THE NEW FINNISH RULES FOR TRANSFER PRICING 2007 Olof Rehn / Attorneys at Law Rehn & Co Ltd

Olof Rehn / Rehn & Co Ab Correction of Transfer Pricing At-arm’s-length price (market price) must be used in transactions between the related parties The transfer pricing can be corrected if: ● Community of interests between the parties and ● conditions that differ from what would have been agreed upon between independent parties. Will in that case be corrected with the amount that the income could have been regarded to rise with, if the conditions had corresponded to the ones that would have been agreed upon between independent parties.

Olof Rehn / Rehn & Co Ab Community of Interests Exists if: ● one of the parties exercises control over the other party ● or if a third party alone or together with related parties exercises control over both parties The rules for community of interests will be applied: ● also on transactions between a company and its permanent business site (thus also branch) ● and on transactions between two Finnish companies

Olof Rehn / Rehn & Co Ab The Documentation of Transfer Pricing - The Act 1041/2006 providing transfer pricing documentation requirements came into force on 1 January 2007 and the new transfer pricing documentation rules apply to fiscal years beginning on or after 1 January Government proposition 107/2006 Background: ● The OECD guidelines for documentation of transfer pricing (1995) ● The Arbitration convention between the EU member states (1999) ● The EU Code of Conduct (2006) Memorandum of the National Board of Taxes regarding transfer pricing documentation ● A written documentation of transactions that have been carried out with parties in community of interests during the tax year is required, - where the other party is a foreigner - and if transactions between a foreign company and its permanent business site in Finland

Documentation of transfer pricing is not demanded from small and medium- sized companies With small and medium-sized companies is meant: - less than 250 employees, - turnover at most 50 million euros or balance sum at most 43 million euros - and what corresponds to the Commission’s recommendation on the definition of micro-company Concerns the whole group’s numerical data The English language is initially okay. The tax office can demand a translation Documentation is required separately for each tax year The company can meet the Finnish requirements by giving a documentation which is in compliance with the EU Transfer Pricing Documentation. Transfer Pricing Documentation of another county can also be used if all the required information is included in it

Olof Rehn / Rehn & Co Ab The Documentation of Transfer Pricing (continues) ● shall contain: 1. a description of the business activity, 2. a description of relations in community of interests, 3. information about transactions between parties in community of interests, 4. a functional analysis of the transactions, 5. a comparability analysis including available information about the comparison objects, 6. a description of the chosen transfer pricing method and its application ● the information referred to above in points 4-6 is not required if the value of the transactions between the parties during the tax year amount to at the most euros.

Description of the Business Activity Gives a general view on the company’s activities Information about company’s and groups’ –products –services –customers –geographical markets –competitions in the markets –development of the markets –company’s market share –business strategy –special circumstances such as tariffs

Description of Relations in Community of Interests The names, identification codes, the home countries and the grounds for the community of interest of related companies must be given, if –there has been cross-border transactions between the company and the party during the tax year or if –their business has a direct or an in-direct influence on the transfer pricing of the company. An organization chart as well as ownership and functional structures can be given to clarify the group structure. The changes in the structure should also be documented on a yearly basis. The tax office may request a shareholder agreement of a company in order to evaluate the control over a company.

Information about Transactions between Related Parties Information should be given about all the economic transactions between the related parties. –type of transaction –parties –amounts in euros –debiting –the relation to the other related party transactions –the terms if needed The tax office may demand copies of the contracts relating to transactions between the related parties.

Olof Rehn / Rehn & Co Ab Functional Analysis ● the OECD guidelines for documentation of transfer pricing form the base ● Takes into consideration used assets and risks that are carried ● An analysis of: - transactions between the parties - comparable transactions between independent parties ● The functions regarding the operations of the company - for example research, planning, manufacturing, distribution, service, financing and leadership. ● The most important assets - among other patents, know-how, models, trademarks, customer lists and distribution channels. ● The risks - market, credit, product development and guarantee risks.

Olof Rehn / Rehn & Co Ab Functional Analysis (continues) ● is an investigation of the facts that have influence on the business transactions ● Explains the roles of the parties and the economic meaning of the functions ● Should contain a specification of the parties’ functions, assets and risks ● The changes from the previous tax year shall be shown ● The meaning of the functional analysis is that the functions, the assets and the risks are assigned to the right party ● Thus, can also the profit generated by the activity be assigned to the right party (according to the tax authorities point of view)

Olof Rehn / Rehn & Co Ab Comparability Analysis ● shall be in accordance with the OECD guidelines for documentation of transfer prices ● is a comparison of transactions between the parties with transactions between independent parties, so called comparison transactions (internal and external) ● according to the OECD instructions these are comparable, - if not even the smallest little difference between the transactions substantially could affect the factor that is being analyzed - or if reasonable and exact adjustments can be made to eliminate the differences

Olof Rehn / Rehn & Co Ab Comparability Analysis (continues) ● An analysis with the help of five factors according to the OECD guidelines. ● The comparison factors are: - The functional analysis, - the characteristics of the transferred product, asset or service, - contractual terms, - the economic circumstances of the parties - the business strategies that the parties are observing ● The comparison factors shall be examined on the basis of transactions with related parties and on the basis of transactions between the comparison objects. The stages of the search for comparable transactions shall be documented. The selection of the comparable transactions should also be described in the analysis.

Olof Rehn / Rehn & Co Ab The Transfer Pricing Methods ● According to the OECD guidelines for documentation of transfer prices ● Transfer pricing methods to use in order to show that conditions adjusted to the conditions on the market have been observed: - Transaction-based methods - Transaction-based profit methods ● The traditional transaction-based methods are: - Comparable uncontrolled price method - Resale price method - Cost plus method ● The transaction-based profit methods are: - Profit split method - Transactional net margin method ● According to the OECD guidelines, the traditional transaction-based methods should be given a priority to the other methods

Olof Rehn / Rehn & Co Ab Transfer Pricing Methods (continues) ● Presentation of chosen transfer pricing method or chosen methods ● The chose of method must be justified ● A presentation of how the transfer pricing method has been applied ● A calculation that demonstrates how a final decision that is adjusted to the conditions on the market has been reached

Olof Rehn / Rehn & Co Ab Presentation of the Documentation of the Transfer Pricing ● To be presented at the tax authority’s request within 60 days ● However, not before six months after the end of the financial year. ● An additional presentation, for example information about the comparison objects, shall on request be handed in within 90 days ● The tax authority may on demand extend the time limits

Olof Rehn / Rehn & Co Ab Increase in Taxes ● If the person liable to pay taxes does not hand in the documentation or the additional presentation within the given time limit ● or if the documentation or the additional presentation has been handed in with essential faults or shortages, ● may the person liable to pay taxes be debited one (or more) tax increase(s) of at the most euros each. ● This tax increase does not exclude a regular tax increase, if the transfer pricing is corrected at the taxation.

Olof Rehn / Rehn & Co Ab The Application of the Law ● The law was applied for the first time at the taxation of the year 2007 ● The documentation requirement and the rule for tax increase will, however, be applied for the first time on a fiscal year that begins or thereafter

Olof Rehn / Rehn & Co Ab Statistics ● In the taxable income in Finland was increased with a total of more than 300 million € ● In 2008 Large tax payers’ office suggested increases to the taxable income in 24 cases which amounted in total to over 42 million € ● So far, there are only a few court cases, mostly about the evaluation of evidence ● The documentation obligation is estimated to concern over a thousand business groups in Finland ● The value of the Finnish export and import was 90 billion € (2004) ● Furthermore services for 9 billion € ● The large companies’ share of the export was over 60 % and of the import over 80 % ● OECD: more than 50 % of the world trade is internal trade

Advokatbyrå - Asianajotoimisto Rehn & Co Attorneys-at-Law Keskuskatu Helsinki Puhelinvaihde: (+358 9) Fax: (+358 9)