Finland vs A Oy, June 2021, Supreme Administrative Court, Case No. KHO:2021:73

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A Oy was part of the A group, whose parent company was A Corporation, a US corporation. A Oy had acted as the group’s limited risk distribution company in Finland.

The transfer prices of the group companies had been determined on a mark-to-market basis using the net transaction margin method and the group companies’ operating profit on a mark-to-market basis had been determined on the basis of US GAAP, the accounting standard commonly applied within the group. The target profit level for the group’s limited risk distribution companies, including A Ltd, was set at 0,5 % in the group’s transfer pricing documentation, based on a comparables analysis.

In 2011, the competent authorities of the countries of residence of the A Group’s European manufacturing companies had entered into an Advance Transfer Pricing Agreement (APA) under which transfer pricing is monitored in accordance with the Group’s common accounting standard, US GAAP, and the market-based operating profit level for the limited risk distributors is 0.5%. The tax authorities in the countries of residence of certain European limited risk distributors had also issued rulings approving a profit level of 0.5% for local distributors.

A Ltd had made a deduction in its 2011 financial statements to adjust its 2010 operating profit level to match the profit level under A Group’s transfer pricing principles. The company had filed a corrected tax return for the 2010 tax year, in which the adjustment was reported as a deduction from taxable income. When the company’s tax return for the 2010 tax year had been resubmitted, the Tax Administration had considered that the company had to achieve a level of operating profit in line with market conditions on the basis of financial statements prepared in accordance with Finnish accounting legislation. In addition, the Tax Administration had removed from the comparators in the comparison file submitted by the company those peer companies whose reported annual operating profit levels had been lower than or equal to 0 %. The tax administration had set the company’s normal market operating profit at 1 %.

The Supreme Administrative Court held that the level of A Oy’s arm’s length profit could be determined on the basis of US GAAP accounting standards, since the A group generally prepared its financial statements in accordance with these accounting standards and since the group monitored transfer pricing on the basis of the accounts kept in accordance with US GAAP accounting standards. The Supreme Administrative Court also considered that the prior transfer pricing agreement between the competent authorities of the countries of residence of the European manufacturing companies of the A group and the decisions of the tax authorities of the countries of residence of the other limited risk distribution companies had to be given probative value.

In addition to these considerations, taking into account that loss-making peers that meet the conditions of the comparability analysis are not to be rejected merely because they suffer losses, the Supreme Administrative Court confirmed that the 0,5 % profit determined for A Ltd under US GAAP was, in the circumstances of the present case, at arm’s length.

The Supreme Administrative Court did not immediately take up the issue of how to calculate the taxable income of A Oy when the company’s US GAAP profit for the financial year 2010 was 0,5 %, but annulled the decisions of the Administrative Court and the Tax Adjustment Board and the resubmitted tax return for the tax year 2010 and remitted the case to the Tax Administration for reconsideration.

 

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KHO2021-73ORG

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