Transfer Pricing Documentation

This is an unofficial translation. The official guidance is drafted in Finnish (Siirtohinnoittelun dokumentointi, record number VH/44/00.01.00/2022) and Swedish (Dokumentation av internprissättning, record number VH/44/00.01.00/2022) languages. In case of divergence of interpretation, the versions in the two official languages, Finnish and Swedish, will prevail.

This guidance addresses transfer pricing documentation.

The present version has been updated due to amendment of section 31 of the Act on Assess­ment Procedure (16.12.2021/1142) which entered into effect 1 January 2022, with the related Government proposal HE 188/2021 vp. Especially the terminology in chapter 6.4 of this guidance on accurate delineation of a transaction was affected by the amendment of section 31 in the said act. However, the amended section 31 has no effect on the legal rules on transfer pricing documentation (found in sections 14a, 14b and 14c of the Act on Assessment Procedure).

In addition, the guidance now has a new chapter 2 providing concise instructions and examples on the steps to be taken before the transfer pricing documentation is prepared. It is advisable that taxpayers take account of them in order to ascertain adherence to the arm’s length principle in the transfer pricing of their controlled transactions. Other updates were made to specify the instructions, and rulings issued by Finland’s Supreme Administrative Court after the previous version of this guidance were taken into account as appropriate.

This guidance applies for the first time on transfer pricing documentation that is prepared for tax years beginning 1 January 2022 or later.

1 Introduction

1.1 Transfer pricing and the arm’s length principle

In taxation, the concept of transfer pricing refers to the pricing that associated enterprises agree upon for their mutual transactions. Transfer pricing must adhere to the arm’s length principle. The arm’s length principle refers to the obligation of associated enterprises to agree on terms, conditions and pricing in their transactions in the same way independent parties under similar circumstances would have agreed. Transfer pricing has a major impact on the income taxes of associated enterprises because the prices paid in controlled transactions will affect the taxable profits and losses of each party. In addition, transfer pricing often has a broader international role, because it affects the decision in which country an international group’s revenues and expenses accumulate, and in which country tax on its income can be collected.

The requirement of complying with the arm’s length principle is the basis for transfer pricing, both nationally and internationally. Article 9 of the OECD’s Model Tax Convention contains provisions defining the arm’s length principle, and similar provisions are included in all tax treaties that Finland is party to. As for Finland’s national legislation, the provision on the arm’s length principle can be found in section 31 of the Act on Assessment Procedure.

The source of interpretation in matters relating to the arm’s length principle is the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, a report released by the Organization for Economic Development and Cooperation (OECD). The OECD Transfer Pricing Guidelines is generally accepted as an international standard for transfer pricing. The OECD Guidelines is not only an important source of interpretation regarding Article 9 of the Model Tax Convention but also in matters related to the national tax provision on transfer pricing adjustment and related to the arm’s length principle included in them. The status of the OECD Guidelines as a source of interpretation is validated in Finland in a number of the Supreme Administrative Court’s rulings (including rulings KHO 2013:36, KHO 2014:119, KHO 2017:146, KHO 2020:35, and more).

The amendments to section 31 of the Act on Assessment Procedure entered into force on 1 January 2022. The previous legal provision governing transfer pricing adjustments was amended by adding new subsections 31.2 and 31.3. In accordance with the Government proposal (HE 188/2021 vp), the general objective of the amendments was that the entire scope of the OECD Guidelines becomes available as the source of interpretation regarding matters related to the provision itself and to the arm’s length principle. To provide more clarity to the way the arm’s length principle should be applied, section 31.2 was added to the Act, on the subject of accurate delineation of transactions, and section 31.3 was added on the subject of disregarding controlled transactions. No changes were made to section 31.1 governing the arm’s length principle and the transfer pricing adjustment. Subsections 2 and 3 in the previous act remained unchanged but were renumbered as subsections 4 and 5. The amendments to section 31 brought no changes to the provisions on transfer pricing documentation sections 14a, 14b and 14c of the Act on Assessment Procedure.

1.2 Objective of this guidance and restrictions of scope

The general objective of this guidance is to assist taxpayers in preparing transfer pricing documentation. Transfer pricing documentation refers to the preparation of a written account by the taxpayer concerning the pricing of transactions between the taxpayer and enterprises associated with it. The purpose of the documentation is to provide proof for tax assessment, that the controlled transactions that the taxpayer has made are priced in accordance with the arm’s length principle. The provisions that govern transfer pricing documentation are found in sections 14a, 14b and 14c of the Act on Assessment Procedure.

This guidance aims to give instructions on how to define the parties concerned by the documentation obligation and what to include in the documentation. A further aim is to emphasise that the focus should be on the content of the documentation, not on matters of form. The guidance strives to answer questions such as who must prepare the documentation; what are the transactions that must be documented; what explanations and accounts are specifically required, and what is the appropriate extent of the explanations and accounts.

The guidance also contains a short description of how transfer pricing documentation is examined in connection with tax assessment. The purpose of this description is to guide the taxpayer in matters related to how transfer pricing documentation should be presented and how it should be supplemented, and in matters related to the punitive tax increase as a consequence of the taxpayer’s neglect to comply with the documentation obligation.

The documentation obligation has been in effect since 2007 in Finland, and the European Union's Code of Conduct on transfer pricing documentation reflects greatly on it. In the form that it has today, the Finnish documentation obligation came into force in 2017 and is based on the OECD and G20 countries’ BEPS Project Action 13 containing revised standards for transfer pricing documentation. After the BEPS Project, an update was made to the documentation obligation in accordance with Chapter V of the OECD Transfer Pricing Guidelines, outlining the three-tiered approach of the Finnish documentation obligation: 1) information on the multinational enterprise (MNE) group (Master File); 2) information on individual group companies (Local File); and 3) country-by-country reporting. The aim of the documentation obligation is, on one hand, to ascertain that the taxpayer evaluates its adherence to the arm’s length principle in an up-to-date manner and, on the other hand, to offer tax administrations in different countries sufficient facts and information in order to assess any tax risks connected to transfer pricing and to conduct tax audits. The OECD Guidelines are also intended for helping different countries to establish clear, unified rules that reduce the expenses from preparing the transfer pricing documentation.

This guidance does not intend to address the Finnish legal provision on transfer pricing adjustment found in section 31 of the Act on Assessment Procedure, or the contents of the tax-treaty article concerning transfer pricing found in Finland’s tax treaties, or the OECD Guidelines that are used as a source of interpretation for both of the above. This guidance refers at some points to the provisions of section 31 of the Act on Assessment Procedure, and to the related Government proposals (HE 107/2006 vp and HE 188/2021 vp), and additionally to the instructions of OECD Guidelines, in order to provide a clearer understanding of the required information. This guidance does not intend to give a full presentation of how the arm’s length principle should be applied, or of what the preconditions of a transfer pricing adjustment in tax assessment are. Instead, the guidance intends to clarify the facts and information to be included in the documentation.

This guidance does not concern country-by-country reporting. The Finnish Tax Administration has issued a guidance document Country-by-country reporting, Verotuksen maakohtainen raportti (in Finnish and Swedish) on the matter. These instructions are issued separately because different codes of conduct apply to the presentation of the transfer pricing documentation and country-by-country reporting. The important difference between the two codes of conduct concerns the duty to submit the reports: the country-by-country report must be submitted to the Tax Administration every year if certain conditions are met, whereas the documentation on transfer pricing is only to be submitted if the Finnish Tax Administration has expressly asked the taxpayer to do so. In addition, the nature of the information to be presented is different. Country-by-country reports contain the same set of detailed information for all filers, but transfer pricing documentation is prepared for each company and group individually.

1.3 Definitions 

Definitions are presented in alphabetical order according to the Finnish instruction (Siirtohinnoittelun dokumentointi, record number VH/44/00.01.00/2022).

Intangible asset

An intangible asset, according to paragraph 6.6 of the OECD Transfer Pricing Guidelines, is an asset that is neither a physical asset nor a financial asset, and which is capable of being owned or controlled for use in commercial activities. It is additionally required that the use or transfer of an intangible asset would be compensated had it occurred in a transaction between independent parties. The OECD Guidelines often use only the single word ‘intangible’ in the sense of ‘intangible asset’.

BEPS

Base Erosion and Profit Shifting (BEPS) is a term used by the OECD to describe phenomena concerning the erosion of tax bases and profit shifting.

BEPS documentation guidelines

Guidelines on transfer pricing documentation and country-by-country reporting issued by the OECD and the G20 countries (Action 13: 2015 Final Report. Transfer Pricing Documentation and Country-by -Country Reporting).

BEPS documentation guidelines (OECD) are enclosed in chapter V of the OECD Transfer Pricing Guidelines.

DEMPE

DEMPE is an abbreviation often employed in the context of intangible assets to describe activities aiming for their Development, Enhancement, Maintenance, Protection & Exploitation.

Documentation

Transfer pricing documentation is a set of documentation describing the arm’s length pricing of the taxpayer’s controlled transactions. The Finnish Act on Assessment Procedure uses the term transfer pricing documentation in its section 14a (Finnish: siirtohinnoitteludokumentointi), but also ‘documentation’ is used in the same sense.

Documentation obligation

As provided in sections 14a, 14b, and 14c of the Act on Assessment Procedure, the documentation obligation requires the taxpayer to prepare the required set of documentation on its transfer pricing, and to present and complement it. However, this guidance does not address the obligation relating to the provisions of section 14d of the Act on Assessment Procedure on country-by-country reporting.

Controlled transaction

Transactions between the taxpayer and an associated enterprise – that has an associated relationship with the taxpayer – are called controlled transactions. The two terms ‘transaction’ and ‘controlled transaction’ have the same meaning in the text of this guidance. Dealings between a company and its permanent establishment, as referred to in section 14b of the Act on Assessment Procedure, mean the dealings carried out between a foreign company and its permanent establishment in Finland. These dealings are treated as equal to controlled transactions.

Associated enterprise

Any party having an associated relationship with the taxpayer. Section 31, subsection 4 of the Act on Assessment Procedure contains detailed rules on how an associated relationship is formed.

Resolution of the Council of the EU on a code of conduct

Resolution of the Council and of the representatives of the governments of the Member States, meeting within the Council, of 27 June 2006 on a code of conduct on transfer pricing documentation for associated enterprises in the European Union (2006/C 176/01). The Code of Conduct (EUR-Lex) is referred to in this guidance as the EU Code of Conduct on transfer pricing.

EU TPD

EU Transfer Pricing Documentation (EU TPD) is the uniform, partly centralised transfer pricing documentation model for associated companies with one another in the European Union.

Government proposal (2006)

Government proposal to the Finnish Parliament on new provisions on transfer pricing, HE 107/2006 vp (Eduskunta).

Government proposal (2016)

Government proposal to the Finnish Parliament on an amendment to the Act on Assessment Procedure and the national implementation of Council Directive on mutual assistance in the field of taxation, and on the repeal of Council Directive 77/799/EEC and an amendment to the Act on application of the Directive, HE 142/2016 vp (Eduskunta).

Government proposal (2021)

Government proposal to the Finnish Parliament on Act amending section 31 of the Act on Assessment Procedure, and for related provisions, HE 188/2021vp (Eduskunta).

Commission Recommendation

Commission Recommendation (EUR-Lex) (of 6 May 2003, 2003/361/EC) concerning the definition of micro, small and medium-sized enterprises.

Interquartile range

Reliability of comparable data can be improved by means of statistical dispersion. Interquartile range refers to the difference between the upper quartile (value below which 75% of the data lies) and the lower quartile (value below which 25% of the data lies).

Accurate delineation of a transaction

Provisions on the accurate delineation of a transaction are laid down in section 31, subsection 2 of the Act on Assessment Procedure. Accurate delineation of a transaction is a key component of both the taxpayer’s transfer pricing process and documentation, as well as of the evaluation of transfer pricing matters, carried out by the tax authority. Accurate delineation refers to the process when the commercial or financial relations between associated enterprises carrying out a controlled transaction are identified, taking into account the economically relevant characteristics. The purpose of accurate delineation is to identify the actual transaction, the allocation of responsibilities between the relevant parties and the parties’ actual dealings when executing the transaction. Accurate delineation of a transaction is consistent with the term ‘accurate delineation’ in the OECD Transfer Pricing Guidelines.

Local File

Local File refers to the information on a specific taxpayer which a company must include in its transfer pricing documentation. Provisions on the documentation obligation of taxpayer information are laid down in section 14b, subsection 2 of the Act on Assessment Procedure, which is divided into nine different paragraphs. ‘Local File’ contains a detailed account of the company and its transfer pricing.

Arm’s length principle

Arm’s length principle, set out in Article 9 of the OECD Model Tax Convention and section 31, subsection 1 of the Act on Assessment Procedure, under which, the terms and conditions agreed or imposed in the commercial and financial relations between associated enterprises must correspond to those which, in similar circumstances, would have been agreed between independent enterprises.

Master File

Master File refers to the information concerning the MNE group which a company must include in its transfer pricing documentation. Provisions on the documentation obligation are laid down in section 14b, subsection 1 of the Act on Assessment Procedure, which is divided into six paragraphs. Master File describes the group’s transfer pricing at a general level.

Median

Median is the middle value resulting from available comparable data arranged in ascending or descending order; or the mean of two averages if the comparable data are quantified as an even number.

OECD

The Organization for Economic Development and Cooperation.

OECD Transfer Pricing Guidelines or OECD Guidelines

Published in 1995 and subsequently supplemented with several updated versions, the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations provide guidance on how transfer pricing between associated enterprises is determined. The Guidelines are a commentary and a source of interpretation for the application of the arm’s length principle. References to the Guidelines in this guidance concern the updated version published in January 2022. Also abbreviated expression ‘the OECD Guidelines’ refers to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD) in this guidance.

Partner enterprise

Being connected to the way the ‘small or medium-sized enterprise’ is defined, ‘partner enterprises’ are ones where the upstream enterprise holds at least 25% of the capital or the voting rights but the holding does not exceed 50%.

PE Report

The OECD’s report on the attribution of profits (Report on the Attribution of Profits to Permanent Establishments) released in 2008, also called the “2008 PE Report". In 2010, the OECD released an updated version of the PE Report.

Small or medium-sized enterprise

Small or medium-sized enterprise is defined in section 14a of the Act on Assessment. This definition coincides with the Commission’s definition of the same, included in the Commission Recommendation of 6 May 2003 concerning the definition of micro, small and medium-sized enterprises (2003/361/EC).

Linked enterprise

Being connected to the way the ‘small or medium-sized enterprise is defined, a company is a ‘linked enterprise’ if its share of ownership exceeds 50%.

Dealings

Dealings between a company and its permanent establishment are considered equal to controlled transactions.

Functional analysis

In accordance with the OECD Transfer Pricing Guidelines, ‘functional analysis’ assesses the activities carried out between associated enterprises, i.e., functions, assets and risks assumed by the parties in the context of a controlled transaction.

Country-by-Country report

Country-by-Country Report (CbCR) is an annual return to be submitted for every accounting period to the Tax Administration, containing information on the relevant MNE group as stipulated by law.

Comparability analysis

‘Comparability analysis’, in accordance with the OECD Transfer Pricing Guidelines, consists of comparing the controlled transaction with an uncontrolled transaction or transactions.

2 Steps prior to documentation 

The purpose of transfer pricing documentation prepared by a taxpayer company is to verify that the controlled transactions it has carried out during the tax year were in line with the arm’s length principle. Provisions on compliance with the arm’s length principle in controlled transactions are laid down in section 31 of the Act on Assessment Procedure. If controlled transactions were not at arm’s length, the tax authority adjusts the taxpayer’s taxation, in other words, adds additional revenue, to the amount that would have been accumulated under arm’s length conditions.

The taxpayer may prepare its transfer pricing documentation after the relevant tax year (see also paragraph 3.3 of this guidance). The taxpayer may have entered into an agreement concerning a controlled transaction, carried out the transaction, closed its books and submitted its income tax return before preparing the transfer pricing documentation. If the taxpayer assesses the transaction’s compliance with the arm’s length principle not until the documentation is prepared, it may prove to be challenging to adhere to the arm’s length principle in practice. The preparation of transfer pricing documentation and confirming that the transactions are at arm’s length is likely to be easier if the taxpayer has attempted to ascertain the arm’s length nature of the controlled transactions already during the relevant tax year by following, for example, the practices described in the following paragraphs.

Taxpayer’s assessment of its compliance with the arm’s length principle may take place gradually, and the necessary measures may take place in the course of the relevant tax year but also at a later stage. In practice, it is recommended for the taxpayer to assess the arm’s length nature of the conditions and pricing of its controlled transaction already when planning and agreeing to the transaction. In addition, it may be necessary to monitor the transfer pricing of certain controlled transactions during the tax year and to make the necessary adjustments to the transfer pricing and accounting to achieve an arm’s length level pricing. For example, if pricing is based on budgeted figures, it may be necessary to adjust the taxpayer’s transfer pricing over the course of the tax year on the basis of actual figures.

The application of the arm’s length principle and confirming that the taxpayer’s transfer pricing has been at arm’s length involves two stages (see the OECD Transfer Pricing Guidelines, paragraph 1.33 and the Government proposal (2021)). In the first phase, the taxpayer is expected to accurately delineate the controlled transaction in accordance with its actual content (section 31, subsection 2 of the Act on Assessment Procedure). In practice, to accurately delineate a transaction the commercial or financial relations between the associated enterprises are identified, along with the economically relevant circumstances that have an impact on them (see also paragraph 6.4.2 of this guidance). It is advisable to assess the impact of these economically relevant circumstances on the conditions as well as the pricing of the controlled transaction already when the taxpayer plans or agrees to the controlled transaction; not only when preparing the transfer pricing documentation.

Once the taxpayer has accurately delineated the actual transaction, it is possible to determine an arm’s length price for the controlled transaction. During the second phase, the taxpayer is expected to analyse the pricing that would likely have been agreed by independent parties for the specified transaction. The accurately delineated transaction should be compared to comparable uncontrolled transactions (see also paragraph 6.6 of this guidance). The taxpayer should note that comparability is only ensured if the comparison is made between transactions with no material differences. The arm’s length transfer price is confirmed by selecting and applying the most appropriate transfer pricing method in accordance with the OECD Guidelines (see paragraph 6.7 of this guidance). However, in practice, the price of a controlled transaction does not need to be set by using the same method the taxpayer utilizes in its transfer pricing documentation to verify the arm’s length nature of the controlled transaction for taxation purposes.

The following simplified example illustrates a situation where a taxpayer uses a different method to set the price for a controlled transaction during the tax year than the method it utilizes for taxation purposes when proving the arm’s length nature of the same transaction in its transfer pricing documentation.

For a detailed description of how transactions should be accurately delineated, accompanied by a functional analysis, see sections 6.4.2 and 6.5 of this guidance. For more information on comparability analysis and applying an appropriate transfer pricing method, see sections 6.6 and 6.7 of this guidance.

3 Preparing the documentation

3.1 The documentation obligation

The obligation to document transfer pricing is divided into information relating to the entire group (the Master File), and information relating to the company that is the taxpayer (the Local File).

There are two stages in preparing the documentation. On the one hand, the taxpayer must annually prepare documentation covering the information under section 14b of the Act on Assessment Procedure, and on the other hand, as required in section 14c of the Act on Assessment Procedure the taxpayer must provide further accounts that complete the documentation. There is no requirement to enclose the documentation with the annual income tax return submitted to the Finnish Tax Administration. Instead, the Tax Administration requests the documentation by a separate request, if in the risk management by the Tax Administration it appears that it is necessary to carry out a more detailed analysis of a certain taxpayer’s transfer pricing, or if the taxpayer has been chosen as part of a larger set of risk assessment of transfer pricing. Based on the documentation provided, the Tax Administration will make a preliminary evaluation of the arm’s length nature of transfer pricing. Furthermore, the Tax Administration may ask for more information if needed to ascertain that the transfer pricing has been at arm’s length.

The rules governing transfer pricing documentation and the way it should be prepared and presented may be different in other countries vis-à-vis the Finnish obligations. It is advisable to learn about the rules in the group’s other operating countries as the differences in the rules may affect group companies’ obligations. For example, there are countries that require the documentation to be completed fully by the time the annual income tax return is to be submitted.

It is also advisable to prepare the documentation with due care and as up to date as possible. This is recommended even though the rules allow for a flexible time frame, permitting the taxpayer to prepare their documentation as the Tax Administration is still evaluating the matter at hand. To prepare the documentation properly from the very beginning is recommended. This helps to avoid misunderstanding and additional requests for more information. It may be difficult to consistently show later that the taxpayer’s transfer pricing was at arm’s length if the documentation contains gaps or taxpayer’s controlled transactions are not accurately delineated in accordance with actual content.

The documentation obligation and certain rules on relieved and alleviated obligations provide for some flexibility but on the preparation of the documentation only. The flexibility and alleviations are not applicable when assessing whether the pricing is at arm’s length, because the arm’s length principle is applied in the same way to all transfer pricing cases. Documentation prepared as required by law does not prevent the tax authority from making a transfer pricing adjustment under the provisions of section 31 of the Act on Assessment Procedure, if controlled transactions are not at arm’s length.

3.2 Form and the information content

The documentation rules do not require adherence to a certain format. The verification of the arm’s length nature of transfer pricing is always based on the facts and circumstances specific to each case, and therefore the documentation is not required to be presented on the basis of a particular formula or format. However, the provisions of section 14b of the Act on Assessment Procedure set out the information content which is the minimum level of documentation required. In addition to what is required by law, this guidance describes more broadly the way in which the documentation may be prepared. The objective is to demonstrate additional information that has proven to be a useful supplement to the documentation obligation. Information required by law and additional recommended information is kept distinctly apart. The additional recommended information is marked by the words ‘may’, ‘may be presented’, ‘may be supplemented’, ‘may be used’ or an equivalent. On the other hand, the information required by law is outlined with ‘must be presented’, ‘must be described’, ‘must be specified’ or with a similar wording. The Tax Administration can impose a punitive tax increase in connection with documentation for neglect, errors or omissions only if they relate to the information to be documented according to the law (see paragraph 7.3.1 of this guidance).

Documentation is sufficient when it satisfies the requirements of section 14b of the Act on Assessment Procedure. Under the provisions of section 14b, the documentation, is limited to general information about the group (Master File), and more detailed information concerning the taxpayer having the documentation obligation (Local File). Under the Government proposal (2016), the purpose of the requirement to receive group-level information is for the authorities to form an understanding of the group’s international business operations and its transfer pricing principles. The information required of a group consists of a general description, covering the entire MNE group. The information about a taxpayer must, however, be in more detail. The information content as required by section 14b is seen as a minimum level but the information and records to be documented must be as specific as is appropriate for each case.

In some cases the documentation has been extensive in terms of number of pages. However, a high number of pages do not replace deficiencies in information content. It is essential that the contents of the documentation is of high quality. Simple documentation may be sufficient if the documentation gives a careful description of the facts affecting transfer pricing and gives an account of the arm’s length nature of transactions. A voluminous documentation may be incomplete if it does not address all the essential elements of the transaction under examination and its accurate delineation. Accordingly, the documentation’s form is not important, instead it should concentrate on the essential elements of each specific case.

The documentation may be prepared in Finnish, Swedish or English. If English is used, essential parts of the documents must, if necessary, be submitted in a Finnish or Swedish translation. The Finnish Tax Administration may furthermore require translation, for example, of points which are open to interpretation, but which are essential for the overall picture. The BEPS recommendation is that the countries involved should accept submittal of documents in the languages that are commonly used. That recommendation can be understood as rather broad, but in Finland the documentation, in addition to the two national languages, is allowed only in English.

3.3 Time frame

There is no actual time limit for preparing the documentation. No require­ments to keep the documentation up-to-date during the tax year or finalise it by the time when the taxpayer’s income tax return is submitted. Only the provision in section 14c of the Act on Assessment Procedure, relating to the obligation to provide documentation, must be taken into account. The taxpayer must present its documentation within 60 days of a request from the tax authority. The earliest time for presenting it for a specific tax year is six months after the end of the tax year. The documentation, as provided for by the amended provisions which entered into force at the beginning of 2017, must be prepared for the first time in respect of the tax year beginning on 1 January 2017.

As was recommended in section 2 of this guidance, when the tax year is ongoing, it is appropriate for the taxpayer to ensure that its transfer prices are at arm’s length, even if the documentation is not required to be prepared in real time. It is important to ensure the adherence to the arm’s length transfer pricing during the tax year because Finnish tax rules do not allow for making tax adjustments that reduce a taxpayer’s taxable income by correcting a tax return alone. Price adjustments to comply with the arm’s length principle must be made in the financial accounts and can be recorded e.g. in the form of an adjustment item in the books. For tax purposes, a transfer pricing adjustment entered in the accounts is a deductible expense, provided that the adjustment is at arm’s length. Accordingly, such adjustment is not a non-deductible expense within the meaning of section 16, subsection 7 of the Act on the taxation of business income.

4 The scope of the documentation obligation

4.1 General remarks on how the obligation is delimited

In principle, the taxpayer is obliged to prepare its transfer pricing documentation on the controlled transactions carried out during the tax year within the meaning of section 31 of the Act on Assessment Procedure. However, the documentation obligation does not apply to all controlled transactions within the meaning of section 31 of the Act on Assessment Procedure. The scope of application of the provision of section 31 on transfer pricing adjustment is extensive; it applies to domestic and to cross-border transactions and to dealings between the company and its permanent establishment. The scope of the documentation obligation is narrower.

Under section 14a of the Act on Assessment Procedure, the documentation obligation applies to controlled transactions where the opposite party is foreign. The documentation must also be prepared in respect of dealings between a foreign company and its permanent establishment situated in Finland. At the same time, it is not necessary to prepare documentation of transactions between Finnish companies, or of dealings between a Finnish company and its permanent establishment situated in a foreign country. The limitation of the documentation obligation to certain cross-border transactions is justified, because tax authorities have extensive access to information referred to in the act in question about any two domestic parties to a transaction. On that basis, transactions between a permanent establishment of a foreign company situated in Finland and a Finnish company belonging to the same group are also exempt from the obligation to prepare documentation. These transactions are exempted although the other party is formally a foreign group company.

As regards controlled transactions below a certain threshold, documentation may be prepared to a lesser extent than complete documentation. Controlled transactions below threshold are transactions between a taxpayer and an associated enterprise where the arm’s length amount for the tax year is less than or equal to 500,000 euros. The Government proposal (2006) justifies the simplified documentation by the fact that transactions below threshold are of no major fiscal interest and that it is therefore not reasonable to require complete documentation on them.

In addition, small and medium-sized enterprises are exempted from documenting all controlled transactions, including cross-border transactions. As proposed in the Government proposal (2006), documentation is not required of small and medium-sized enterprises because the preparation and upkeep of the documentation involve costs that are not reasonable when compared with the interest to preserve the tax revenue which the SMEs generate.

4.2 Definition of ‘associated relationship’

Section 31, subsection 4 of the Act on Assessment Procedure contains the legal definition of association. The parties to a transaction are considered associated if one party exercises control within the other or if a third party, either alone or jointly with closely related parties, exercises control within both parties to the transaction.

In general terms, the concept of ‘exercising control’ in the provisions of section 31, subsection 4 is the same as that found in the Finnish Accounting Act and Companies Act. According to section 31, subsection 4 of the Act on Assessment Procedure, one party exercises control in the other when:

1. it holds, directly or indirectly, more than half of the other party’s capital;
2. it holds, directly or indirectly, more than half of the voting rights connected to all the shares or interests of the other party;
3. it is entitled to designate, directly or indirectly, more than half of the members of the Board of Directors or other comparable governing body or to another body with that right; or
4. it is managed jointly with the other party or is effectively able to control the other party.

According to the Government proposal (2006), de facto control within the meaning of section 31, subsection 4, paragraph 4 may be the result of a shareholders’ agreement signed by a shareholder or of other arrangement of that kind. The exercise of joint management and de facto control referred to under (4) above is intended, according to the legislator’s preparatory work for the Accounting Act (HE 126/2004 vp and HE 89/2015 vp), to cover situations where financing and debt collateral arrangements or other specific activities are the reason for setting up new special purpose entities that are managed as a subsidiary, even in the absence of an ownership link between the companies. These arrangements do not therefore enable to evade the obligation to include all entities that are part of the economic unit in the consolidated accounts. The Government proposal (89/2015) states that the evaluation of whether control is exercised is connected to the ‘substance over form’ principle. All aspects of the arrangement must be reviewed and evaluated with the overall perspective in mind, and on a case-by-case basis. This is in line with the opinion (number 1775/2006) of the Finnish Accounting Board on the substance-over-form principle in the context of annual accounts. In the same way, evaluation based on the overall perspective and substance over form is also in line with the provisions of section 31, subsection 4 of the Act on Assessment Procedure. According to the Government proposal (2006), it may also be considered that there is an associated relationship when one of the parties to a transaction exercises some form of control over the other, in several different ways, that in the overall perspective, it is deemed to exercise control over the other party.

Finland’s Supreme Administrative Court analysed, as one of the questions in a case (ruling KHO 2021:123), the joint management and the formation of an associated relationship in a joint venture case within the meaning of section 31, subsection 2, paragraph 4 of the Act on Assessment Procedure (current section 31, subsection 4, paragraph 4). There was a situation where two independent shareholders held 50% of the shares in the B AB joint venture. B AB, in turn, held all of A Oy’s share capital. In the Board of Directors, both shareholders had an equal representation in B AB. Board members appointed one member to serve as Chairman of the Board, with no decisive voting power. If the Board’s voting result was a tie and no solution to the disagreement between shareholders was to be found, the shareholders would complete a repurchase procedure under the cooperation agreement resulting in the dissolution of the joint venture. The Supreme Administrative Court took the view that it is clear based on the preparatory work of section 31, subsection 2 of the Act on Assessment Procedure (now section 31, subsection 4) that also joint management, within the meaning of paragraph 4, presupposes that control is being exercised in the relationship between enterprises. As per the Court’s ruling, the wording of section 31 corresponded to section 5, subsection 3 of Chapter 1 of the Accounting Act (1304/2004) where, according to the preparatory work, the ‘joint management’ concept is connected to financing and debt-collateral arrangements, or to special purpose entities formed for such purposes, as these entities are managed in the same way as subsidiaries. The Court found that neither of the two shareholders exercised sole control over the joint venture, or over the company fully owned by the joint venture.

The associated relationship of section 31, subsection 4 of the Act on Assessment Procedure also emerges where control arises from indirect ownership, voting rights or the right to appoint more than half of the members of the Board or other comparable governing body. It is noted in the Government proposal (2006) that section 31 covers all typical situations of associated relationships, such as transactions between parties in a group of companies, and situations where a third party has control of both parties to the transaction. The Government proposal (2006) also points out that section 31 applies, for example, to transactions between a foreign company’s permanent establishment situated in Finland and another foreign company belonging to the same group.

Under section 31, subsection 4 of the Act on Assessment Procedure, a third party exercising control may not only be a group company but also a natural person alone or together with their immediate circle. The immediate circle includes, according to the definition found in the Government proposal (2006), the spouse of a person or someone with whom the person lives in a marriage-like relationship, the person’s sister, brother, half-sister, half-brother, their spouse or a relative in a descending or ascending line, and the spouses of those persons or persons living together with them. In addition to the above, persons living in a registered partnership may also be persons exercising control or persons inside the immediate circle. A natural person’s immediate circle also includes the estates of the persons mentioned above because in the event of death, their rights and obligations are transferred to the heirs and successors through universal succession.

Legal transactions, between a company and a natural person holding its shares do not constitute controlled transactions to be documented. In that regard, legal transactions, such as compensation for employment, investments of capital, and transfers of personal assets will be assessed in the light of the tax rules that apply. If a Finnish natural person is a self-employed entrepreneur, and there are foreign companies controlled by this person, belonging to the business source of income, the documentation obligation applies to controlled transactions between this entrepreneur and these controlled foreign company.

4.3 Small and medium-sized enterprises

4.3.1 Applying the definition 

The documentation obligation does not concern small and medium-sized enterprises. Commission Recommendation 2003/361/EC is the base for the definition of small and medium-sized enterprise, SME. The Recommendation’s main purpose is to establish a uniform SME definition for facilitating various forms of support offered to SMEs.

Section 14a, subsection 3 of the Act on Assessment Procedure contains the Finnish definition. SME is a company:

1. with fewer than 250 employees;
2. with maximum annual sales of 50 million euros, or with a maximum balance-sheet total of 43 million euros; and
3. meeting the characteristics of small or medium-size enterprise under the definition of the Commission Recommendation 2003/361/EC.

To be treated as an SME, companies must meet all the three requirements of section 14a cited above. However, it is permissible for the company to exceed one of the second requirement’s thresholds regarding sales and balance-sheet total, and it is still regarded as an SME. If both thresholds are exceeded, the company is no longer regarded as an SME.

In accordance with the Commission Recommendation, all key figures for the group must be considered when the number of employees, the turnover and the balance-sheet total are estimated. This means that the consolidated financial statements presented by the parent company must be examined. For this reason, the documentation obligation also often applies to fairly small companies operating in Finland if they are part of a large international group exceeding the thresholds and if they have controlled cross-border transactions.

Companies have the status of a large enterprise and are required to prepare documentation on their controlled transactions under section 14a of the Act on Assessment Procedure if the SME definition’s thresholds are exceeded. In other words, the definition of large enterprise can be understood as the inverse of the SME definition discussed above. If even just one of the definition’s conditions is fulfilled, the enterprise falls into the category of large enterprises. As of the second condition, both the net sales and the balance sheet thresholds must be exceeded.

In conclusion, a large enterprise is an enterprise with:

1. at least 250 employees; or
2. with more than €50 million of net sales and more than €43 million of balance-sheet total; or
3. no characteristics that would identify it as a small or medium-size enterprise under the definition of the Commission recommendation 2003/361/EC.

4.3.2 Values going over the threshold

When calculating the data referred to in the definition of SMEs, data valid on the most recent balance sheet date is used. For newly established companies, this data is calculated on the basis of a reliable estimate, made during the company’s accounting year. In addition to the company itself exceeding the threshold values, it also happens that partner enterprises and linked enterprises cause the values to exceed the thresholds (see paragraph 4.3.3 of this guide).

The calculation of number of employees must include full time, part time and seasonal employees. Moreover, the number must include wage earners and any people comparable to wage earners under national legislation and the shareholders of the enterprise if they participate in company management. For information on relevant rules of national legislation in various countries, you can seek information and guidance published by the public authorities of the country concerned. The unit of measurement for personnel is FTE, full-time-equivalent. In other words, if he or she is employed for the entire year, one full-time employee counts as 1 unit. Correspondingly, someone who works part time, someone who is a seasonal worker, and someone with a contract for only some months of the year would count as fractions of 1 unit.

Net sales for the accounting year refers to the commercial revenue that the enterprise has received, net of any corrections and other adjustment items. Net sales must be accounted for without value-added tax and without any other indirect taxes. Balance-sheet total means the total aggregate value of the company’s assets.

The Commission Recommendation sets out the principle that an enterprise will lose its status as an SME if the thresholds are exceeded. However, for purposes of the above, the status stays as it is during the first year with values exceeding the thresholds. In other words, the SME status that was valid at the beginning of the year will remain valid through the year. If during the next year, the values still go over the threshold, there have been 2 accounting periods with exceeded thresholds, and the enterprise loses its status as an SME. The documentation obligation does not enter into force until the 2nd year when the thresholds were exceeded, not the first year. However, under Commission Decision 2012/838/EU (EUR-Lex), the above rule is not applicable if the company has become part of a group that exceeds the threshold values. This may happen as a consequence of an acquisition (see the Annex of the Commission Decision 2012/838/EU (EUR-Lex), paragraph 1.1.3.1., subparagraph 6, point e and the Commission’s User guide to the SME Definition, released in 2015; page 14). Under the circumstances, the enterprise loses its SME status immediately when the transaction was made, and it is required to prepare documentation on its controlled transactions already for that accounting year. It is possible for an enterprise to gain an SME status if its values stay below the thresholds for two consecutive years although the enterprise has previously been large. The documentation must, however, be prepared for the first year when the values are below threshold.

4.3.3 Going over the thresholds due to data from partner and linked enterprises

The third SME requirement is a reference to the recommendation of the European Commission, which addresses the presence of characteristics that indicate that a company is independent and other signs typical of small and medium-sized enterprises. The purpose has been to enact provisions that effectively relieve pure SME companies that are not part of a larger whole from the obligation to provide documentation. For this reason, three different types of enterprises are discussed in the Commission Recommendation. Each type is related to another company in its own way, and this is taken into account when making a determination of possible SME status. According to the ways the enterprises are related, all other companies except pure SMEs are left out of the defined SME status.

The three types of enterprises in the Commission Recommendation are: uncontrolled enterprises, partner enterprises and linked enterprises. Uncontrolled enterprises are either fully independent or are minority shareholders of one or more enterprises (each interest less than 25% of capital or votes). Partner enterprises are in question if one company holds at least 25% of the other company’s capital or votes, but no more than 50%. If the ownership interest goes over 50%, the relation to that company is linked enterprise. The type of the associated relationship has an impact on whether another company’s number of employees, net sales and balance-sheet total is included when calculating the taxpayer’s data. Moreover, the extent of how the values are combined with those of the taxpayer also depend on the type of the associated relationship and the percentage of ownership.

In general, no controlled transactions to be documented exist for an uncontrolled enterprise even if such an enterprise were to exceed the thresholds. The taxpayer must, however, prepare the documentation if its own thresholds are exceeded in a situation where the taxpayer has an associated relationship with another company for some other reason than ownership (see examples 4 and 5 in paragraph 4.2 of this guidance). When an associated relationship is based on natural persons’ ownership, only the taxpayer’s own key figures and values count towards the thresholds. In these cases, the associated enterprise’s data is not taken into account when assessing whether the company in question is small or medium-sized.

When the companies being examined are partner enterprises, the taxpayer’s values are adjusted by adding a portion of the other enterprise’s values to them. The part of the partner enterprise’s values to be added is the percentage of share ownership or the percentage of voting rights, whichever is higher. The part to be added to the taxpayer’s data comes from partner enterprises that are one step away from the taxpayer, either upwards or downwards. This means that if the taxpayer’s partner enterprises have other partner enterprises in their holding, these more distant affiliates are not taken into account in the calculations. However, when a partner enterprise has linked enterprises, 100 percent of the linked enterprise’s values are added to the partner enterprise’s values. Even in this case, from the taxpayer’s perspective, the proportional part that is added still only reflects the percentage of share ownership or the percentage of voting rights in the partner enterprise.

The other enterprise is a linked enterprise in relation to the taxpayer, if the taxpayer has the majority of its voting rights, either directly or indirectly, or if the taxpayer exercises control in it. Whenever there is a linked enterprise, 100 percent of the linked enterprise’s values must be added to the taxpayer’s values. If the company being examined does not issue consolidated accounts, and it has a linked enterprise having further linked enterprises or partner enterprises, 100 percent of the linked enterprise’s plus all further linked enterprises’ values are added to the taxpayer’s values, and also a proportional part of the partner enterprises’ values.

The conclusion is that a Finnish company which is part of an international group may exceed the thresholds so that the documentation obligation comes into effect even if its net sales, balance sheet and number of employees all are low. The documentation obligation enters in effect for the tax year when the Finnish company is acquired by the international group, if the other requirements leading to the documentation obligation are fulfilled (for more information, see paragraph 4.3.2 above).

4.4 Controlled transactions below threshold

A simplified documentation obligation concerns controlled transactions that fall below the materiality threshold. Section 14b, subsection 5 of the Act on Assessment Procedure contains the Finnish legal definition. If a transaction between the taxpayer and an associated enterprise, in the course of the tax year, is no more than €500,000 it is a transaction below threshold. The Government proposal (2006) states that the threshold value set in euros refers to the controlled transaction’s value under arm’s length conditions. This means that the taxpayer is under obligation to ascertain that its pricing is compliant with the arm’s length principle although the simplified documentation does not expressly require a full description of its arm’s length nature.

Firstly, the simplified documentation obligation in the case of controlled transactions below threshold means that no Master File, containing group-level information within the meaning of section 14b, subsection 1 of the Act on Assessment Procedure, is necessary if the total volume of transactions between the taxpayer and the other party in the course of the tax year is no more than €500,000. The threshold applies separately to each transaction between the taxpayer and the other party; from this, it follows that the taxpayer must prepare the Master File with group-level information if there is a transaction with even just one party going above the 500,000-euro threshold in the course of the tax year.

Secondly, the simplified documentation obligation means that no functional analysis, comparability analysis, and description of the applied transfer pricing method are necessary to be included in the Local File containing taxpayer-level information within the meaning of section 14b, subsection 2 of the Act on Assessment Procedure, if the total volume of transactions between the taxpayer and the other party in the course of the tax year is no more than €500,000. However, for all the remaining taxpayer-level information, it is necessary for the taxpayer to prepare transfer pricing documentation also in the case of controlled transactions below threshold.

The total amount of controlled transactions staying below the threshold may in some cases become considerably high although the threshold is not exceeded in relation to a specific associated enterprise. The following example is an illustration of such a case.

4.5 Permanent establishment

Under section 14a of the Act on Assessment Procedure, the documentation obligation also applies to dealings between a foreign company and its permanent establishment in Finland. It is necessary to prepare documentation on the part of a foreign company’s income that becomes attributable to its permanent establishment in Finland, and the documentation must be prepared similarly as on the permanent establishment’s other cross-border transactions with other associated enterprises. From this, it follows that the permanent establishment located in Finland must prepare the same kind of documentation as an independent company would prepare under similar circumstances, i.e., where there would be a separate entity conducting the business of the PE, and this separate entity would have transactions with a foreign associated company.

However, the documentation obligation with respect to permanent establishments is not applied on dealings between a Finnish company and its permanent establishment located abroad. To receive relief for double taxation of the permanent establishment’s income, it is however required that a detailed account on those dealings is given. The facts and information required to eliminate double taxation are similar to the facts and information in transfer pricing documentation. The facts to be given also comply with the recommendation found in the EU Code of Conduct where permanent establishments are recommended to give similar documentation on how their income is created as the documentation required of companies.

The dealings between the company i.e. the head office and its PE are not seen as business transactions in the ordinary sense because the PE is part of the company. Examples of the dealings include services that the PE renders to the head office, and trade of tangible goods. Such a dealing between the head office and the PE takes place when, for example, the head office’s product sales to independent parties are entered into accounts as sales executed by the PE. With respect to the income attributed to the PE, there has been a purchase of products from the head office, entered into the PE’s accounts, although no actual transaction took place between the head office and its PE. This purchase is examined in the same way as a controlled transaction between associated companies. Therefore, when calculating the income of a permanent establishment, the arm’s length principle must be applied.

When doing so, the applicable tax treaties must be complied with. Under Article 7, section 2 of the OECD Model Tax Convention, the profits attributable to a permanent establishment are the profits that the permanent establishment might be expected to make if it was a separate entity. Therefore, when assessing a permanent establishment’s profits, one must take into account the functions performed, assets used and risks assumed when allocating the profit. When appropriate, the OECD Transfer Pricing Guidelines is also a source of interpretation when calculating the arm’s length income attributable to the PE.

In 2008, the OECD released a Report on the Attribution of Profits to Permanent Establishments, further on referred to as the PE Report (2008). The approach presented in the PE Report (2008) is based on creating a set of analogies between the OECD Guidelines and the way profits of a PE should be calculated. The objective is to build a harmonised interpretation for the attribution of profits to PEs, which would better suit for today’s cross-border circumstances. There are differences between previous practices and the instructions derived from the PE Report (2008). However, section 8 of the PE Report’s preface points out that many of its conclusions imply no contradiction with the Commentary to Article 7, the Business Profits article, which has previously been applied on permanent establishments. Based on the above, an update was made in 2008 to the Commentary of the OECD Model Tax Convention, covering the points where no contradictions were seen between the PE Report’s conclusions and the previous Commentary.

Finland’s Supreme Administrative Court has stated that the OECD’s Commentary to the Model Tax Convention has significance for purposes of interpretation especially in situations where tax-treaty provisions, built on the Model Tax Treaty’s logic, are in question, although the Commentary itself is not a legally binding source of interpretation (ruling of the Supreme Administrative Court KHO 2002:26). Based on the Supreme Administrative Court’s ruling KHO 2016:71 it is evident that in the context of determining the income attributable to a permanent establishment, no importance should be attached to the parts of the PE Report (2008) that only apply to situations recognized by the 2010 OECD Model Tax Convention. At the same time, the Supreme Administrative Court notes that the PE Report (2008) contained opinions that were intended to serve as guidelines for interpreting the Model Tax Convention valid at that time. In this regard, the Commentary was updated in 2008 in such a way that those opinions were included in it. The established case-law emanating from the Supreme Administrative Court’s ruling (KHO 2016:71) takes account of the 2008 update to the Commentary in the context of a tax treaty containing an Article that was based on the previous Business Profits article of the OECD Model Tax Treaty, i.e. before the Model was updated in 2010. The Supreme Administrative Court took the 2008 Commentary update into account for all tax years concerned, i.e. from 2006 to 2010.

In the interests of clarity, the OECD drew up a new Business Profits article and its Commentary in 2010, including all the conclusions that originate from the PE Report (2008) in them. Also in 2010, the OECD released an update to the PE Report, further on PE Report (2010). When making the documentation it should be taken into account that sections II to IV of the PE Report discusses how to attribute profits to the permanent establishments of banks and insurance companies.

PE Report (2008) is intended as a source of instructions for attributing profits and income to permanent establishments for which an older tax treaty is applicable. The 2008 updates to the Commentary, together with the PE Report (2008) are used as sources of interpretation in situations where the Business Profits article of the tax treaty applies, and the treaty in question is based on the old OECD Model Tax Convention released before 2010. The 2008 Commentary, together with the PE Report (2008) will continue to serve as sources of interpretation for as long as the Business Profits articles with the earlier wording remain in effect.

In turn, the PE Report (2010) and the 2010 Commentary are for attributing profits and income of permanent establishments according to the new tax treaties. References to a new tax treaty mean the treaties in which the Business Profits article is formulated as instructed by the OECD Model Tax Convention of 2010. The conclusions drawn by the PE Report (2010) are entirely the same as those of the PE Report (2008); however, the more recent PE Report contains a number of changes that make its references and wordings match the new Model Tax Convention’s article on Business Profits.

For more information on the attribution of profits to PEs, see Finnish Tax Administration’s guidance "General guidelines for the attribution of income to permanent establishment".

When preparing the documentation it is recommended to take account of the fact that unless the tax treaty to be applied in the situation at hand has no provisions matching the 2010 OECD Model Tax Convention’s article on Business Profits, the attributable profits cannot take account of a notional interest payment, royalty or a mark-up connected to administrative service charges between the head office and its foreign permanent establishment. However, in the case of banks, the documentation must include internal interest dealings also in situations where the Business Profits article of an older tax treaty is applied.

5 Documentation concerning the group (the Master File)

5.1 General remarks

Section 14b, subsection 1, paragraphs 1 to 6 of the Act on Assessment Procedure contain detailed rules on the documentation at group level in a Master File. The documentation obligation under the provisions of Finnish legislation is similar to that of the BEPS documentation recommendation. The BEPS recommendation places special emphasis on the importance of offering a high-level overview in the Master File. A proper understanding of the group’s business helps place its transfer pricing practices in a global economic, legal, financial and tax context. The Master File’s purpose is not to provide detailed information on the matters outlined in section 14b, subsection 1 of the Act on Assessment Procedure. Instead, the purpose is to provide sufficient information for reaching an overview.

The Master File must cover the entire multinational enterprise group. Under section 14b, subsection 3 of the Act on Assessment Procedure, the meaning of ‘group’ is as defined in Chapter 1, section 6 of the Finnish Accounting Act, or as defined in corresponding legal acts of other countries. For example, Government proposal (2016) contains the observation that when a Finnish company is part of an MNE group falling under the U.S. GAAP accounting rules and jurisdiction, it is necessary for the Finnish company to present group-level documentation based on the definition of ‘group’ as it is laid down in the U.S. GAAP. The documentation must extend to the entire MNE group, not only to the subdivision where the Finnish taxpayer belongs to. As regards the entirety constituted by the foreign company and its permanent establishment in Finland, it is necessary to present the group-level information within the meaning of section 14b, subsection 1 even if the foreign company does not operate in a group structure. In this case, the foreign company is a non-group company under the definition of law, but the documentation obligation applies to it. Accordingly, the group-level documentation is required, by way of exception, also in this case where the company is not part of a group.

An exception to the documentation of the entire group is provided in section 14b, subsection 4 of the Act on Assessment Procedure, as it is acceptable, as an alternative, to present consolidated information for the business area of the group to which the taxpayer company belongs. However, this is only possible if the business area conducts its operation independently of the rest of the group and can be separated from the rest of the group. For example, after an acquisition, the business area acquired into the group may continue to operate independently and comply with principles that are different from those of the rest of the group, in which case it is reasonable to prepare separate documentation of group-level information for the business area. However, information on the group provided in relation to such a business area must always include information on the centralised functions and on transactions with other business areas of the group in addition to the transactions within the business area concerned. In accordance with section 14b, subsection 4 of the Act, the taxpayer must also present group-level information on the Finnish Tax Administration’s request regarding the group’s other business areas. All documented group information must be available in order to provide a general understanding of the business activities of the entire group.

Chapter I of the OECD Transfer Pricing Guidelines suggests that group-level information can be used to analyse the arm’s length nature of transfer pricing. The considerations set out in the OECD Guidelines help understand the basic issues in the transfer pricing framework; this also contributes to understanding the information content of the BEPS documentation recommendation. Paragraph 1.33 of the Guidelines sets out two key steps in the application of the arm’s length principle: accurate delineation of controlled transactions and comparability analysis. Both steps are easier to undertake against a solid background of having identified and understood the MNE group’s business. According to paragraph 1.34 of the OECD Guidelines, analysis of transfer pricing requires a broad understanding of the industry sector in which the MNE group operates, and of the factors affecting the business in the sector, before moving on to the assessment of the activities of one taxpayer company. Based on the above, an overview of the business operations of the group is an important part of the taxpayer’s transfer pricing documentation.

5.2 Organisational structure

In accordance with section 14b, subsection 1, paragraph 1, of the Act on Assessment Procedure, the documentation must include an organisational structure. The presentation of an organisational structure is intended to provide an overview of the group’s ownership relations.

The presentation must cover the organisation of the group in its entirety. This must be represented by an organization chart describing the legal ownership structure of companies in the group. The chart must also show the geographical locations of legal and economic entities and permanent establishments. The description of the organisational structure may be supplemented by a diagram indicating the group’s functional structure. Additionally, the description may be supplemented by describing any substantial changes that the group has undergone in recent years.

5.3 Description of the group’s business

In accordance with section 14b, subsection 1, paragraph 2 of the Act on Assessment Procedure, the documentation must include a description of the group’s business. This is intended to provide an overview of the group’s business operations and position on the market. The overview makes it possible to understand the circumstances surrounding the group’s business and its value chain. The description of the group’s business on a general level must identify the six sets of information listed in the BEPS documentation recommendation, which will be addressed in greater detail in the following six sections (5.3.1 to 5.3.6) of this guidance.

Under the documentation obligation, the group’s business must be described in the Master File as discussed in this section, and the business of a taxpayer is, in turn, described in a later section (the Local File). The requirement to give a separate description of the group’s business emphasises that only a general overview of the group’s business is required.

5.3.1 Drivers of business profit

The first set to be documented is a description of the important drivers relevant to the MNE group’s business that generate income and create value. Drivers of business profit include the impact of business strategies and prevailing market conditions on business, the characteristics of the products or services offered, the way the group manages its supply chain, the functions that create value, valuable intangible assets and significant risks. It may additionally be necessary to cover the group’s drivers of business profit in other sections of the documentation of group-level information. Nevertheless, all the drivers of business profit that are important, generate income and create value for the group’s business are to be listed here.

5.3.2 Group’s production chain and supply chain

The next set to be documented is a description of the production and supply chains for the group’s five largest products and/or service offerings by turnover plus any other products and/or services amounting to more than 5% of group turnover. The BEPS documentation recommendation states that the description can be presented in the form of a chart or a diagram. Description of the production and supply chain of the most significant products and/or services helps to understand how and where value is created in the group’s business activities.

Chapter I of the OECD Transfer Pricing Guidelines on the application of the arm’s length principle emphasises the importance of an outcome of the transfer pricing consistent with value creation. However, the group-level documentation of the business does not require a separate, extensive value chain analysis. The description of the group’s business focuses only on describing the production chain and supply chain of the group’s most important products and/or services on a general level. The description must give a comprehensible overview of how and where the value of the group’s business is created.

5.3.3 Main geographic markets

The description of the group’s business must include an account of the main geographic markets for the products and/or services referred to above, which account for the highest turnover figures. The description of geographic market areas can be enclosed or presented separately in a graph or table containing data on the production and supply chains of products and/or services.

5.3.4 Important service arrangements

The description of the group’s business must include a list and a brief description of important service arrangements between the members of the MNE group. However, the list and brief description are not necessary for services relating to research and development, because R&D activities are described in more detail on the Master File documentation of intangible assets. The description of the important service arrangements must be accompanied by a description of the service provider’s capabilities to perform the service. For example, a brief explanation of the experience, expertise and capacity of the staff in the procurement unit, where important purchasing for business needs takes place, is needed to understand the nature of the service provided on a general level. The description must additionally present the group’s transfer pricing policies for allocating services costs, and for determining prices to be paid for services.

5.3.5 Brief functional analysis

The group-level business description must contain a brief functional analysis. It must describe the main contributions to value creation by individual entities within the group. Significant contributions to the group’s business include key functions performed, important risks assumed, and important assets used. The brief functional analysis is not intended for covering all the group companies’ functions even if the descriptions focus on some functions performed by individual group entities. Only the most significant contributions should be addressed in order to facilitate understanding of the group-level operation of business. It is acceptable to re-use the brief functional analysis, when preparing the Local File of a single taxpayer only on the condition that this brief functional analysis is completed with descriptions of economically relevant functions carried out by the associated enterprise and the taxpayer.

5.3.6 Business restructuring transactions, acquisitions and divestitures

The group-level description must contain information on any significant business restructurings, acquisitions and divestitures that have taken place during the accounting year. Important business restructuring transactions refer to internal group arrangements that involve material changes in the functions performed by group companies, in the assets used and in the risks assumed. For example, the transformation of a fully-fledged manufacturing and sales group company into a low-risk company offering manufacturing and sales services is a business restructuring, causing a significant impact on the income generation of the group companies participating in the arrangement. Another example of business restructuring is an intra-group transfer of self-developed intangible assets and related business which a group company developed at its own risk.

Such restructurings and similar changes may be related to a single set of arrangements or to consecutive arrangements over several years. Previous actions related to major business restructuring during the accounting period must be explained in order to give a complete overview of changes in the group’s business. An explanation may also be provided for restructurings or acquisitions that were carried out after the reportable accounting year ended or are intended to be carried out later.

5.4 Description of activities connected to intangible assets

In accordance with section 14b, subsection 1, paragraph 3 of the Act on Assessment Procedure, the documentation must include a description of the group’s activities relating to intangible assets. As noted in the Government proposal (2016), ‘intangible assets’ refer to assets within the meaning of Chapter VI of the OECD Transfer Pricing Guidelines called ‘intangibles’. ‘Intangible assets’ is the term used in this guidance.

No precise definition of intangible assets is given, as in paragraph 6.6 of the OECD Guidelines, by focusing on accounting or legal definitions, since a transfer pricing analysis in a case involving intangible assets should concentrate on the determination of the conditions that would be agreed upon between independent parties for a comparable transaction. The OECD Guidelines point out that the name of a transaction is not important from a transfer pricing perspective, because the focus must be on the economic value being transferred in a controlled transaction, regardless of whether the economic value is derived from tangible or intangible assets, from a service, or from some other item or function. However, intangible assets may play a significant role in the creation of value. Therefore, it is necessary to provide documentation on intangible assets at the required level.

The description of a group’s intangible assets must contain a general description of the group’s overall strategy for the development, ownership and exploitation of intangible assets. The description must be accompanied by information on the location of the group’s significant research and development functions, and the place of R&D management and control functions. References to ‘significant R&D’ and ‘R&D management’ mean the important group functions discussed in the OECD Guidelines’ paragraph 6.56. Examples of such functions include design and control of research programs, direction of research, control over strategic decisions regarding intangible development programmes, management and control of budgets, important decisions regarding defence and protection of intangible assets, and ongoing quality control over R&D functions. To identify the physical locations of the important functions and to connect the facts about locations with the group’s overall strategy on intangible assets are essential factors for gaining an understanding of the group-level functions related to intangible assets.

The description of the group’s intangible assets must contain a list of intangible assets or groups of intangible assets that are important for transfer pricing purposes and which entity owns them. In addition, the description must contain a list of all significant agreements on intangible assets and indicate the group companies that are parties to the agreement. Such a list would include, for example, cost contribution agreements, principal research service agreements and license agreements. The list is required for important agreements only, making it unnecessary to include all the group’s agreements on intangible assets. The description must additionally contain a general description of the group’s transfer pricing policies related to R&D activities and intangible assets. The transfer pricing policies that the group pursues can be derived from the overall group strategy discussed in the previous paragraph. For example, if the ownership and management of the group’s intangible assets are centralised to one group company according to the group strategy, the transfer pricing documentation must contain a brief description of the transfer pricing policies pursued when such centralization is effected, including the centralization’s impact on how the profits generated by the intangible assets are allocated among group companies.

The description of the group’s intangible assets must additionally contain a general description of any important transfers of intangible assets among associated enterprises during the fiscal year concerned. The description must include the parties to such transfer, jurisdictions where each party is located and compensation paid for the transfer. The description can be included in the general description of the group’s business, if the transfer of intangible assets is part of a restructuring of the group’s business.

5.5 Description of treasury activities

In accordance with section 14b, subsection 1, paragraph 4 of the Act on Assessment Procedure, the documentation must include a description of treasury activities. Its objective is to give an account of the group’s financial activities on a general level. Chapter X of the OECD Transfer Pricing Guidelines contains guidance on intercompany financing. The way a particular MNE group has organised its treasury activities may vary depending on the group structure and business. There are groups with a centralised treasury function, others with a decentralised one, and still others with a treasury function that is neither centralised nor decentralised. Actual circumstances and accurate delineation of transactions play an important role when the transfer pricing of intra-group financial transactions is examined. From this, it follows that it is not enough that the term ‘treasury activities’ is used for identifying a certain activity (see paragraph 10.44 of the OECD Guidelines). Such items as intra-group loans, guarantees, collateral, intercompany cash pool arrangements and hedging instruments are typical intra-group financial transactions.

A general description of the MNE group’s external funding must be presented first. The documentation can describe the treasury function in the same way as instructed in the C section of chapter X of the OECD Guidelines. There must be a description of how the group has organised its external funding. The description must be accompanied by any significant financing arrangements in force between group companies and independent financiers. If the group’s treasury function is centralised, the key terms and conditions of any significant external loan taken out by the group company responsible for obtaining centralised funding must be described in general terms. At the same time, it is necessary to describe how this significant loan is related to the total financing of the group, in order to understand the overall financial position of the group. As regards financing taken into the group as a whole, it should be noted that it does not as such verify the arm’s length nature of the intra-group financing of an individual group company. This is because there may be important differences in the functions of the entire group compared to the functions of an individual group company as well as in the assets used for the functions and in the risks assumed, and in other circumstances.

The description must contain information on the group companies that provide intra-group treasury services centrally. The description must be accompanied by information on the countries or jurisdictions under whose laws the group companies have been organised and where their places of effective management are located. In this context, effective management is understood as the management of a company engaged in treasury activities which has capability to decide on the organisation of intra-group finance, and to take risks relating to intra-group finance, and which actually takes those decisions. If a group company that carries responsibility for centralised treasury activities does not effectively manage the financing activity, a general level analysis of the other group companies related to centralised financing must be included.

The description of the treasury activities must also contain a general description of the transfer pricing policies applied to intra-group financing arrangements. This description must indicate the general principles to be followed in the context of intra-group financing. Under paragraph 10.14 of the OECD Guidelines, the same principles apply to the transfer pricing of intra-group financial transactions as for other controlled transactions.

In addition, in the Tax Administration’s statement on the Guidelines issued by the OECD regarding financial transactions — OECD:n rahoitusliiketoimia koskeva siirtohinnoitteluohjeistus (in Finnish and Swedish) addresses the documentation requirements, making reference to the OECD’s 2020 release of Guidelines on Financial Transactions.

5.6 Financial statements

In accordance with section 14b.1.5, of the Act on Assessment Procedure, the documentation must contain the group’s financial statements or if the financial statements are not available, a compilation of accounting records that provides corresponding information. The group’s consolidated financial statements are used to further develop the general understanding of the group’s financial position.

The requirement to disclose the group’s financial statements may be met in several ways. The group’s financial statements for an accounting period relating to the tax year may have been prepared for financial reporting, regulatory requirements, internal management, taxation, or some other purpose. However, it is not necessary to draw up the group’s financial statements separately if no financial statements or similar information exist. Documents may be submitted in the language in which they were originally drawn up. However, a summary of their content must be provided in Finnish, Swedish or English. The word ‘summary’ refers in this context to the key figures, and key textual elements of the financial statements.

5.7 Pre-emptive statements

In accordance with section 14b, subsection 1, paragraph 6 of the Act on Assessment Procedure, the documentation must include any pre-emptive statements and advance agreements, received from Tax Administrations regarding cross-border income allocations. The said provision requires that a list and short description must be presented, covering all the group’s unilateral advance pricing agreements that are in force during the group’s tax year, and other pre-emptive statements which tax authorities have issued on income allocation between countries. The above also includes information on any pre-emptive statements issued by the Finnish Tax Administration.

The meaning of ‘pre-emptive statements and advance agreements’ is understood in the broad sense, extending to all written statements as well as all advance agreements made between the company and a tax authority relating to the cross-border situation. The format of such statements is irrelevant. In the context of the Finnish Tax Administration, this means advance rulings, memoranda of pre-emptive discussions and other similar written statements where the view of the Tax Administration is expressed about the facts that affect the taxation of the group company.

The meaning of ‘allocation of income among countries’ is here understood in a broad sense, as it refers to a number of factors having an impact on the allocation of taxable profits of companies situated in different jurisdictions, such as transfer pricing, attributing profits to a PE, classifications of income subject to tax and categories of tax-deductible expenses. Although the meaning of ‘allocation of income’ is different in this context from ‘attributing profits to a PE’, any pre-emptive statements connected to the determination of the permanent establishment’s profits must be included in the list and the short description.

6 Taxpayer documentation (Local File)

6.1 Description of the organisation and management structure

In accordance with section 14b, subsection 2, paragraph 1 of the Act on Assessment Procedure, the documentation must include a description of the taxpayer’s organisational structure and management structure. The description of the taxpayer’s organisation and management structure differs from the outset from the high-level description of the entire group (the Master File), as do the other items to be documented here (the Local File). The documen­tation of taxpayer-specific information includes a detailed description of the company and its transfer pricing, whereas the description of the group addresses the group’s transfer pricing on a general level.

The description of the taxpayer’s organisation and management structure is part of the account about the company concerned by the documentation obligation. For example, the company’s organisational structure can be presented in an organisation chart which shows the principles of how the company is organised. The documentation must additionally include an account describing the way the functions relating to company management are arranged within the company’s organisation and management structure. This account must shed light on the internal allocation of responsibilities and indicate the individuals having executive positions.

In addition, the documentation must include an account of the group’s internal reporting obligations that are imposed on the company’s directors. This account must describe the individuals to whom local management reports and the jurisdiction(s) in which these individuals have their primary offices. There may also be a presentation stating what data is reported and the way it is put into use, thereby complementing the description of the company’s organisational and management structure. When drawing up the description on reporting, the organising of decision-making functions related to risk control, as discussed in paragraph 6.5.4 of this guidance, is worth observing.

6.2 Description of the company’s business

6.2.1 General remarks

In accordance with section 14b, subsection 2, paragraph 2, of the Act on Assessment Procedure, the documentation must give details on the taxpayer’s business. The goal of this requirement is to provide a detailed description of the taxpayer’s business operations and their business strategy.

The detailed description is, per definition, a thorough discussion of the business being operated. However, it is acceptable if just the key factors that have the most important impact on the operation are in primary focus. The description should give a good overall picture of the taxpayer’s business without excessive details obscuring the picture. The extent of information required can be put in perspective if one bears in mind that while the Master File is intended for providing a high-level overview of the MNE group’s business, the Local File is for describing the taxpayer’s business operations much more precisely.

6.2.2 Description of business operations and business strategy

The description of the taxpayer’s business operation gives facts about the taxpayer’s geographical market area and the competitive situation in the market. The description may be accompanied by information concerning the taxpayer’s key competitors, and by statistical information on market size in euros. The description of the market can also contain information on the trend of market development. The market trend has an impact on various things such as the competitive situation and the company’s strategic choices. It may be appropriate to present the taxpayer’s history of business activities, describing how the company’s position has developed on the market, and also to include a discussion of how the taxpayer’s products or services differ from those offered by competitors. Additional information about the taxpayer’s business operations may be included, such as an account outlining any special circumstances affecting the business environment.

It is advisable to add general information on the decision-making relating to the taxpayer’s business, because the capability to make decisions – or the lack thereof – has a major impact on the taxpayer’s transfer pricing. The key question here is: who exercises control over business risks? Accordingly, it is advisable to accompany an account on how business decisions are made. Based on this, it will be possible to evaluate who makes the decisions on assuming business risks, who bears responsibility for assessing whether risks are realised, and who decides on how the company should react to any risks realised. Paragraph 6.5.4 of this guidance addresses risk control in more detail, in connection with functional analysis.

The description of business must contain a description of the business strategy pursued by the taxpayer. Paragraph 1.134 of the OECD Transfer Pricing Guidelines states the following on the impact of business strategies: Business strategies would take into account many aspects of an enterprise, such as innovation and new product development, degree of diversification, risk aversion, assessment of political changes, input of existing and planned labour laws, duration of arrangements, and other factors bearing upon the daily conduct of business. The OECD Guidelines also refer to market penetration, expansion of market share, and efforts to defend market share as business strategies. In these circumstances, companies may temporarily incur higher costs, and achieve lower profits than the taxpayer’s competitors. For example, market penetration can be attempted in a situation where the parties to a controlled transaction are a local sales company and the principal which is a party responsible for product sales. In such a case, the transfer pricing documentation must identify which party decides on carrying out the business strategy and decides on how to react to business risks.

The documentation may also be accompanied by a discussion on how the accurate delineation of transactions is affected by the economic circumstances that concern the parties, and the market, and the business strategies of each of the parties (see paragraph 6.4).

6.2.3 Business restructurings and transfers of intangible assets

Business information also includes an account of business restructurings and transfers of intangible assets that the taxpayer has been involved in, or that have had an impact on the taxpayer during the tax year. It may be that the impact will materialize in the coming years. Business restructurings, in accordance with Chapter IX of the OECD Transfer Pricing Guidelines, refers to cross-border reorganisation concerning the functions, assets or risks of a multinational enterprise. They often involve a transfer of valuable intangible assets to another party. However, it is possible to transfer intangible assets between associated enterprises also without a wider business restructuring. A transfer of intangible assets may therefore also be an individual transaction that has to be explained in documentation from the perspective of the transfer pricing’s arm’s length nature (see also paragraphs 5.4 and 6.4 of this guidance).

In this context, the meaning of ‘business restructuring’ does not coincide with what is provided in the Act on the taxation of business income regarding corporate arrangements. Instead, it means changes in the organisation and in the operations of the company. Accordingly, a business restructuring can be characterised as a change in the business model, or its reorganisation, or a change in the value chain or a structural change. The name of the arrangement does not matter because the main idea is to examine the impact it has on the taxpayer’s functions, assets and risks.

Business restructurings must be evaluated as a whole, in which attention must be paid to the total effects even if the business restructuring has taken place in separate phases over a longer period of time. The assessment must not be restricted to specific aspects such as the acceptability of a subsequent comparability analysis or the methodology applied. When describing the taxpayer’s business, the overall view must be as comprehensive as possible. For example, when a business restructuring was initiated in the tax year in question, the measures taken in the tax year and the main features of a plan to be implemented later can be presented. To give an overall view, a description of the parties’ functions, the assets involved and the risks assumed are also required, as per the time before and after the arrangement. These functions, assets and risks may be described in more detail in the documentation’s functional analysis section.

Business restructurings typically take place through new, modified or terminated contractual agreements. In practice, the flow of goods and services from the business units may remain unchanged, but the contracts may bring about significant changes to the allocation of risks, responsibilities, and the allocation of income among the parties. A key element in documenting contracts related to business restructuring is that the contract should reflect the actual restructuring made. Business restructurings must be described in the transfer pricing documentation in accordance with the actual economic content of the restructuring. If the contents of the contract for any reason differ from the arrangement that actually was carried out, the facts, circumstances and impacts of the arrangement must be described carefully in the documentation. For example, the registration of a patent may have been left in the name of the party that in actual fact relinquished the patent. Then, after a business restructuring, the party that makes an economic use of the patent and is the party responsible for its development has no legal ownership of the patent. In this case, the pricing of the transaction and the entire case must be examined on the basis of actual activity and content, not merely with regard to legal ownership as it is generally understood by definition of civil law.

In the circumstances described by this example, the transfer pricing documentation should be based on the pre-restructuring functional analysis and the post-restructuring functional analysis. The description must give details on the functions carried out by the parties, their assets, their risks before and after the restructuring, and examine whether the contracts that were made are in line with the parties’ actual behaviour. Especially, the descrip­tion must place an emphasis on the important functions and assumed risks of both parties. For example, the way the parties exercise control over risks must be described in detail. Evaluations of the actual impact of a business restructuring are greatly affected by who makes the decisions on assuming business risks, who assesses whether risks are realised, and who decides on how the company should react to any risks realised.

The impact of the restructuring on the taxpayer’s operations must be described in the transfer pricing documentation. The key questions related to restructuring include both the compensa­tion to be paid for the restructuring itself and the compensation to be paid afterwards. Both must be in line with the arm’s length principle. In general, post-restructuring, ongoing intra-group transactions include simpler or more conventional transfer pricing situations. In contrast, the question of compensation to be paid for the business restructuring itself may be a more complicated transfer pricing issue because an intangible asset or the operation of an entire business unit is transferred. If the restructuring involves a transfer of something for which an independent enterprise would pay a compensation for, the related parties are required to pay the compensation as well. The controlled transaction must be documented, and the documentation must contain a calculation of the arm’s length price of the item transferred. Correspondingly, when a termination of a contract is part of a business restructuring, it should be evaluated whether the party is giving up something of value, i.e. giving up something that an independent enterprise would require payment for.

6.3 Description of associated relationships

In accordance with section 14b, subsection 2, paragraph 3, of the Act on Assessment Procedure, the documentation must contain a description of the taxpayer’s associated relationships. The description can be combined with the listing, discussed in the next paragraph, of the taxpayer’s controlled transactions. To do so is in line with the document structure required by the BEPS Documentation Guideline. Some structural differences exist between the documentation obligation set out under Finnish national laws and the documentation obligation based on BEPS. This is due to the legislator’s decision to leave the central parts concerning taxpayer’s documentation (Local File) mostly unchanged in the Finnish legislation. However, the information may be presented in preferred order because the focus should be on content, not the documentation’s formal layout.

The description of the taxpayer’s associated relationships must include information on associated companies that the taxpayer has transactions during the tax year, or companies whose transactions during the year have either a direct or indirect impact on the pricing of the taxpayer’s controlled transactions. The details on every associated relationship to be presented are name of the associated company, the company’s identifier, domicile, reason for the associated relationship, and the controlled transaction carried out between the parties. The description must also contain a description of any changes that occurred during the tax year in the relationships between the associated companies and the taxpayer.

To describe the associated relationships is not restricted only to situations where the taxpayer itself is party to the transaction but the description must also cover transactions between other parties that have an impact on the pricing of the taxpayer’s controlled transactions. Under such circumstances, the taxpayer makes no direct business transaction with the associated company but it is still necessary to describe the associated relationship in the documentation.

Para­graphs 1.190–1.193 of the OECD Transfer Pricing Guidelines present an example to illustrate absence of a direct, exact transaction. The example describes a situation where a shared services centre of an MNE negotiates on behalf of two associated manufacturers an order to purchase components from an independent supplier and places an order on their behalf. The group’s negotiating power ensures them a quantity discount, which the two manufacturers would not have been able to get independently. Then, the shared services centre asks the supplier to send two invoices, one with the discounted price, the other with the original selling price, so that the quantity discount falls to only one of the two manufacturers. The invoicing arrangement results in group synergy being allocated incorrectly. The home country of the manufacturer that had to pay full price would be entitled to make a transfer pricing adjustment. Because the MNE has arranged for a centralised procurement function, it is possible to allocate the discount to both of the two manufacturers although no business transaction was made between the manufacturers. Accordingly, the other manufacturer is an associated company, which must be adequately described when preparing the documentation.

6.4 Transaction details

6.4.1 General remarks 

In accordance with section 14b, subsection 2, paragraph 4, of the Act on Assessment Procedure, the documentation must contain a description of the taxpayer’s controlled transactions, and a description of any dealings between the company and its permanent establishment. The transaction must be accurately delineated and presented in the documentation based on its factual substance. Accurate delineation of a transaction is a condition for the transaction to be priced at arm’s length for tax purposes. Finnish legal provisions on accurate delineation, as a component that facilitates adherence to the arm’s length principle, are found in section 31, subsection 2 of the Act on Assessment Procedure, with further discussion on accurate delineation in the Government proposal (2021), and in the OECD Transfer Pricing Guidelines that Finland recognizes as the central source of interpretation of the provision on transfer pricing adjustments. In accordance with section 31, subsection 2 of the Act, this guidance adopts the expression ‘to accurately delineate’ transactions leaving behind the previously used term ‘to identify’ transactions.

Associated companies can arrange their commercial and financial relationship, as well as their mutual transactions in many ways. The term ‘transaction’ is understood to refer broadly to all economic actions taken to conduct business or to pursue other economic goals. Accordingly, the concept ‘transaction’ is extensive as described for example in the Finnish Government proposal (2021). In addition to typical commercial transactions such as selling and purchasing, also all transactions connected with treasury activities are included, as are also the sales and other transfers of intangible assets, other arrangements for which payment is received in some form, along with arrangements for which there is no consideration or payment made. As a result, if an associated company renders services free-of-charge to other associated companies, the deliveries of such services are transactions.

The obligation to prepare transfer pricing documentation also applies to dealings between a foreign company, the head office, and its permanent establishment in Finland. It is also required of permanent establishments located in Finland to document any other cross-border transactions (that the head office carries out) with other associated companies when the transactions are booked as part of the permanent establishment’s activity. The permanent establishment located in Finland must prepare the same kind of documentation that a Finnish company would prepare under similar circumstances when it has carried out cross-border intra-group transactions.

6.4.2 Accurate delineation of a transaction 

‘Accurate delineation’, as defined in section 31, subsection 2 of the Act on Assessment Procedure, means the stage of the transfer pricing process when the commercial or financial relations between the associated enterprises carrying out the controlled transaction are identified, taking account of the economically relevant characteristics and of the transaction’s actual nature and content. According to the government proposal (2021), the purpose of accurate delineation is to describe the actual transaction as well as the responsibilities between the parties of the transaction and the parties’ actual conduct when the transaction is executed. Taxpayers can only set an arm’s length price to a controlled transaction when the actual transaction is accurately delineated. The OECD Transfer Pricing Guidelines contain detailed instructions on the subject of accurate delineation of transactions (see e.g. paragraphs 1.33 to 1.138 and Chapter X, section B).

Economically relevant characteristics are divided in the following categories under the provisions of section 31, subsection 2 of the Act on Assessment Procedure and under the OECD Guidelines:

• Contractual terms
• Functions, assets and risks of the parties
• Characteristics of property transferred, or services provided
• Economic circumstances of the parties and of the markets where they operate
• The business strategies of the parties

The sections below contain a further discussion of economically relevant characteristics. For accurately delineating transactions the importance of each economically relevant characteristic varies in each case. Transfer pricing documentation must include description of the economically relevant characteristics as they form the basis for the accurate delineation of the actual transaction.

Economically relevant circumstances

To accurately delineate transactions, written contractual terms form the basis for the identification of economically relevant circumstances. Therefore, it is advisable that taxpayers’ transactions with associated enterprises are agreed on in writing, and the contents of these contracts are revised regularly. However, a written contract between two associated enterprises does not necessarily give full details on the transaction’s economically relevant characteristics. In order to safeguard that the pricing of controlled transactions is arm’s length, taxpayers are therefore required to provide additional information on the economically relevant circumstances that affect the controlled transaction, referred to above. Although the written contract always forms the basis for the accurate delineation of a transaction, it is particularly important to examine whether the actual conduct of the parties conforms to the contract, as noted in paragraph 1.46 of the Guidelines.

In addition to the contractual terms, also the parties’ functions, assets and risks must be identified when accurately delineating a transaction. In practice this means the functional analysis as outlined in the OECD Guidelines and by extension, the parties’ actual conduct and their capabilities connected to the controlled transaction. Functional analysis provides information on the economically relevant functions and responsibilities connected to the controlled transaction, the assets the associated enterprises used or invested in the functions, and the risks the parties assumed. For purposes to accurately delineate and price the controlled transaction it is important in the functional analysis to identify, for example, the economically relevant risks; to analyse the associated enterprises’ functions related to the control over these risks, as well as to acknowledge the parties’ financial capacities to bear the risks. The analysis aiming at identifying and allocating risks is described in more detail in section 6, subsection 5, paragraph 4 of this guidance. The nature of the transaction affects the level at which the taxpayer has to describe its functions, assets and risks and which among them are economically relevant for the transaction in question. For example, relating to a business restructuring, the parties’ functions, assets and risks must be looked into, both before and after the controlled transaction. More information on functional analysis is in section 6, subsection 5 of this guidance.

When accurately delineating a transaction, the taxpayer must also identify the characteristics of the transferred asset or service provided. According to the OECD Guidelines, important characteristics may include the physical features, quality and reliability of tangible assets; and how well and to what extent the assets are available. Important characteristics of services include their nature and extent, among others. Important characteristics of intangible assets include the form of the transaction (such as licensing or sale), the type of the intangible assets (such as patents, trademarks or know-how), the duration and degree of protection (property rights), and the anticipated benefits from the use of the assets. Important characteristics of loans include the factors listed in paragraph 10.29 of the OECD Guidelines, such as the amount of the loan, its currency and maturity, the schedule of repayment, and the purpose of the loan (e.g. for working capital, for an acquisition).

To accurately delineate the controlled transaction, the taxpayer will also have to explain the economic circumstances of the parties and of the markets. In this regard, it is necessary to look into the alternative products or services available in the market. Economic circumstances relevant to the controlled transaction include geographical location, market size, extent of competition in the market, the relative status of buyers and sellers there, any regulation exercised by the state, production costs and the timing of the controlled transactions. As necessary, cyclical fluctuations in the economy and the lifecycle of the product may also have relevance. For example, a discussion of how market conditions affect transfer pricing of financial transactions can be found in paragraphs 10.30 to 10.33 of the OECD Guidelines.

When accurately delineating transactions between associated enterprises, it is also important to identify the economically relevant business strategies of the parties. According to the OECD Guidelines, the factors identified in the business strategy category include innovations and the development of new products, degree of business diversification, willingness to take risks, assessment of political changes, impact of existing and proposed labour laws, and other factors relevant to day-to-day business management. Business strategy may additionally include components related to market penetration, efforts to increase market share and efforts for defending an existing market share. However, business strategies that do not affect commercial or financial relationships between the associated enterprises should not be taken into account when accurately delineating a transaction.

Describing economically relevant characteristics in transfer pricing documentation

As instructed above, taxpayer must provide information in its transfer pricing documentation on controlled transactions carried out in the tax year. As stated in paragraph 1.36 of the OECD Guidelines, taxpayers must include the economically relevant characteristics underlying the accurate delineation of the actual transaction in the taxpayer-specific documentation (in the Local File), as the documentation supports the taxpayer’s analysis of its transfer pricing.

When preparing the documentation, it must be taken into account that the economically relevant characteristics identified when accurately delineating the transaction may need to be described in several different sections of the documentation. For example, it may be appropriate to describe the contractual terms or the characteristics of transferred assets or provided services in connection with the description of the controlled transaction. Descriptions of pursued business strategies may, in turn, be more naturally placed in connection with the description of the taxpayer’s business. In some cases, it may be most appropriate to describe the economically relevant characteristics of the transaction in the context of a functional analysis. Some of the economically relevant characteristics may be weighted in different ways when accurately delineating a transaction. Accordingly, in one situation, local market conditions may be a factor of great importance affecting a controlled transaction; while in another situation the significance of local market conditions is negligible. When preparing the documentation, it is advisable to only focus on the economically relevant characteristics that are important to the delineation of a controlled transaction to be documented.

The taxpayer can add a summary of the economically relevant characteristics and of the accurately delineated transactions to its documentation. However, it may be appropriate to present such a summary only at the stage when all the economically relevant characteristics are identified and fully described. For example, the taxpayer’s summary can contain information on which economically relevant characteristics are the most important from the perspective of accurate delineation of transactions, and which ones, in turn, are the least important.

Accurate delineation of transactions under the definition of section 31, subsection 2 of the Act on Assessment Procedure is not applicable to the dealings between a permanent establishment and its head office because they do not qualify as actual legal transactions. However, it is noted in the Government proposal (2021) that when income is allocated under the arm’s length principle to different parts of an enterprise, the true content of the dealings must be evaluated, taking account of the functions, assets and risks of the different parts of the enterprise. In the case of a permanent establishment situated in Finland, it is necessary to describe the economically relevant characteristics in the documentation, as appropriate, because they have an effect on the allocation of income as required under the arm’s length principle. Often there are no written contracts on the internal dealings taken by an enterprise. For this reason, it is important to describe especially the functions and responsibilities of a permanent establishment and its employees.

A simplified documentation obligation concerns the controlled transactions that fall below the threshold of materiality (for more information, see paragraph 4.4). These transactions must be accurately delineated to reflect their actual content and they must be priced according to arm’s length principle. However, it is not necessary to describe their economically relevant characteristics in the documentation.

In accordance with the OECD Guidelines, the economically relevant characteristics of the accurate delineation are the same as the comparability factors in the comparability analysis of a controlled transaction and a comparable transaction. In addition, for a successful comparability analysis, it is important to delineate a controlled transaction accurately and to identify all the economically relevant characteristics. A carefully undertaken functional analysis combined with an identification of other economically relevant characteristics provides a base for finding comparables among third party transactions. This way, it becomes possible to compare the functions performed by the comparables, and other comparability factors (i.e. the economically relevant characteristics) with the controlled transaction. The information collected in order to accurately delineate a transaction is also necessary, for being able to select the transfer pricing method for purposes of verification of arm’s length pricing.

6.4.3 The grouping of transactions and other information on transactions 

Taxpayers can divide their controlled transactions into transaction groups, for example as follows: the sale and purchase of goods; the sale and purchase of services; transfers of ownership of or right to use intangible assets; transfers of ownership of fixed assets; the compensation received and paid for the right to use intangible assets; other compensation received for the transfer of a business activity, other compensation paid for the acquisition of a business activity; any compensation received for collateral and liability guarantees given, and compensation paid for the collateral received and liability commitment; lending, borrowing, interest income, interest expense; income and expenses related to derivatives contracts, and other income and expenses. Alternatively, the taxpayer can implement even more detailed groups or categories. For example, the assignment of intellectual property rights may be divided into technology rights, trademark licensing rights and other licences where necessary.

The documentation must present the euro values of the compensation received and paid for each transaction within all the groups and categories established. The euro values must be broken down into compensations received from and paid to each foreign associated enterprise. Parties to a transaction must be presented in this context, although the presentation of the parties is, in principle, required to already be documented in the preceding paragraph when describing the associated relationships. The information must be provided either by transaction or by group of transaction, even if transactions are combined in order to verify whether the conditions are arm’s length, as described in paragraphs 3.9 to 3.12 of the OECD Transfer Pricing Guidelines. The combination of transactions is discussed in more detail in paragraph 6.6.1 on comparability analysis of this guidance.

In addition, the taxpayer must include a list of the agreements concerning its controlled transactions. In addition to the list of agreements, copies of the most essential agreements must be enclosed to the documentation. In general, material agreements are those that generate primary income for the company, contracts related to intangible assets, and contracts for business restructurings.

6.5 Functional analysis

6.5.1 General remarks

In accordance with section 14b, subsection 2, paragraph 5 of the Act on Assessment Procedure, the documentation must contain a functional analysis of the taxpayer’s controlled transactions and also of dealings between the company and its permanent establishment. ‘Functional analysis’ is defined as the functional analysis referred to in the OECD Transfer Pricing Guidelines. It describes the functions performed by the associated enterprises that participate in the transaction, the assets involved and the risks assumed. As noted in paragraph 6.4.2 of this guidance, the functional analysis is an essential part of the accurate delineation of the actual transaction.

Functional analysis must be presented for each party to the transaction being examined, in order to provide an overall picture of the parties’ contributions to the transaction. It is important to create an overall picture because the functions performed by the associated parties play a key role in accurate delineation of the actual transaction, and thus in its pricing. In the OECD Guidelines this is illustrated by the observation that the compensation for transactions between independent parties usually reflects the functions carried out by the parties, taking into account the assets used and the risks assumed. The OECD Guidelines emphasise that it is particularly important to understand how value is being created by the group as a whole, what the interdependencies of the functions performed by the associated enterprises are, and what contributions are made by the associated enterprises to value creation. Accordingly, the conclusion is that the number of functions performed is not relevant, but the economic significance of the functions is most important. Careful execution of the functional analysis and its description in the documentation constitute an essential part of the evaluation process of transfer pricing.

The rules on documentation treat the functional analysis as an activity separate from comparability analysis, although functional analysis has generally been considered only as one factor for determining comparability. In the OECD Guidelines, the instructions relating to functional analysis are clarified by requiring a functional analysis at different stages of the transfer pricing’s evaluation process. First, the functions, assets and risks of the parties described in the functional analysis are part of economically relevant characteristics, which are used to accurately delineate the actual controlled transaction (for more information, see paragraph 6.4.2). Secondly, the same characteristics are used for evaluating comparability in a comparability analysis, where they are called ‘factors relevant to determining comparability’. For more information on comparability analysis, see paragraph 6.6 of this guidance.

The BEPS documentation recommendation points out that it is sufficient in the functional analysis to include a reference to the brief functional analysis of the entire group (in the Master File) insofar as the specific functional analysis concerning the taxpayer (Local File) is similar to the functional analysis of the entire group. The description of the entire group’s business operations must explicitly contain a brief functional analysis focusing only on the most important key functions of the group, and therefore the objective of the group-level description is different from that of the taxpayer-specific description. The group’s brief functional analysis can only be used for the Local File, if the first analysis is complemented with descriptions of economically relevant functions, having an impact on the controlled transaction, carried out between the taxpayer and the associated enterprise.

The functional analysis must also include any changes in the functions of the parties compared to the previous tax year. If a change in functions relates to a business restructuring or transfer of intangible assets that occurred during the past year, the change may also be described in the context of information on business activities discussed above (see paragraph 6.2.3). However, if the change in functions is not related to another more extensive restructuring, the description should be included in the functional analysis. The impact of the change on the parties’ functions, assets used in the functions and the risks assumed in the functions must be described, including the situation before and after the change.

When applying the provisions in section 14b of the Act on Assessment Procedure, to perform a functional analysis of the dealings between a company and its permanent establishment means a functional analysis of the dealings carried out between a foreign company and its permanent establishment in Finland. The PE Report (2008) describes an analysis to be carried out in two stages in order to determine the profits and income of a permanent establishment, where the first stage relates to the functional analysis and the second stage concerns the attribution of income. The permanent establishment is subjected to a functional analysis and a fact-based evaluation identifying economically relevant activities that the permanent establishment conducts, and the responsibilities it bears. The purpose of the analysis is to outline a hypothetically separate permanent establishment, which would be separate from the rest of the enterprise. Based on the functional analysis and the fact-based analysis, assets and risks related to the functions are then attributed to the permanent establishment. The amount of interest-bearing and non-interest-bearing capital required by those functions and risks are also attributed to the permanent establishment. For more information on performing a functional analysis on a permanent establishment, see chapter 3 of the Tax Administration’s "General Guidelines for the Attribution of Income to Permanent Establishment".

Although the functional analysis constitutes a whole, the functions, assets and risks are addressed separately in the following, in the interests of clarity.

6.5.2 Functions

Functions may typically include planning, research and development, procurement, manufacturing, assembly, quality control, warehousing, distribution, marketing, advertising, sales, transportation, technical maintenance, financing, administration and management. The list is not exhaustive. The functions must be described on a case-by-case basis, with special focus on economically relevant activities related to controlled transactions, whose nature and impact on value creation needs to be described in detail. By contrast, functions that are less relevant economically can be described in a short, general manner. The description may include the number of staff or costs required to perform the functions.

For transactions involving the transfer or use of intangible assets, the functional analysis must include a description of the associated enterprises’ functions relating to those intangible assets. It is important to focus on the activities related to the development, enhancement, maintenance, protection and exploitation of intangible assets. These activities are often referred to with the abbreviation DEMPE (Development, Enhancement, Maintenance, Protection & Exploitation). The role of DEMPE in transfer pricing analysis is described in Chapter VI, section B of the OECD Transfer Pricing Guidelines. Paragraph 6.56 of the OECD Guidelines sets out functions that may be of special significance in the context of controlled transactions where intangible assets are transferred or exploited. The taxpayer is required to give details especially on the role of the associated enterprises in decision-making related to research and development and to marketing. In accordance with the OECD Guidelines, important functions include design and control of research and marketing programs, direction of research, control over strategic decisions regarding intangible development programmes, management and control of budgets, decisions regarding defence and protection of intangible assets, and quality control over research and development work.

For purposes of describing the parties’ functions, it is not sufficient to put up a table with ticks on the activities performed by each party, as such a table does not capture anything else except the relative number of the functions. To present functions in a table, or in some other list format, does not as such indicate which functions are economically relevant. In the same way, general characterisations of the functions performed by one party are not enough, because they may be based on simplified assumptions regarding the associated enterprise’s role without a careful functional analysis. A mere reference to the tasks of one party in an agreement is not sufficient from the perspective of describing the functions, because information must also be provided on the true actions that the parties take and the actual responsibilities that the parties have.

6.5.3 Assets used for the functions

The functional analysis must describe the assets used for performing functions related to controlled transactions. Assets may be for example tangible, intangible or financial assets, depending on the nature of the business. The importance of intangible assets may be emphasised if the parties make use of valuable intangible assets in their functions. For some functions, production plants, machinery and equipment may be the most central income-generating asset type. The functional analysis must specify the assets used by the parties to the controlled transaction and its effect on the generation of income. However, there is no need to produce an exhaustive list of the categories of company’s assets. Documentation is sufficient when the assets used for the economically relevant functions related to the controlled transaction are specified and their impact is explained. If the parties to a transaction do not own valuable assets that generate business income, the functional analysis must indicate which one of the associated enterprises is the true owner.

The OECD Transfer Pricing Guidelines contains, besides intangible assets, only a short instruction on other types of assets utilised in the functions. In paragraph 1.54 of the OECD Guidelines concerning the functional analysis, there is a brief mention referring to the type of assets used, the use of valuable intangible assets, the financial assets, and to the nature of the assets used. Functional analysis must take account of factors like the assets’ age, market value, location and property-right protections available. The OECD Guidelines has a separate chapter VI on intangible assets. In fact, intangible assets tend to be the most important asset category affecting transfer pricing, which deserves special attention in the functional analysis. The concept of intangible assets must be understood in a broad sense, because in transactions between independent parties, intangible assets may generate income even if they are not subject to registration or transferable.

The OECD Guidelines emphasises on several occasions that the evaluation of transfer pricing must focus on the arm’s length nature of a transaction rather than on the label assigned to the transaction. This should be taken into account also when the impact of intangible assets is evaluated. According to paragraph 6.2 of the OECD Guidelines, the key consideration is whether a transaction conveys economic value from one associated party to another, irrespective of whether that value derives from tangible property, intangible assets, services or other items or activities. The conclusion of the OECD Guidelines is that an item or activity that conveys economic value is taken into account when determining the arm’s length price, even if the item or action does not constitute an intangible asset within the meaning of paragraph 6.6 of the OECD Guidelines.

Intangible asset is defined in paragraph 6.6 of the OECD Guidelines as asset that is neither a physical asset nor a financial asset, which is capable of being owned or controlled for use in commercial activities. In addition, its use or transfer is required to be compensated had it occurred in a transaction between independent parties in comparable circumstances. The OECD Guidelines points out that accounting and legal definitions do not matter, because attention should be paid to conditions agreed in the case of a comparable transaction between independent parties. In addition, the OECD Guidelines does not divide intangible assets into different categories. However, items of intangible assets are described by many examples. Intangible assets include patents, know-how, trade secrets, brands and trademarks, contractual rights and licenses. The values consisting of goodwill and ‘ongoing concern’ must also be taken into account in a functional analysis. In the event of sale or other transfer, intangible assets can appropriately be considered as a whole, not divided into different categories.

6.5.4 Risks assumed in connection to the functions

The functional analysis must contain a description of the risks assumed by the parties. The OECD Transfer Pricing Guidelines states in paragraph 1.71 that although there are many definitions of ‘risk’, in a transfer pricing context it is appropriate to consider risk as the effect of uncertainty on the objectives of the business. Paragraph 1.72 contains a list of different categories of risks but the list is not exhaustive. The categories provide a framework that may assist in ensuring that a transfer pricing analysis considers the range of risks likely to arise from the commercial or financial relations of the associated enterprises. Risks assumed in connection to the functions include strategic or market risks, operational risks, financial risks, transactional risks and hazard risks. The functional analysis must focus on the economically significant risks that are connected to the controlled transaction and on how the risks affect the pricing of the controlled transaction.

To identify risks is important for purposes of transfer pricing evaluations because risks affect the transaction’s actual content, the pricing, and the transaction’s other terms and conditions. The OECD Guidelines point out that risk is inherent in all business activities, as companies seeking opportunities to make profits always face some uncertainty. The assumption of higher risk brings about a higher expected return in the open market although the final profits depend on the actual outcome of whether risks are realised. To identify the risks is an important component of the functional analysis in order to accurately delineate the controlled transaction.

The OECD Guidelines (paragraphs 1.56 to 1.126) describe broadly risk identification and its effects. Although the instructions given in the OECD Guidelines are extensive, they must not be interpreted as a statement indicating that risks are more important than a company’s functions and assets. The OECD Guidelines emphasise the importance of performing a careful functional analysis in order to ascertain which of the functions, assets and risks are material.

The risks carried by the parties must correspond to what independent parties would have agreed on the allocation of risks. The important element is that an agreement is not the decisive factor when the allocation of risks between associated enterprises is being analysed. Instead, in addition to the party having assumed risks, it also has to be able to control them, and it must have sufficient financial capacity to assume the risks. The actual risk allocation can usually be found out by examining how the associated enterprises behave, when the associated enterprises’ risk-related activity is analysed according to the process described below.

A six-step process for analysing risks is outlined in the OECD Guidelines (e.g. in paragraph 1.60). This is a framework for analysing the parties’ risks, as part of the accurate delineation of an actual transaction. It is useful for taxpayers to follow all the six steps of analysing risks when preparing their transfer pricing documentation.

The first step is to identify the economically significant risks and then to determine how they are contractually assumed by the associated enterprises. The third step is to determine, through a functional analysis, how the associated enterprises operate in relation to economically significant risks. The functional analysis must especially focus on questions like which parties perform control and risk mitigation functions, which parties encounter upside or downside consequences of risk outcomes, and which parties have the financial capacity to assume the risk. The next step is to interpret the information and determine whether the contractual assumption of risk is consistent with the conduct of the parties and other facts of the case. On the one hand, it is necessary to analyse whether the parties follow the contractual terms, and on the other hand, whether the party assuming the risk exercises control over the risk and has the financial capacity to assume the risk. The fifth step consists of reallocating the risk to the party that proves to be the actual bearer of the risk, if the above steps indicated that the party the contract refers to does not actually control the risk, or does not have the financial capacity to assume the risk. Generally, the risk is reallocated to the party that has actually exercised control over the risk and has the financial capacity to assume the risk. Finally, as the sixth step, the actual controlled transaction is priced under the arm’s length principle, taking into account the allocation of the risk. The OECD Guidelines gives further details (e.g. in paragraph 1.71) on the scope and specific action points related to the steps 1 to 6 above.

The OECD Guidelines puts special emphasis on the exercise of control over the risks. The meaning of ‘exercising control’ is approximately the same as ‘risk management’, i.e. functions relating to risk evaluation and various ways of reacting to risks. Under the definition in paragraph 1.65 of the OECD Guidelines, control over risk involves the main elements of risk management. Control over risks consists of two parts. First, the party having responsibility for risk control must have the capability to make decisions to take on, lay off, or decline a risk-bearing opportunity, together with the actual performance of that decision-making function. In addition, the party must be capable of making decisions on whether or not to react to a new risk, and how to react to it; and there must also be some evidence of the party having made such decisions and taken such action. It is not necessary for a party to perform various risk-mitigation operations on a daily basis. Those operations may have been outsourced. However, the party must make the necessary decisions relating to such outsourcing.

Paragraph 1.66 of the OECD Guidelines contains a more detailed description of a company’s capability to make such decisions. Decision-makers should possess competence and experience in the area of the particular risk for which the decision is being made and have an understanding of the impact of their decision on the business. They should also have access to the relevant information, either by gathering this information themselves or by exercising authority to have the relevant information gathered to support the decision-making process. A mere formal decision-making does not qualify as the exercise of a decision-making function, to demonstrate control over a risk. The following examples illustrate formal decision-making: minutes of a board meeting stating a decision that was actually made elsewhere; and setting a general policy for the handling of risks. The party that actually exercises risk control makes the important decisions concerning the entire business decision, including the decision to begin evaluating different alternatives, and the decisions at the various stages of the preparation process, and the decisions either to undertake or not to undertake the business transaction.

Furthermore, the allocation of risk depends on whether or not a party to a transaction has financial capacity to bear the risk. When evaluating the capacity to bear risks, the size of the entity’s capital is not the only decisive factor. In accordance with the OECD Guidelines, whether or not the entity has access to funding is a decisive factor. The assessment of whether a party has access to funding should be made on the basis that the party assuming the risk would be operating as an unrelated party in the same circumstances. The OECD Guidelines takes up an example situation where exploitation of rights in an income-generating asset could open up funding possibilities for a party. It would be possible to receive funding if the asset generated a cash flow.

6.6 Comparability analysis

6.6.1 General remarks

In accordance with section 14b, subsection 2, paragraph 6, of the Act on Assessment Procedure, the documentation must include a comparability analysis. Under the aforementioned provision, the information available on comparables is to be included in the comparability analysis. The provision refers to the concept of comparability analysis within the meaning of the OECD Transfer Pricing Guidelines, i.e. making comparisons of the terms and conditions of a controlled transaction with those of a similar transaction made between independent enterprises. According to the OECD Guidelines, transactions are comparable if none of the differences between the transactions could materially affect the factor being examined (such as price or margin) in the methodology, or if reasonably accurate adjustments can be made to eliminate the material effects of any such differences.

In complying with the arm’s length principle, every group company is treated as a separate entity, and not as inseparable parts of the MNE group’s consolidated operation of business. The separate entity approach means that for tax purposes, any associated enterprise is regarded as being separate, i.e., having an obligation to act under arm’s length conditions with other associated enterprises. Comparability analysis focuses on examining the terms and conditions of controlled transactions between associated enterprises, and on evaluating whether the terms and conditions differ from those that would be agreed upon if the transactions were made between independent enterprises. Accordingly, comparability analysis is at the heart of the application of the arm’s length principle.

When performing a comparability analysis, all the steps described above need to be taken into account. They are useful for the purpose of providing an overall picture of the transaction to be evaluated and of its transfer pricing. Paragraph 1.33 of the OECD Guidelines contains a description of the relationship between the comparability analysis and the rest of the evaluation process. There are two important stages in the evaluation process of transfer pricing: to accurately delineate the actual controlled transaction, and to compare it with a transaction carried out between independent parties. In addition to these two important stages, the process includes selection of the most appropriate transfer pricing method and making a conclusion regarding the arm’s length conditions concerning the transaction.

To begin the comparability analysis, the possible comparables are identified. However, identification of the comparables is only the starting point of evaluation. The actual comparability analysis is conducted when the possible comparables are subjected to further observation and evaluation. Comparability analysis aims for making a conclusion of whether the controlled transaction and the potentially comparable transaction are indeed comparable. Comparability is evaluated against the background of the five comparability factors as defined in the OECD Guidelines. The five comparability factors coincide with the economically relevant circum­stances identified in the accurate delineation of a transaction: the contractual terms, the parties’ functions, assets and risks, the characteristics of assets transferred or services provided, the economic circumstances of the parties and of the market, and the business strategies pursued by the parties. Comparability requirements can only be fulfilled if the comparison is performed between transactions that actually are similar.

The basis for transfer pricing is, according to the OECD Guidelines, examination of transactions, in which the arm’s length principle is applied separately on each transaction. However, reference is made in the Guidelines’ paragraphs 3.9 to 3.12 to closely linked or continuous transactions that cannot be evaluated separately. Examples include the pricing of closely-linked products when it is impractical to determine pricing for each individual product or transaction. Such transactions can be evaluated together, provided that the associated enterprises making the transactions remain the same, and that the terms and conditions were similar. The transactions evaluated together must be comparable with the comparables that were used. The transfer pricing documentation must indicate the reasons for evaluating certain transactions together.

6.6.2 Economically significant controlled transactions have priority

In comparability analysis, it is appropriate to focus on those controlled transactions that are economically significant. Such a transaction or series of transactions may be valuable in terms of amount, it may be complex, or new, or it may be carried out under circumstances that have changed significantly. An economically significant transaction from a transfer pricing perspective is determined by the facts and circumstances of each case. Comparability analysis for an economically less significant transaction may be less thorough. Examples of less significant transactions are those of low value and those that are carried out in well-established circumstances. The circumstances are considered stable if a transaction or a series of transactions is carried out in an environment where the parties’ functions or the surrounding circumstances have not changed compared to previous years. In such a case, it is sufficient to include the preceding year’s comparability analysis in the transfer pricing documentation. However, the comparables must still be updated from time to time; an update interval of 3 years may be appropriate if there are comparables available.

The OECD Transfer Pricing Guidelines contain detailed instructions regarding intra-group services, which are discussed from a comparability analysis perspective in Chapter VII, section D of the OECD Guidelines. Section D addresses the pricing of low value-adding services. To determine whether service charges are arm’s length in certain situations specified in the OECD Guidelines, there is a simplified approach where the service costs incurred are allocated to those group companies that benefit from the services. A uniform 5-percent markup is added to costs of services to which the simplified approach applies (compare with the Supreme Administrative Court’s ruling KHO 2017:146).

The approach described in the OECD Guidelines only concerns low value-adding services of a supportive nature that are not part of the core business of the MNE group; do not require the use of unique and valuable intangible assets; do not lead to the creation of unique and valuable intangible assets; and do not involve the assumption or control of significant risk by the service provider. The OECD Guidelines refer to several activities, as examples, that would not qualify as low value-adding services, such as research and development services; manufacturing and production services; purchasing activities; sales, marketing and distribution activities; financial transactions, and the services of corporate senior management. When provisions of Finland’s domestic legislation are applied, it is appropriate to use these definitions that the OECD Guidelines provides.

The simplified approach for determining arm’s length charges for low value-adding services makes it easier to verify the arm’s length nature of services, taking into account that the tax authorities in different countries normally refrain from challenging the benefit tests that companies enclose to their transfer pricing documentations, and also because the 5-percent markup needs no justification by a specific comparability analysis. This approach is beneficial for all parties involved. Among other things, it reduces costs, provides certainty on the acceptability of the service charges, and provides tax administrations with focused documentation that is in line with the OECD Guidelines. Paragraph 7.64 of the OECD Guidelines sets out instructions for preparing the documentation when the company opts for the simplified approach. The service provider and service recipient must prepare a description of the low value-adding intra-group services. The description must contain, among others, a calculation showing the determination of the cost pools and the mark-up applied thereon, and calculations showing the application of the specified allocation keys.

6.6.3 The tested party

The transfer pricing documentation must indicate which associated party was chosen as the tested party after the transaction has been accurately delineated. It is necessary to choose the tested party in situations where the arm’s length conditions of pricing are tested using a one-sided transfer pricing method as referred to in the OECD Transfer Pricing Guidelines. The cost plus method, resale price method and transactional net margin method are referred to as the one-sided methods.

What is meant by ‘tested party’ is the party to a controlled transaction whose financial indicator relating to a transaction is compared with an independent enterprise’s comparable financial indicator. The financial indicators in this context typically consist of the mark-up on costs, the operating profit from sales activities, or the calculated yield for assets in business use. According to paragraph 3.18 of the OECD Guidelines, the tested party is generally the one to which a transfer pricing method can be applied in the most reliable manner and for which the most reliable comparables can be found. The tested party will often in practice have less complex functions compared to the other party. It is easier to find comparables for the one with the simpler activities than for a party that has more complex and unique functions. For example, where a relationship is formed between a buyer of manufacturing services and a service provider, the buyer can exercise control over the risks of manufacturing, carry responsibility for the significant functions, and own valuable intangible assets. Consequently, it will be difficult to find comparables for the buyer.

When choosing the tested party, it should be noted that comparability is typically affected by the use of unique and valuable intangible assets. In general, the tested party cannot be the one that uses unique and valuable intangible assets in its functions. However, all business operations are in some ways based on the use of some intangible assets. It is not an obstacle for being chosen as the tested party even if some usual intangible assets are identified. Examples of usual intangible assets include the customer relationships formed, and the common marketing efforts carried out by a sales company to develop the local market.

To choose the tested party means in practice that, in order to evaluate whether the controlled transaction is arm’s length, it is enough to apply one of the OECD Guidelines’ one-sided transfer pricing methods to determine the profit resulting from a controlled transaction. It is possible to choose the tested party, the comparables, and the transfer pricing method to be applied only when the actual controlled transaction is accurately delineated; which also means that sufficient facts and information are available about both parties’ functions, assets and risks and about their other economically relevant characteristics.

The choice of a tested party was addressed, among other things, also in the ruling of the Supreme Administrative Court KHO 2020:34.

6.6.4 Comparables

Internal comparables

‘Internal comparable’ refers to a transaction between a party to a controlled transaction and an independent party, carried out under circum­stances comparable to those of the controlled transaction. The use of internal comparables has a primary place in comparability analysis. The OECD Transfer Pricing Guidelines refer to the primary status of internal comparables on many occasions. For example, paragraph 2.28 states the following, addressing the resale price method: “The resale price margin of the reseller in the controlled transaction may be determined by reference to the resale price margin that the same reseller earns on items purchased and sold in comparable uncontrolled transactions.ˮ

Similar references to internal comparables are found in the guidance on the cost plus method and the transactional net margin method. The reason for giving preference to internal comparables is that it is relatively easy to ascertain that the transactions and the controlled transaction have comparability in relation to one another because reliable and detailed information is available on both these transactions.

An internal comparable cannot be used if the comparability factors, within the meaning of the OECD Guidelines, are inadequate. For example, sale of a few commodities to an independent party is not an adequate comparable to the sale of several thousand units of the same commodity to an associated enterprise. In such a case, the great difference between the quantities sold is likely to have a considerable impact on comparability. Another example of an inadequate comparability is a situation where the independent party’s geographic market and market conditions are different from those of the controlled transaction. A third example is the independent enterprise’s position in the supply chain. However, the comparables may be used on the condition that the effects of the differences can be removed by making comparability adjustments in a sufficiently reliable way.

External comparables

‘External comparable’ refers to a comparable transaction between independent parties. External comparables are searched from public databases, but they may be difficult to put into use due to insufficient information. Typically, not enough information is available on uncontrolled transactions carried out between independent parties.

No transactions that have been carried out within the same MNE group or within other MNE groups can be used, because no intra-group transaction can in any circumstances have the characteristics of an uncontrolled transaction. Therefore, information derived from the financial indicators of an MNE group member such as net sales or mark-ups added to costs cannot be used as comparable information, because the company’s membership in an MNE group may have an impact on its pricing. However, values derived from the consolidated financial statements of a different MNE group can be used as external comparables on the condition that the other MNE group operates a business that can otherwise be considered as having sufficient comparability. Intra-group transactions are eliminated from consolidated financial statements, and thus the group relationship does not affect comparability.

Information collected of external comparables must be such that it can be submitted to a tax authority. A comparable cannot be based on confidential information. The same applies to the tax authority: it is not allowed to make a transfer pricing adjustment based on confidential tax-related information. The requirement to only utilise publicly available information is based on the principle that all parties must have the same information available to them.

Available comparables

In accordance with the Finnish legal provisions, comparability analysis must include information on available comparables. This means that the taxpayer can refrain from presenting comparables if it has not been possible to find comparables or if it has been too expensive to prepare a comparability search. The EU TPD also contains references to comparables that are available. Accordingly, the Local File should include essential facts about internal and/or external comparables if they are available. To restrict the documentation requirement only to comparables that are available reflects the EU TPD’s objectives to reduce expenses caused to taxpayers due to the obligation to prepare the transfer pricing documentation.

It is noted in the Government proposal (2006) that when the taxpayer decides to refrain from presenting comparables in the documentation, the decision is always based on the taxpayer’s subjective view on the matter. If the taxpayer has made the conclusion that no comparables can be found, or that it is too expensive to search for comparables, no comparables are attached to the documentation. However, they must state the reasons for not presenting any comparables in the documentation. In addition, the taxpayer must show what other economic evaluations support the transaction’s arm’s length nature. For example, situations involving the pricing of low value-adding intra-group services, as discussed above, are covered by specific instructions of the OECD Guidelines and they do not require the taxpayer to present comparables.

To leave out comparables is not seen as neglect with regard to the documentation obligation because there is a specific instruction that allows it. From this, it follows that the authorities cannot impose the punitive tax increase within the meaning of § 32.1, line 2 of the Act on assessment procedure, due to material omission or errors in the taxpayer’s transfer pricing documentation. For more information on the punitive tax increase, see section 7.3 of this guidance.

6.6.5 Selecting potential comparables

Search practices

The search of comparables is always done after a controlled transaction is accurately delineated. A comprehensive description of the accurately delineated transaction and of the tested party makes a good starting point for a successful search and comparability analysis. The comparability analysis may prove unsuccessful if parts of the transfer pricing analysis and documentation preceding the comparability analysis, are made carelessly. In particular, if the delineation of the transaction contains errors, it may lead to a controlled transaction being compared with a totally inappropriate transaction. The errors may, in spite a technically correct comparability analysis, lead to a considerably different result than the true arm’s length price.

The first step in a comparability analysis is to determine the search method for comparable transactions. There are several different methods. However, it is necessary to first take account of the sources of information that are available and then select the search method for comparables. Searches can be based on an additive approach or on a deductive approach, as referred to in paragraphs 3.40 – 3.46 of the OECD Transfer Pricing Guidelines, or a combination of both approaches. The additive approach consists of the person making the search drawing up a list of third parties that are believed to carry out potentially comparable transactions. Information is then collected on transactions conducted by these third parties to confirm whether they are in effect acceptable comparables, based on the predetermined comparability criteria. The deductive approach consists of a database search where the broad material is refined using appropriate selection criteria. One way to combine both approaches is a deductive database search where the results are completed by adding certain known comparables which for some reason did not come up in the search. The OECD Guidelines emphasises the importance of a transparent and as objective as possible search process.

Searches for comparables are highly dependent on the availability of comparables suitable for each case. The first task of the person conducting the search is to investigate whether the controlled transaction might have an internal comparable. In accordance with the OECD Guidelines, an internal comparable is the most recommendable alternative. However, internal comparables are rarely available, so the search for comparables must often be directed toward external comparables. In these circumstances, the search is based on the deductive approach, using database information. However, an additive search may also be used as a way to find external comparables.

Sources of information

External comparables can be searched from a number of different sources. Typically, commercial databases are used, but proprietary databases developed by companies and publicly available information can also be used.

Commercial databases contain public information reported to public authorities such as the Finnish Patent and Registration Office. The business maintaining the commercial database sells the information it has collected and categorised. For this reason, it may be relatively expensive for small MNE groups to utilise commercial databases. Therefore, it is not obligatory to use such a database for purposes of preparing the transfer pricing documentation. Different search terms are employed when conducting database searches in order to find comparables that are as valid as possible; the facts about those comparables are then utilized during the comparability analysis. Often, the database content is used for comparing companies’ financial statements with one another, instead of comparing the prices of various transactions. This limits the range of choice of the most suitable transfer pricing methods. Furthermore, the database content may be incomplete. For example, descriptions of companies’ business activities, their business sector codes and the shareholder data may contain errors or omissions, so that the search result may include enterprises that are not in the least valid for comparison. In this case, it is important to supplement the search results with any other knowledge about the comparables, because the supplemented search results will improve the quality of the data being compared.

An alternative source of comparables can be the databases that the companies themselves have developed. The proprietary databases set up by companies may be based on customer information or on publicly available information compiled by the companies. If necessary, it is required that the tax authorities are given access to the company’s proprietary database contents, or direct access to the database. The comparables derived from proprietary databases must be regarded as confidential if the tax authorities are not given access to this source of information. In that case, the company is unable to refer to those comparables to justify its transfer pricing being at arm’s length.

Search criteria

Searches for comparables are always based on case-specific facts and circumstances. For this reason, the search criteria must be set in such a way that the search can generate valid comparables with regard to the controlled transaction and the tested party. The following discussion concerns, on a general level, the setting of search terms for comparables connected to one-sided transfer pricing methods. However, they cannot be applied as such on e.g., searches of financial transactions (the comparable uncontrolled price method).

When selecting search criteria for database searches, one must take into account, among others, the geographical market area, functions, assets, risks, products or services, size class and other economic conditions. In general, searches should be directed toward data derived from several years. The longer time frame can improve the quality of the resulting comparable information.

Comparables must primarily be searched from the geographical market area of the tested party. What is normally understood as the geographical market is the country where the tested party is situated, where the overall market conditions usually are similar. However, if necessary, the search can be extended to other geographical market areas in addition to the tested party’s country. The EU TPD recommendations contain a point of view that comparables found in pan-European databases should not be rejected automatically. The comparables should be evaluated on a case-by-case basis. This approach means that a pan-European database search is acceptable if the comparables fulfil the requirements for comparability factors, as instructed in the OECD Guidelines. Comparability requires that for example the comparables operating in different states operate in adequately similar market conditions and have adequately similar cost structures.

Acceptance of searches that cover a wide geographical area is necessary and useful especially in the case of a tested party conducting business in a small market where it is probably difficult to find comparables. For example, it may be that no Finnish comparables are found for a Finnish sales company of an MNE group. In this case, one can search for comparables in other Nordic countries. The search can be extended to the countries of Northwestern or Western Europe where there may be comparable enterprises pursuing activities in similar circumstances. As a result, foreign comparables can be accepted for the Finnish sales company, provided that the comparables fulfil the requirements for the comparability factors as instructed in the OECD Guidelines. Correspondingly, it may be appropriate to conduct just one search for comparables to cover all the European sales companies of a Finnish MNE group. The comparables are acceptable if they fulfil the comparability factors as instructed in the OECD Guidelines.

The primary approach is to search for comparables in the business sector where the tested party conducts its operations. If necessary, the search can be extended to other sectors, because differences in products do not affect transfer pricing in the same way in all situations. For example, paragraph 2.75 of the OECD Guidelines points out: “Prices are likely to be affected by differences in products, and gross margins are likely to be affected by differences in functions, but net profit indicators are less adversely affected by such differences”. However, where an extension of a search for comparables covers several sectors of business, it must be limited to sectors where the economic activity is similar by nature to that in the sector where the tested party operates. For example, the circumstances surrounding a wholesale business operation in vegetables are very different from those in the wholesale business of electric appliances. Selection of the sector of business must additionally take account of the differences between the real business sector of the company and the sector as it is designated in the database’s list of business sectors.

The tested party’s business operations may have a volume that has a considerable impact on comparability. For example, the tested party’s and the comparable enterprise’s company sizes should fall into approximately the same category. This means that in the case of a tested party with €40 million in annual turnover, a suitable comparable to be searched is probably among the companies that have annual turnover figures varying from €10 million to €100 million, because the size category would be approximately the same. Instead, if the potential comparable is a company with €500 million in annual turnover, it would probably not become a comparable because its operations are much more extensive, and its price and cost structures are assumably not similar to those of the tested party.

When search criteria are being determined, a number of other additional, case-specific factors must be considered as well. For example, when the tested party conducts a low-risk business, it is not advisable to look for comparables that have started their business very recently or that are in loss-making position. Often, a loss-making business is an indication that the comparable takes on much more risk in its activities than the tested party, which conducts a low-risk business. However, mere loss-making is not a reason for rejecting a potential comparable (see the Supreme Administrative Court’s ruling KHO 2021:73), because it is possible that an uncontrolled enterprise has had loss years during its history although the enterprise normally has a low risk level. In any case, the comparable must be an enterprise with functions, assets and risks that are comparable with the tested party. Unless there are special reasons to decide otherwise, a company should not be accepted as a comparable if it has had losses in several years under examination.

The taxpayer is required to provide documentation on the search criteria, including reasons for the criteria. In addition, the taxpayer is required to provide documentation concerning every stage of a database search process, so that the search can be repeated. The provided documentation must include a specification of all the possible comparables that the search returned; to identify each company, its TIN or a code corresponding to the Finnish Business Identity Code must be indicated (alternatively, the database’s company identifier can be used, such as the Bureau van Dijk database’s “BvD ID”). The actual comparability of the possible comparables will then be assessed on the basis of additional information gathered later.

6.6.6 Selecting comparability information

The taxpayer must select the actual comparables among the candidates that were searched based on quantitative search criteria as described above. The taxpayer should assess the potential comparables’ and the tested party’s mutual comparability against the background of the five comparability factors defined in the OECD Transfer Pricing Guidelines. All available sources of information must be used for this purpose, including companies’ annual reports, websites, and other facts and information that are publicly available. Insufficient information often makes it difficult to assess the potential comparables’ and the tested party’s mutual comparability. The information on the comparables is often insufficient. As a result, it may be impossible to identify all the factors that actually have an impact on comparability. For example, there may be information available on the comparable enterprise’s size and on its geographical market. At the same time, the comparables’ contractual terms, business strategies or other factors are often confidential and unavailable to outsiders. The potential comparable must generally be rejected if not enough publicly released information is available.

However, the comparability analysis can still be performed, even if some of the facts having an impact on comparability remain insufficient. Paragraph 1.13 of the OECD Guidelines makes the general observation regarding the arm’s length principle that it is important not to lose sight of the objective to find a reasonable estimate of an arm’s length outcome, based on reliable information. According to the OECD Guidelines, it should also be recalled at this point that transfer pricing is not an exact science but does require the exercise of judgment on the part of both the tax administration and taxpayer. For processing insufficient information, there are several other methods to use. One of them is to improve the reliability of a comparability analysis through the method described below, making use of statistical calculations that serve the purpose of narrowing the useful range of comparable data.

It is necessary for the taxpayer to include a list in the taxpayer’s transfer pricing documentation, with a proper specification of the selected comparables, relevant descriptions, and copies of the materials that were used for the assessment of those comparables. The next step is to supplement the selected comparables with other comparables, i.e., those that the search did not capture but are for other reasons identified as possible comparables. The taxpayer is also expected to present information on the selected comparables’ important financial indicators, which will be needed when the analysis is performed. The selection of the important financial indicators depends on the transfer pricing method applied. The taxpayer’s transfer pricing documentation must also include a list of the rejected comparables including reasons for rejection. Typically, rejection of a potential comparable from becoming a comparable is due to reasons like belonging to an MNE group, obtained information proving that the potential comparable’s functions are too different, other special circumstances, or due to other factors having an impact on comparability.

6.6.7 Comparability adjustments

Comparability adjustment is pointed out in the OECD Transfer Pricing Guidelines on several occasions. Paragraph 3.47 of the OECD Guidelines describes comparability adjustments:

"To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology or that reasonably accurate adjustments can be made to eliminate the effect of any such differences."

It is stated in the OECD Guidelines that the purpose of these adjustments is to improve comparability. Based on this, a comparison may be appropriate even if not all differences can be adjusted. It bears emphasis that comparability adjustments are only appropriate for differences that will have a material effect on the comparison. On the other hand, the need to perform numerous or substantial adjustments to key comparability factors may indicate that the comparables are in fact not sufficiently comparable.

The OECD Guidelines has obviously adopted a reserved attitude toward comparability adjustments. One of the indications of this is the contents of Chapter III, section A.6 addressing an example of making a working capital adjustment. The working capital adjustment is made by adjusting the impact of the different levels of working capital between the controlled and tested parties on the profits. Annex to Chapter III provides detailed information on the example of a working capital adjustment. Nevertheless, the OECD Guidelines notes that adjustments should not be performed on a routine basis in all situations. Further, a significantly different level of relative working capital between the controlled and tested parties should result in further investigation of the comparability characteristics of the potential comparable. The OECD Guidelines additionally contains a general observation that sophisticated adjustments are sometimes applied to create the false impression that the outcome of the comparables search is scientific, reliable and accurate. Therefore, the search for comparables should primarily be directed toward comparables that are known to be highly comparable, reducing the need for comparability adjustment.

The documentation must include an account of any and all comparability adjustments that were made. The account concerning the adjustments must describe how the adjustment was calculated and indicate whether the comparability adjustment concerned both of them or only either of them. In addition, the account can contain a reasoning for the comparability adjustment and a description of how the performed adjustment improves comparability.

6.6.8 The arm’s length range

Based on the information obtained from comparables, an arm’s length price or margin is found for the controlled transaction. According to paragraph 3.55 of the OECD Transfer Pricing Guidelines, the arm’s length price or margin may consist of a single figure. Alternatively, to apply the arm’s length principle can also result in a range of figures, all of which are relatively equally reliable. If it is possible to determine, in accordance with the OECD Guidelines, that some uncontrolled transactions have a lesser degree of comparability than others, they should be eliminated. It is generally very difficult to determine the differences between degrees of comparability among the comparables, because in practice, the information concerning the comparables is insufficient. For example, if the comparable was found in a database search, information concerning the transaction’s contractual terms or concerning the company’s business strategies usually remains unavailable. In such cases, statistical tools might help enhance the reliability of the comparability analysis.

According to paragraph 3.57 of the OECD Guidelines, statistical tools that take account of central tendency to narrow the range can be used, if some comparability defects remain that cannot be identified and/or quantified, and the range of figures consists of very many values (for more information, see the Supreme Administrative Court’s ruling KHO 2021:127). The Finnish Tax Administration requires that the arm’s length range of figures must be narrowed if the information concerning the comparables is insufficient and if the range contains a high quantity of observations. The way the need for narrowing the range is determined is to give more emphasis to the reliability of comparables than to how many comparables are included. One of the ways to narrow the arm’s length range of figures is to calculate a statistical interquartile range. The resulting interquartile range will then point to an arm’s length range of figures among the comparable data that will have a higher degree of comparability than the full range of figures had. Other statistical tools to improve reliability can also be used, on the condition that the statistical tool is well suited for the facts and circumstances of the case at hand.

For example, according to the definition of the interquartile range published by Statistics Finland, it means the difference between the upper quartile (where 75% of outcomes stay below it) and the lower quartile (of which 25% stay below). This way, the ‘interquartile range’ concept refers to the middle values of all outcomes, in other words, to 50% of all of them. The first step is to place the comparable data in the order of magnitude (for example, the integers 1,3,3,4,5,9, and 10). Then, the upper quartile must be worked out by multiplying the quantity of comparables (7) by 25% (25:100 × 7=1.75). Because the resulting value is not an integer, the lower quartile’s definitive border must be the next integer – in this case, the comparable coming second in the order of magnitude (the lower quartile is thus 3). To work out the upper quartile, the quantity of comparables (7) is multiplied by 75% (75:100 × 7=5.25). Because the resulting value is not an integer, the upper quartile must also be defined by the next integer – in this case, the 6th comparable in the order of magnitude (the upper quartile is thus 9). Accordingly, the interquartile range is 3–9.

The interquartile range is calculated differently if the last phase results in an integer. Let us assume that there are 4 comparables (3,4,5,9 if arranged in an order from lowest to highest). Multiply the quantity of comparables (4) by 25% to calculate the comparables’ lower quartile (25:100 × 4=1). Because the resulting value is an integer, the bottom quartile is the average of the first and second comparable (the lower quartile is 3.5). To calculate the upper quartile, multiply the quantity of comparables (4) by 75% (75:100 × 4=3). Because the resulting value is an integer, the upper quartile is the average of the third and fourth comparable (the upper quartile is 7). The interquartile range is thus 3.5–7.

Statistical tools can be used for selecting the most appropriate point inside an arm’s length range, as well. This can be done even though in principle all the values inside the range are satisfactorily arm’s length. The most appropriate point can be the median value of all the comparables. The median is the central value of the order of magnitude, if the reference points amount to an uneven number; or the average of the two central-value averages if the reference points are an even number. According to the OECD Guidelines, the statistical tools that aim for a central statistical tendency can reduce the errors caused by any remaining comparability defects that cannot be identified and/or quantified.

6.7 The transfer pricing method and its application

6.7.1 General remarks

In accordance with section 14b, subsection 2, paragraph 7, of the Act on Assessment Procedure, the documentation must contain a description of the transfer pricing method and of the way it is applied. The applicable methods are described in the OECD Transfer Pricing Guidelines. The methods are divided into traditional transaction methods and transactional profit methods. The comparable uncontrolled price method, the resale price method, and the cost plus method fall into the category of traditional transaction methods. The transactional net margin method and the transactional profit split method are transactional profit methods. The approach of transactional profit methods is to examine the profits that one, or several, associated enterprises received from the transaction. The operating profit level is the usual level of examined profits.

The basic point of view taken in the OECD Guidelines is that the most appropriate transfer pricing method must be found for the pricing of each transaction. To select the most appropriate transfer pricing method means that the choice should be the transfer pricing method which is most reliable. In accordance with the OECD Guidelines, no one method is suitable in every possible situation, nor is it necessary to prove that a particular method is not suitable under the circumstances. To identify the most appropriate method is generally easier if the accurate delineation of the transaction and the functional and comparability analyses are performed carefully as described above. When accurate delineation of the transaction and functional and comparability analyses are properly carried out, it usually ensures that the choice of the transfer pricing method for the controlled transaction cannot go wrong.

The guidance provided in the OECD Guidelines, dealing with the selection of the most appropriate transfer pricing method was added to the Guidelines in 2010. Up to 2010, traditional transaction methods had priority over other transfer pricing methods, and accordingly, the other methods would only be applicable if the situation had exceptional characteristics. At present, the selection of the most appropriate transfer pricing method is no longer based on a hierarchy of methodologies, because the relevant factor for the selection is the method’s reliability. However, according to the OECD Guidelines, the traditional transaction methods are still the most direct way to prove the arm’s length price of controlled transactions because the differences in price are generally easy to derive from the commercial and financial relations between the parties to the transaction. For this reason, to apply a traditional transaction method is preferrable to the transactional profit method in situations where either one of the two transfer pricing methods can be applied in an equally reliable manner. In the same way, to apply the comparable uncontrolled price method is preferable to other methods in situations where transfer pricing methods can be applied in an equally reliable manner.

The OECD Guidelines provides an additional opportunity for MNE groups to apply methods that the OECD Guidelines does not describe. The precondition for determining that such a method is applied is that the transaction price is in line with the arm’s length principle. No other methods must be used if, based on facts and circumstances, the methods taken up by the OECD Guidelines are the most appropriate. The OECD Guidelines additionally refers to transfer pricing documentation. The taxpayer is under obligation to explain why another method has contributed to a better outcome than transfer pricing methods presented in the OECD Guidelines.

6.7.2 Method selection

It is possible to apply any of the methods described in the OECD Transfer Pricing Guidelines as the transfer pricing method, but account should be taken of the OECD Guidelines’ considerations with regard to the selection of the most appropriate method.

The comparable uncontrolled price method, CUP, compares the price of a product or service of a controlled transaction to the price of a similar transaction made between independent parties in comparable circumstances. The comparable uncontrolled price method is the most direct and reliable way to prove the arm’s length conditions of the controlled transaction’s price, provided that a comparable transaction is available. However, it is usually difficult to find such comparables because no publicly released information is generally available concerning the comparables. In practice, the CUP method is the primarily applicable transfer pricing method to financial transactions (for more information, see Chapter X, paragraph C.1.2.1. of the OECD Guidelines). It is particularly appropriate to use the CUP method in situations where a satisfactory internal comparable is identified (for example, see paragraphs 10.94–10.95 of the OECD Guidelines). However, in some circumstances, sufficiently reliable verification of the arm’s length pricing can be attained with external comparables as well. For example, in the case of intra-group loans, the arm’s length nature of the interest rate is often assessed by comparing intra-group loan rates with similar loan arrangements between independent parties. However, it is possible to select the CUP method only if sufficiently reliable comparables have been identified when performing the comparability analysis.

The resale price method (RPM) and the cost plus method are applied on a gross margin level. According to the OECD Guidelines, both methods fall under the category of traditional transaction methods because a gross margin-based remuneration is closer to the transaction’s price than a remuneration based on operating profit. The two methods aim to determine a gross margin that the party could receive if it had performed the same functions as in a transaction made with an independent party. The resale price method determines an arm’s length margin for a reseller in a situation where the reseller buys the product from an associated enterprise and sells it on to an independent enterprise. The associated reseller’s arm’s length gross margin is determined by comparison with a comparable reseller and this reseller’s gross margin. In the case of the cost plus method, costs linked with a sale of products or services are examined and a margin is added. The cost plus method takes no account of usual business overhead costs, which is different from methods based on all net costs of the enterprise. The choice between the resale price method and the cost plus method is often difficult in practice because there is seldom gross-margin level information about comparables available, and when such information is available, it is often difficult to verify that the information is reliable and comparable.

The transactional net margin method aims for finding out the net margin that the party can receive either from one transaction or from a combination of transactions. It is very useful in situations where a carefully performed functional analysis shows that the party to the transaction makes no unique or valuable contributions and uses no unique or valuable intangible assets. In these circumstances, the associated enterprise can be chosen as the tested party. The tested party’s net margin-related economic indicator is compared with the corresponding financial indicator of the comparable enterprise. The financial indicator may be, for example, the mark-up added to net expenses, in which case the net expenses contain all the production costs of the service provided. Examples of financial indicators also include the operating profit based on turnover or a return on assets utilised in the business. The transactional net margin method is the most common transfer pricing method, relied on by both multinational enterprises and tax administrations for determining the arm’s length transfer pricing.

The transactional profit split method divides the profits or losses between the associated enterprises in the same way as uncontrolled enterprises would have done. In accordance with the OECD Guidelines, the transactional profit split method can provide a solution for highly integrated operations in cases for which a one-sided method would not be appropriate. Furthermore, the transactional profit split method can offer a solution for cases where both parties to a transaction make unique and valuable contributions to the transaction, and/or together control the risks connected to the transaction. It is necessary to undertake a careful functional analysis for identifying which contributions are unique and which are not. For example, one of the parties may own intangible assets in the form of sales or manufacturing know-how and expertise, but this type of intangible asset is still not considered as a unique and valuable contribution to the business that would require application of the transactional profit split method. Sales and manufacturing know-how and expertise is generally a necessary precondition for conducting business, so the comparable enterprises will normally possess the same know-how i.e., own some non-unique intangible assets. A sales company selected as a tested party may be active in collecting customer data and manage a high-performance logistic system in the same ways as a comparable uncontrolled sales company. In these circumstances, a one-sided transfer pricing method can be selected instead of the profit split method. The OECD Guidelines emphasize in general that when selecting a transfer pricing method, the respective strengths and weaknesses of each method must be considered.

Furthermore, paragraph 2.10 of the OECD Guidelines sets out a statement concerning “general rules of thumb”. A rule of thumb means for example a calculation rule for always dividing returns on intangible assets by an 80-20 ratio between a licensee and the licensor. In accordance with the OECD Guidelines, to apply a rule of thumb does not provide an adequate substitute for a complete functional and comparability analysis. Accordingly, a rule of thumb cannot be used to evidence that a price or an apportionment of income is arm’s length.

6.7.3 Application of the selected transfer pricing method

By applying a transfer pricing method, the taxpayer verifies that the pricing of its controlled transactions has actually been at arm’s length, not only that the pricing has complied with rules or principles at a general level.

The taxpayer must present a calculation concerning the application of the method resulting in arm’s length pricing. The calculation may be, for example, evidence that the price used was determined through the comparable uncontrolled price method. Another way to present the calculation can involve the profit-and-loss account of the company being evaluated or other similar account, if not enough information can be found in the company’s standard profit-and-loss account. For example, if the applied transfer pricing method is the cost plus method, the taxpayer must provide information on the tested party’s costs, and an arm’s-length mark-up based on the comparability analysis. If the applied transfer pricing method is the transactional net margin method, the taxpayer must describe the tested party’s final result based on the selected financial indicator. For the above methods, the taxpayer must additionally present the tested party’s profit-and-loss account and balance sheet, where effects of the applied transfer pricing method should be visible. If the applied transfer pricing method is the transactional profit split method, the taxpayer must provide calculations indicating the profits that were split, and the allocation key used. The taxpayer that applied the transactional profit split method must present separately each party’s calculations, adjustments, and the final results. Profit-and-loss accounts and balance sheets concerning all parties involved must be enclosed in the documentation.

6.7.4 Specific aspects related to intangible assets

Transactions involving intangible assets are subject to the arm’s length principle in accordance with the general rules of the OECD Transfer Pricing Guidelines. However, practice has shown that there are a number of challenging issues related to the transfer pricing of intangible assets. Among other things, it is difficult to find comparables for transactions involving intangible assets. In view of the challenges posed by the transfer pricing of intangible assets, the OECD Guidelines includes a full chapter (VI) in respect of intangible assets, which also discusses the choice and application of the most appropriate transfer pricing method.

Paragraphs 6.132-6.133 of the OECD Guidelines describe the factors to be taken into account when choosing the transfer pricing method. The OECD Guidelines points out that it is important to recognise that transactions structured in different ways may have similar economic consequences. For example, the performance of a service using intangible assets may have very similar economic consequences as a transaction involving the transfer of an intangible asset, as either may convey the value of the intangible asset to the transferee. Accordingly, in selecting the most appropriate transfer pricing method in connection with a transaction involving the transfer of intangible assets or rights in intangible assets, it is important to consider the economic consequences of the transaction, rather than proceeding on the basis of an arbitrary label. Furthermore, gaining a clear overall view of the MNE group’s business operations and how the intangible assets contribute to value creation is emphasized. The analysis should identify all factors that contribute to value creation, and it is important to refrain from assuming simply that all residual profit, after routine functions are compensated, should be allocated to the owner of intangible assets.

As a rule, any of the methods described in the OECD Guidelines may be chosen as the most appropriate transfer pricing method when a taxpayer verifies the arm’s length nature of a transaction involving intangible assets. Nevertheless, the Guidelines also suggest that the use of alternative methods may be appropriate. The conclusion is, however, that the methods most likely to prove useful in verifying the arm’s length nature of a controlled transaction involving intangible assets are the comparable uncontrolled price method and the profit split method. For example, methods that seek to estimate the value of intangible assets based on the cost of intangible asset development should be generally avoided because the costs are rarely correlated with value. The OECD Guidelines states that valuation techniques can be useful tools.

Valuation techniques can be used in order to estimate an arm’s length price for a transaction involving intangible assets, if reliable comparables cannot be found. Guidance on the use of valuation techniques can be found in paragraphs 6.153 to 6.178 of the OECD Guidelines. The OECD Guidelines focuses on techniques that discount the value of projected future income streams or cash flows based on intangible assets, although the OECD Guidelines do not provide a complete description of all valuation techniques and do not highlight any particular valuation techniques. Taxpayers and tax authorities may use valuation techniques as a component of the application of the five OECD’s transfer pricing methods; or they can use them as a tool to identify an arm’s length price. The OECD Guidelines emphasises that valuation techniques must be used in a manner that is consistent with the application of the arm’s length principle. This means that the valuation must be based on the perspective where the arm’s length price of a transaction between associated enterprises is evaluated. As a result, the approach to valuation in transfer pricing may therefore differ substantially from valuations carried out for accounting purposes; because the latter looks for the likely market price between hypothetical market participants.

The arm's length price of a transaction involving intangible assets may be difficult to determine at the time when the intangible assets are transferred, if there is insufficient information on the expected economic benefits of the intangible assets and on their risks. In this case, it is a highly uncertain valuation as discussed in Chapter VI, section D.3 of the OECD Guidelines. After an intangible asset is transferred to an associated enterprise, its value may later prove to be either much higher or much lower compared to what the parties had estimated at the time of the transfer. When there is uncertainty in the valuation of an intangible asset, special attention must be paid to the arm’s length nature of the conditions related to setting the selling price. In such a case, the taxpayer must enclose an account with the transfer pricing documentation to address the question whether an independent enterprise would have accepted a fixed price, with no mechanism for adjusting the price later in order to adjust any consequences of uncertainty in the valuation. Such an account must include a discussion on whether independent parties would have adopted a shorter-term agreement, whether the agreement would contain specific price adjustment clauses in the terms of the agreement, and whether independent parties would agree on special terms of payment that would depend on future contingent events. It should additionally be noted that independent parties are capable of renegotiating their contractual terms when circumstances change substantially, provided that both parties have an interest in the renegotiation.

6.8 Financial statements

In accordance with section 14b, subsection 1, paragraph 2, of the Act on Assessment Procedure, the documentation must include the taxpayer’s financial statements for the tax year, or a set of several financial statements for any multiple accounting periods ending during one tax year. For documentation purposes, it is acceptable to include unaudited financial statements if audited financial statements are not available.

6.9 Pre-emptive statements and advance agreements

In accordance with section 14b, subsection 2, paragraph 9 of the Act on Assessment Procedure, the documentation must include copies of any pre-emptive statements and advance agreements regarding the taxpayer’s controlled transactions. Pre-emptive statements and advance agreements refer to unilateral, bilateral or multilateral advance pricing agreements (APAs) issued by public authorities, in force during the tax year, as well as other ex-ante tax statements issued by the public authorities concerning the controlled transaction by the taxpayer. The intention and purpose of the requirement to present them is to improve transparency. The Finnish Tax Administration will have better capacity to analyse the taxpayer’s controlled transactions if another country’s tax authority’s statements on them are made available. Like mentioned in the Government proposal (2021), APAs concern the participating taxpayers and the sovereign states involved in the APA, taking account of the relevant facts and circumstances. The APA is binding only for the sovereign states that actually participate in the APA.

The requirement to enclose copies covers pre-emptive statements and advance agreements originating from public authorities of countries outside Finland. Accordingly, there is no need to enclose copies of the Finnish Tax Administration’s pre-emptive statements; however, the taxpayer can mention their existence in the documentation in the interests of clarity. An official decision originating in another country may be issued to the other party of a controlled transaction, or to a different party having entered into a transaction for which the pricing has an indirect connection with the taxpayer’s controlled transaction. For example, referring to the sourcing of the manufacturing company presented above in paragraph 6.3 of this guidance, if the public authority of the company’s country of fiscal residence had issued an ex-ante statement, it would have to be included in the taxpayer’s documentation although the manufacturing company and the taxpayer made no direct transaction with each other. It is acceptable to enclose the copy in its original language but there must be a translation summarizing the important content of the statement if the original language is not Swedish or English.

There is usually no difficulty in determining what kind of agreement constitutes an APA. Different countries employ different practices with APAs, but they are usually concluded in the form of State-to-State agreements, based on a mutual agreement procedure as outlined in relevant tax treaties. However, in some countries, APAs can also be concluded as an agreement between the taxpayer and the government authority of the country. A number of countries have legislation in force with rigid procedural rules governing APAs or instead of legislation, there may be administrative instructions and regulations. Often, a unilateral ex-ante statement is seen as a document equal to an APA although the statement cannot be characterised as an agreement. For example, the compilation of statistics on transfer pricing in the European Union is based on the adoption of this approach, so unilateral preliminary rulings and ex-ante statements from different fiscal authorities are entered in EU statistics in the same way as advance pricing agreements are.

In this context, the concept of ‘pre-emptive statement’ is intended to cover all the decisions that public authorities have made, where a stand is taken in a matter related to taxes. The format of such statement is irrelevant. Accordingly, they can be issued in a ruling format or labelled in some other way. A typical example of a pre-emptive statement is a written opinion from a country participant in a Cross-Border Dialogue.

7 Examining transfer pricing documentation

7.1 Presenting the documentation

7.1.1 Deadline

Legal provisions on presenting and supplementing the documentation are in section 14c of the Act on Assessment Procedure. The taxpayer must present its documentation within 60 days of being requested to do so by the tax authority. The earliest time for presenting transfer pricing documentation, for the tax year that has ended last, is six months from the closing of the relevant accounting period. When asking the taxpayer to present the documentation, the tax authorities specify the tax years to be covered. The tax authorities may extend the deadlines on request. In this context, the extension of time concerns both the presentation and the supplementation of the documentation. The taxpayer must give reasons for requesting an extension of time. In practice, where a valid reason is given, the tax authorities can extend the deadline by some weeks.

The deadline for submitting the documentation is reasonable, in line with the EU TPD recommendations. The EU TPD states that the taxpayer in a given Member State should make its EU Transfer Pricing Documentation available, upon request by a tax administration, within a reasonable time depending on the complexity of the transactions. The 60-day deadline and the six months included in the Finnish rules are in line with the recommendations set out in the EU TPD because sufficient time is accorded to the taxpayer to finalise the documentation at the stage when the tax authorities have prompted the taxpayer to submit the documentation. There are other countries where the corresponding deadlines are shorter. The Finnish rules make no reference to the complexity of the taxpayer’s transactions. However, the taxpayer has the opportunity to request for an extension of time to submit its transfer pricing documentation if the delay is caused by the complexity of transactions.

In accordance with BEPS documentation instructions, the ideal solution would be a requirement to finalize the Local File by the date of the usual deadline for the tax year’s income tax return. As pointed out by the BEPS instructions, group-level information (Master File) should be examined and if necessary, updated, by the date of the group’s ultimate parent company’s deadline for its income tax return. Finnish legal provisions do not include the above recommendations as such. Accordingly, the rules allow for a flexible time frame, permitting the taxpayer to still prepare documentation at a time when the Tax Administration is conducting evaluation of the matters at hand. Nevertheless, it is recommendable to follow the BEPS documentation instructions and prepare the documentation accordingly. In particular, where a Finnish taxpayer’s documentation obligation extends to the preparation of group level documentation, the taxpayer should be prepared for requests from other countries for presenting the Master File.

7.1.2 Storing the documentation

The taxpayer must present its documentation when the Finnish tax authority requests the taxpayer to do so. In view of the provisions of section 56b of the Act on Assessment Procedure concerning the rule that tax assessments, based on the tax authority’s decision on a transfer pricing adjustment, can be reassessed before six years from the start of the year following the tax year have elapsed, the length of the storage period for transfer pricing documentation is also six years from the start of the year following the tax year. It is advisable that transfer pricing documentations are kept even longer because another country’s tax authorities may take measures later on a controlled transaction and its transfer pricing. In this case, the stored documentation can prove helpful to the competent authorities of the countries involved, as these authorities, within the framework of a mutual agreement procedure of the relevant tax treaty, conduct negotiations about the arm’s length conditions of the other country’s initial transfer pricing adjustment.

Taxpayers can freely select the method and the place where they keep their documentation. The way that documentation is stored — whether on paper, in electronic form or in any other way — is at the discretion of the taxpayer. The place where the documentation is stored can be outside of Finland, on the condition that the taxpayer is still able to present the documentation within the set deadline.

7.1.3 Request to present the documentation

Tax authorities can ask the taxpayer to present the documentation when the authority takes measures relating to risk management, tax audits, processing of tax returns, a mutual agree­ment procedure, or when other tax-related measures are carried out. However, documentation cannot be presented in all situations. For example, the taxpayer cannot enclose its transfer pricing documentation to an application for advance ruling if the documentation is not yet ready at the time of applying. Yet, materials similar to the taxpayer’s transfer pricing documentation must be enclosed with the application so that the matter can be processed. The tax authorities will generally ask for the documentation when analysing transfer pricing risks. This is the stage when possible risks are evaluated from the perspective of whether further action would be necessary, in the form of an appropriate control measure or in the form of further guidance.

The transfer pricing documentation is not enclosed with the company’s or permanent establishment’s tax return. The Tax Administration’s decision issued every year concerning the information to be provided on the tax return contains a list of the facts and information that a corporate entity must submit. Among them is the requirement that corporate entities must state whether they are, under section 14a of the Act on Assessment Procedure required to make a transfer pricing documentation concerning its controlled transactions, and to give an account of such controlled transactions. Tax Forms 6B and 6U (foreign corporate entity) contain a box that can be ticked, indicating that the corporate entity has the obligation to prepare the documentation. Form 78 is for giving an account of transfer pricing.

7.2 Supplementing the documentation

7.2.1 Additional information to be submitted

Under the provisions of section 14c, subsection 2 of the Act on Assessment Procedure, the taxpayer must supplement the transfer pricing documentation on request. The taxpayer must present the requested supplemental information within 90 days from the request by a tax authority. The tax authority may extend the deadline on request. The provision of section 14c, subsection 2 of the Act on Assessment Procedure that refers to supplemental information does not, however, mean any materials that are part of the documentation obligation itself. In the established practice of tax assessment, deadlines ranging from 2 weeks to 3 weeks are customary when a taxpayer is asked to submit more information. The deadline can be extended if there are acceptable grounds for extension.

According to the Government proposal (2006), it may be necessary to supplement the taxpayer’s transfer pricing documentation if it proves to be incomplete. When sending a request for additional information to ask the taxpayer to supplement the documentation, the tax authority is entitled to go beyond the documentation requirements that apply to the taxpayer’s transfer pricing documentation. The provision in question refers to an uncontrolled comparable as an example of supplemental information. However, if no comparables are available, the tax authority cannot require that comparables should be presented.

The reason for sending the taxpayer a request for additional information, as indicated in the Government proposal (2006), is connected to efficient use of resources. Full coverage of all possible areas is not required of the documentation because it is more efficient for both taxpayers and tax authorities to steer their resources toward the controlled transactions that are worth further examination, i.e. the ones concerned by the requests for further information.

It is only worthwhile for the tax authorities to request taxpayers for additional information on controlled transactions that are important on size and materiality grounds and that have an important economic impact. Where the controlled transactions raise no questions from a transfer pricing perspective, or where the transactions stay below the threshold of materiality, it is recommendable to leave them out of any detailed examination. However, the tax authorities are entitled to ask the taxpayer to provide additional information concerning a controlled transaction that seems to stay below the materiality threshold if, based on the taxpayer’s transfer pricing documentation, there is not enough clarity regarding whether the controlled transaction exceeds the threshold or whether it has material economic impact for the taxpayer. For these reasons, it is recommended that taxpayers, when preparing their transfer pricing documentation, focus on controlled transactions of adequate size and materiality, because it may be difficult to gather additional information afterwards.

The provision in question on the opportunity to add supplementary information corresponds to the recommendations on additional information found in the EU TPD. In accordance with the EU TPD, the Member States should be entitled in their domestic law to require, by specific request or during a tax audit, different information and documents to complement the EU TPD, because the EU TPD is a basic set of information for the assessment of the MNE group’s transfer pricing. The EU TPD’s general part refers to the undertaking by the taxpayer to provide supplementary information upon request and within a reasonable time frame in accordance with national rules. The BEPS documentation recommendation states similarly that the tax authorities’ rights to receive information goes beyond the documentation requirements.

7.2.2 The obligation of parties exempted from the documentation obligation to submit accounts

Parties exempted from the documentation obligation are not subject to documentation provisions. Taxpayers do not need to prepare documentation concerning controlled transactions between Finnish-resident companies, controlled transactions between small or medium-sized enterprises, or concerning dealings between a Finnish company and its permanent establishment situated in a foreign country. No documentation as referred to in section 14b of the Act on Assessment Procedure is required for these controlled transactions. In the same way, no additional reports as referred to in section 14c of the Act on Assessment Procedure are required for such controlled transactions.

However, being exempt from the documentation obligation or to apply a simplified documentation requirement do not allow the taxpayer to cease from applying the arm’s length principle on their controlled transactions. The arm’s length principle must be applied also on a controlled transaction exempt from the documentation obligation. For this reason, on request by the tax authority, the taxpayer must give an account as necessary concerning the taxpayer’s controlled transaction if the tax authority is in the process of examining the arm’s length conditions of the controlled transaction. The requests for additional information are based on the provisions of section 11 or section 14 of the Act on Assessment Procedure. The request for additional information may concern for example the information referred to in section 14b of the Act on Assessment Procedure.

The taxpayer must submit a report as necessary concerning the arm’s length conditions of the dealings between a Finnish company and its permanent establishment situated in a foreign country, when a procedure is ongoing in order to relieve international double taxation (for more information, see “Relief for international double taxation relating to corporate taxes” — Kansainvälisen kaksinkertaisen verotuksen poistaminen yhteisöjen verotuksessa). The PE Report (2008) of the OECD states that the instructions found in Chapter V of the OECD Transfer Pricing Guidelines are applicable, by analogy, to the documentation relating to dealings between a head office and its PE/branch. Under the recommendations of the EU TPD, Member States should apply similar considerations to documentation requirements for the attribution of profits to a permanent establishment as apply to transfer pricing documentation. Double taxation is relieved in accordance with the applicable tax treaty and under the provisions of the Act on the Elimination of International Double Taxation (Laki kansainvälisen kaksin­kertaisen verotuksen poistamisesta (1552/1995)) insofar as the taxing right with respect to the permanent establishment’s profits, under arm’s length conditions, belonged to the country where the permanent establishment is situated.

7.3 Punitive tax increase

7.3.1 Application

The provisions of section 32, subsection 1, paragraph 2, and section 32a, subsection 8 of the Act on Assessment Procedure lay down rules on the punitive tax increase, to be imposed due to the taxpayer’s neglect in matters related to the transfer pricing documentation and its supplementary information. In accordance with the provisions of section 32, subsection 1, paragraph 2 of the Act on Assessment Procedure, if the taxpayer does not submit the transfer pricing documentation or supplementary information by the deadline referred to in section 14c, or if the taxpayer submitted transfer pricing documentation or supplementary information with substantial errors or omissions, a punitive tax increase will be imposed on the taxpayer by the Tax Administration. Under section 32a, subsection 8 of the Act on Assessment Procedure, the maximum amount of the punitive tax increase is €25,000. These provisions were enacted with the intention to increase the taxpayers’ compliance to the documentation obligation.

The provisions of section 32, subsection 1, paragraph 2 concerning documentation are applied on a separate basis in relation to a punitive tax increase, if any, to be imposed due to a decision on transfer pricing adjustment. The punitive tax increase concerning documentation is imposed even if the taxpayer’s transfer pricing proves to be in line with the arm’s length principle. For example, the punitive tax increase is imposed if no transfer pricing documentation was presented by the deadline or if the documentation submitted was substantially incomplete. In these circumstances, whether or not the transfer pricing itself is in line with the arm’s length principle is not relevant. On the other hand, the punitive tax increase with regard to the documentation is imposed even in cases where another punitive tax increase is also imposed, as provided in section 32, subsection 1, paragraph 1 of the Act on Assessment Procedure.

It may be that the taxpayer neglects the transfer pricing documentation in several ways at the same time. For example, the taxpayer may neglect to provide the documentation in a given time and neglect to provide the requested further details. In such a case, the Tax Administration will examine the grounds for imposing the punitive tax increase specifically for every occurrence of neglect, and for every error. After a total sum is calculated, based on various occurrences of neglect and errors, the Tax Administration imposes a punitive tax increase, amounting to €25,000 maximally, in the form of a single decision.

No punitive tax increase is imposed with regard to the taxpayer’s negligence associated with documentation which is connected to a more extensive account of facts and information than what is required under the documentation obligation. This guidance refers by the words ‘may’, ‘may be presented’, ‘may be supplemented’, ‘may be used’, etc. to many items of additional information for which documentation can be presented based on recommendation. To present such additional information is not based on the legally defined documentation obligation. For this reason, no punitive tax increase is imposed with regard to any omissions or neglect in the documentation. On the other hand, where this guidance refers to information required by law, using expressions like ‘must be presented’, ‘must be described’, ‘be specified’, etc., the punitive tax increase can be imposed. The information content is in that case required by law.

More information on penalty fees imposed as a consequence of non-compliance in reporting is available in Tax Administration’s guidance “On penalty charges" — Seuraamusmaksut tuloverotuksessa (in Finnish and Swedish).

7.3.2 Amount of the punitive tax increase

The punitive tax increase is imposed case-by-case, with consideration to the circumstances relating to the matter. When imposing the punitive tax increase related to the transfer pricing documentation a reasonable approach is always applied and the amount of the punitive tax increase depends on the seriousness of the taxpayer’s neglect. Under section 32a.8 of the Act on assessment procedure, neglect with regard to transfer pricing documentation entails a maximum punitive tax increase of €25,000.

The taxpayer presents the transfer pricing documentation past deadline: the amount ranges from €1,000 to €5,000.

The taxpayer presents a set of supplementary information to the transfer pricing documentation past deadline: the amount ranges from €1,000 to €5,000.

The taxpayer presents the transfer pricing documentation, but it contains substantial errors or omissions: the amount ranges from €5,000 to €10,000.

The taxpayer presents supplementary information to the transfer pricing documentation, but it contains substantial errors or omissions: the amount ranges from €5,000 to €10,000.

The taxpayer presents no supplementary information within the deadline, nor later during the period when the matter continues to be examined: the amount ranges from €5,000 to €10,000.

The taxpayer presents no supplementary, important information at all within the deadline nor later during the period when the matter continues to be examined: the amount ranges from €10,000 to €25,000.

The taxpayer presents no transfer pricing documentation at all within the deadline nor later during the period when the matter continues to be examined: the amount ranges from €10,000 to €25,000.