the prices and terms of internal transactions should correspond to what independent parties would have agreed in comparable circumstances. Transfer pricing also frequently arises in situations where a company has a permanent establishment in another country.

Transfer pricing affects the taxable income of a group companies located in different countries. Therefore, tax authorities in various jurisdictions have a clear incentive to monitor that internal transactions are priced fairly. Careful transfer pricing planning and documentation reduce the risk of double taxation and tax disputes, ensuring that the value created by the business is taxed in the jurisdiction where the value creation actually occurs.

Transfer Pricing Regulation

The foundation of transfer pricing is formed by the OECD Transfer Pricing Guidelinesses, which Finland, like most of the jurisdictions, uses as the basis for interpretation. In Finland, compliance with the arm’s length principle and documentation requirements is regulated by law. In addition, the Finnish Tax Administration has issued clarifying and practical instructions regarding the application of transfer pricing and the preparation of transfer pricing documentation.

Furthermore, as a result of the OECD’s BEPS project (Base Erosion and Profit Shifting), new measures have been introduced, such as country-by-country reporting (CbCR), which must be followed by groups whose turnover exceeds EUR 750 million.

Although transfer pricing is extensively guided and not a new topic, it still allows for significant discretion, for example in the transfer pricing models used and their practical implementation. On the one hand, this wide discretion leads to situations where the tax authorities’ view of whether arm’s length pricing has been achieved may not always align with that of the taxpayer. This is why careful planning and documentation of transfer pricing play a key role in avoiding later disputes.

Documentation Requirements in Finland

In Finland, transfer pricing documentation must be prepared for related party transactions between companies where one of the parties is foreign. Documentation is not required for transactions between domestic companies, nor for transactions between a Finnish company and its foreign permanent establishment. Small and medium-sized enterprises are exempt from the documentation requirement.

However, it is important to note that even if a company is not required to prepare documentation, its related-party transactions must still comply with the arm’s length principle. Upon request, the taxpayer must also provide an explanation of such transactions.

If the total arm’s length value of related-party transactions with one related company does not exceed EUR 500,000 during the tax year, simplified documentation may be prepared. Full documentation must be prepared if the group is not small or medium-sized and if the value of related-party transactions exceeds EUR 500,000.

Transfer Pricing Documentation – What it consists of and why it should be prepared

In Finland, the taxpayer must present the documentation within 60 days upon request by the tax authority. In addition, the documentation for the tax year may be requested no earlier than six months after the end of the tax year. In other countries, the deadlines are usually stricter.

The obligation to prepare transfer pricing documentation is divided into two parts. The first part is the master file, which provides a group-level overview of the entire group’s business activities. It includes, among other things, financial information, and its preparation is recommended annually, even though it only needs to be submitted to the Finnish Tax Administration upon request.

The second part of transfer pricing documentation is the local file, which focuses on individual group companies. The local file contains company-specific information such as financial data and transaction details. Preparation of this document is also recommended annually, although it only needs to be submitted to the Finnish Tax Administration upon request.

In addition, large groups are required to prepare a country-by-country report (CbCR). The CbCR must be prepared annually if the group’s turnover exceeds EUR 750 million. Usually, the report is submitted by the parent company or another designated company to the tax authorities in the country where that company is located. Not all group companies are required to submit the report themselves, but they generally have an obligation to make a CbCR -notification to the Finnish Tax Administration of the submission of the report.

Failure to prepare and submit documentation may lead to tax increases, even if transfer pricing is at arm’s length. Failure to comply with CbCR obligations may also result in penalties. It should also be noted that documentation thresholds vary by country, even if there is no requirement to prepare and submit transfer pricing documentation in Finland, such an obligation may arise in another jurisdiction where the group operates.