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
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