KHO:2013:36 Transfer pricing -case 32E29000 EUROPEAN AND INTERNATIONAL TAX LAW, SPRING 2014 KAROLIINA MÄKELÄ

Parties A Oy, the Finnish mother company B AS, the Estonian subsidiary ◦Owned 100% by A Oy A Oy makes orders to B AS who manufactures the products. A Oy sells the products forward

Responsibilities ◦A Oy bears the greater part of the risk ◦A Oy owns the manufactured products in the whole manufacturing process ◦B AS has bought the production equipment from A Oy in August 2004 ◦B AS has developed the working methods to be more productive ◦B AS has created a unique know-how which is valuable

Transfer price method Transactional net margin method, TNMM ◦Arm’s length principle was analyzed by comparative data search ◦Charged matters ◦The service ◦The locations savings ◦Not raw materials Location savings ◦For the savings which was obtained when function is done in low cost country and not in high cost country ◦It is computational charge

Tax audit The Finnish Tax Office made tax audit to A Oy and B AS manufacturing services transfer pricing method. The decision was given at and after that A Oy has made appeals. First A Oy appealed to tax administration The answer they received wasn’t satisfactory Then A Oy appealed to the Administrative Court The answer they received wasn’t satisfactory Finally A Oy appealed to the Supreme Administrative Court The final decision

Tax administration Tax administration decision at Increases to the taxable income and tax increases for years 2004 and 2005 ◦Based on the Tax Office tax audit report ◦Increases to the taxable income ◦ € for 2004 and € for 2005 ◦Tax increases ◦ € for 2004 and € for 2005 Tax administrator board of adjustment responses for A Oy complain at ◦Rejection for complain for increase to the taxable income ◦Tax increases reduced to 800 € for both years

Administrative Court A Oy Appeal A Oy in its appeal has demanded that the Tax Office adjustment board decisions are revoked and the taxes and tax increases are refunded A Oy claims that the Tax Office has without decent argument override the company’s presentation of the arm’s length principal they have followed A Oy has formed detailed description how the Tax Office has made incorrect interpretation of the transfer prices method

Administrative Court Administrative Court rejected the appeal The comparability analysis comprises well the whole activities ◦Including the location savings The manufactured products and raw materials are owned by A Oy The cost savings belongs in full to A Oy ◦B AS developments are ordinary  The Administrative Court sees that cost base deducted by raw-materials leads to arm’s length end result

Supreme Administrative Court A Oy appealed and demanded that the decision of the Administrative Court has to be revoked A Oy has formed detailed description how the Administrative Court has made incorrect interpretation of the transfer prices method Tax recipients legal service unit has given answer, where it asks the appeal to be rejected A Oy has given their answer

Decision of the Supreme Administrative Court The decision of Administrative Court is revoked and new amounts of increase of taxable income is given. Demand of tax increase removal is rejected ◦Tax administration changes the taxation for the decision of the Supreme Administrative Court Supreme Administrative Court presents their arguments for the decision

Conclusion of the Supreme Administrative Court ◦Location savings charge is rejected ◦The business function wasn’t the same in Estonia than it was before in Finland ◦Transfer price method is accepted ◦Cost base is changed ◦Cost base includes: raw material and services ◦Acceptable charge