Finnish court issues landmark TP ruling involving ERP

A new transfer pricing ruling by the Finnish Supreme Court on enterprise resource planning and intra-group services arrangements is expected to set precedents in taxpayers’ favour.

19 October 2017

The Finnish Administrative Supreme Court on September 13 issued two rulings, korkein hallinto-oikeus (KHO) 2017:145 and KHO 2017:146. Both rulings have been welcomed by Finnish TP professionals as potential trendsetters for future transfer pricing rulings as these are generally scarce in the country. But KOH 145 is expected to have a significant impact on multinationals in Finland with centralised software planning systems or intentions to implement them.

Janne Juusela, partner at Finnish law firm Borenius, told TP Week the decisions could have an impact for around 20 pending cases involving major financial interests.

Ruling 2017:145 confirmed that the Finnish transfer pricing adjustment provision does not authorise the re-characterisation of a transaction.

In this case, a Finnish multinational incorporated a new subsidiary in Finland in 2004 to centralise the group’s enterprise resource planning (ERP) to increase cost savings. This subsidiary developed, customised and maintained the group’s ERP system, and offered customised ERP system services to other group companies. Significant expenses occurred in the implementation process and to compensate for this, the subsidiary charged service fees from the other group companies over a 10-year period. A big portion of these costs had accrued before the ERP system was implemented in 2006.

According to Juusela, the Finnish TP provision enables the authorities to evaluate the pricing of the transactions between two companies, but not to disregard the business model or structure that the companies have chosen. Therefore, the ruling also confirms that the OECD’s transfer pricing guidelines cannot be used as the only grounds for re-characterisation.

"So if tax authorities want to challenge the structure or the business model, they have to use the Finnish tax avoidance provision, which makes it possible to challenge artificial structures," Juusela told TP Week.

The Finnish tax authorities argued that this should have been a cost-sharing agreement, and the costs accrued from developing the ERP system should have been recharged as they occurred, even while the product was still being developed.

However, the Supreme Administrative Court stated that the transaction chosen by the parties [the companies] must be respected and the transaction in question corresponds to the existing practice on the market, said Sami Tuominen, head of tax, and Anna Shumskaya, associate, at Bird & Bird in Helsinki.

"This decision reconfirms the position previously stated in KHO 2014:119 on that the transfer pricing provision only grants authority to adjust the pricing in accordance with the terms and conditions as agreed and implemented by the parties. This taxpayer-favourable ruling has significance for companies planning centralised IT-development projects and also in similar ongoing tax disputes, further strengthening the principle of taxpayers’ freedom of choice," they told TP Week.

For the fiscal years 2006-2009 the case was referred back to the Finnish tax authorities for determining the market rate for the arm’s-length pricing of the service fees.

Profit margin level

The other ruling, decision 2017:146, was "slightly controversial with decision 2017:145", said Tuominen and Shumskaya.

In this case, the group companies had agreed on the cost-sharing model regarding the provision of intra-group services including marketing, HR, IT and trademark administration, with the intention of standardising such services globally. The tax authorities disregarded the company’s model, stating that these were intra-group management services and that there was not enough evidence to support the cost-sharing model.

“The tax authorities considered that the profit margin of 7% had to be charged to the group companies that received the services. The court upheld the position of the tax authorities, however, reducing the profit margin to 3%. As a result, the pricing of the transaction has been adjusted in accordance with the terms and conditions as agreed and implemented by the parties belonging to the same group,” said Tuominen and Shumskaya.

The decision concerned the fiscal years 2005-2007.

"The court saw that databases and profit margins used between independent companies are not comparable with the services in question and thus, cannot be used," they explained.

"The decision is problematic as, even though level of profit margin might be right from the theoretical point of view, it is difficult to estimate the correct profit margin level if you are not able to use databases and margins used between independent companies. We can see that there might be also difficulties to agree the right margin level by the involved tax administrations."

The above article was published on on 19 October 2017 and has been republished with the approval of the Publisher.