Tuesday 13 August 2024

Transfer Pricing Documentation Requirements for Companies in Finland

Transfer pricing (TP) documentation is essential for companies engaged in inter-company transactions to ensure that their pricing aligns with the arm's length principle, which is critical for tax compliance. In Finland, the obligation to prepare and maintain transfer pricing documentation is subject to specific criteria and thresholds. This article outlines these requirements and provides insights into the simplified documentation process for smaller transactions.

a) Obligation to Prepare Transfer Pricing Documentation

A company in Finland is required to prepare and maintain transfer pricing documentation if it meets at least one of the following conditions:

  • Employee Threshold: The company employs at least 250 persons. This criterion captures large companies that have significant operations and may engage in substantial inter-company transactions.
  • Financial Threshold: The company’s turnover exceeds €50 million, and its balance sheet total exceeds €43 million. Companies meeting these financial criteria are likely to have complex business structures and significant inter-company dealings, necessitating thorough TP documentation.

b) Simplified Transfer Pricing Documentation for Smaller Transactions

For companies with inter-company transactions that are relatively small in value, Finnish regulations allow for simplified transfer pricing documentation. Specifically, if the total value of inter-company transactions with a Finnish company is less than €500,000 (0.5 million EUR), the company can opt for simplified documentation.  This threshold is designed to reduce the compliance burden on smaller companies or those with minimal inter-company transactions, while still ensuring that the transactions are documented and can be justified as being at arm's length.

c) Contents of Simplified Transfer Pricing Documentation

Simplified transfer pricing documentation is a more streamlined version of the comprehensive TP documentation typically required for larger transactions. In Finland, this simplified documentation can consist of:

  • Company Description: A brief description of the company, including its business activities and its relationship with the associated enterprise involved in the inter-company transaction.
  • Transaction Details: A concise description of the inter-company transactions, including the nature and amounts involved. This can usually be documented in 1-2 pages.

Importantly, the simplified documentation does not require a benchmark study, functional analysis, or economic analysis, which are typically included in more detailed TP reports. However, despite the simplified requirements, the transactions must still adhere to the arm's length principle, meaning they should be priced as if they were conducted between unrelated parties under similar circumstances.

The Finnish Tax Administration reserves the right to request a more detailed justification for the pricing of inter-company transactions at any time during a tax assessment. Therefore, companies must be prepared to provide additional information if required.

d) Submission Deadlines for Transfer Pricing Documentation

The timeline for submitting transfer pricing documentation in Finland varies depending on the tax year in question:

  • For Previous Years: Companies have 60 days to submit the required TP documentation when requested by the Finnish Tax Administration. This applies to documentation for earlier financial years.
  • For the Immediate Previous Year (PY): Companies have a longer timeframe to prepare and submit documentation for the most recent financial year. The deadline is 6 months from the end of the financial year to submit the TP documentation.

These deadlines emphasize the importance of timely and accurate record-keeping for companies involved in inter-company transactions, ensuring that they can meet compliance requirements without undue delay.

e) Transfer Pricing Markup Range for IT Services

According to insights provided by  a Senior Manager specializing in Transfer Pricing at big 4, IT services are generally considered low-value-added services in Finland. The appropriate markup range for these services typically falls between 5% and 15%.

This range is indicative of the market norms and is used to determine the arm's length price for IT services provided between related parties. Ensuring that pricing falls within this range can help companies avoid scrutiny from tax authorities and demonstrate compliance with the arm's length principle.

f) Transfer Pricing Methods in Finland

In Finland, companies can choose from several transfer pricing methods to determine the arm's length price for inter-company transactions. The most commonly used methods include:

  • Cost Plus Method: This method involves adding an appropriate markup to the cost of the services or goods provided. It is often used for routine transactions, such as the provision of services or the sale of manufactured goods.
  • Transactional Net Margin Method (TNMM): TNMM compares the net profit margin relative to an appropriate base, such as sales, costs, or assets, with the net margin earned by comparable uncontrolled transactions.
  • Comparable Uncontrolled Price (CUP) Method: The CUP method compares the price charged for goods or services in a controlled transaction with the price charged in a comparable uncontrolled transaction.

Each method has its strengths and is suitable for different types of transactions. Companies should select the method that best reflects the economic reality of their transactions and ensures compliance with Finnish transfer pricing regulations.

Conclusion

Compliance with transfer pricing regulations is crucial for companies operating in Finland, particularly those engaging in inter-company transactions. The Finnish framework provides flexibility for smaller transactions through simplified documentation requirements, while still upholding the need for pricing at arm's length. By understanding the applicable thresholds, submission deadlines, and acceptable pricing methods, companies can effectively manage their transfer pricing obligations and mitigate the risk of tax disputes

No comments:

Kerala HC strikes down Rule 96(10) of CGST Rules since its inception

  This tax alert summarizes a recent ruling of the Kerala High Court (HC)  on the validity of Rule 96(10) of the Central Goods and Services ...