Finland vs. Corp. March 2013, Supreme Administrative Court HFD 2013:36

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A AB purchased manufacturing services of its subsidiary B AS, which had its headquarters in Estonia. The internal pricing of services had since July 2004 been under the net margin method. The price data beside B AS’s realized expenses also included half of the so-called location-savings. On taxation of A AB approved as deductible expenditure only B AS’s actual expenses plus a calculated profit margin.

The Supreme Administrative Court stated that A AB in Finland did not have such manufacturing as B AS was conducted in Estonia during the tax year. B AS’s production of the products differed substantially from A ABs former manufacturing in Finland, where A AB had manufactured the products by hand. Most of the new working methods and stages developed in Estonia had never been used in Finland. Hence the situation was not comparable to the location savings by moving the activities as described in the OECD report, and the pricing of would not be judged on the basis of the principles according to the OECD report in such situations. The base price was not included, the calculated benefits for A AB of the subsidiary’s manufacturing costs being lower than the estimated costs that the company would have had if it had manufactured products in Finland.

The market-based internal price for contract manufacturing could be determined by using the net margin method so that it was based on comparable companies’ profit margins. In assessing which companies were comparable, in addition to other factors would be taken into account that B AS had its business in a country where costs were low and therefore had the opportunity for a larger margin than companies in countries where costs were higher. In determining the profit margin had to take account of A ABs and B AS’s supposed negotiating power in the event that they had been independent company. B AS was not the holders of intellectual property rights or particularly high-class know-how or technology that would have formed the basis for a high profit margin. Within the company, however, were developed manufacturing processes so that it was suitable for large scale production, and B AS had acquired significant expertise in the production. It was therefore reasonable to expect a higher profit margin for the B AS than comparable companies in the A AB’s documentation.


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