No recharacterization expected in the implementation of the OECD transfer pricing guidance on financial transactions in Finland
The application of the OECD transfer pricing guidance on financial transactions in Finland is not expected to lead to any recharacterization, but implicit parent company support is to be noted.
As covered in one of our previous Insights articles, in February the OECD issued new guidance on the application of the arm’s length principle for financial transactions (OECD (2020), Transfer pricing Guidance on Financial Transactions: Inclusive Framework on BEPS Actions, 4, 8-10, OECD, Paris. On 1 July 2020, the Finnish Tax Administration (FTA) published its comments on the applicability of this new OECD guidance in Finland.
Recharacterization of guarantees to loans not permitted
The FTA restates and confirms that the Finnish transfer pricing clause in section 31 of the Act on the Tax Assessment Procedure (AAP) does not provide the authorities with the power to disregard and recharacterize or replace a company’s intra-group transaction with another transaction, even if the transaction originally carried out by the company did not fulfil the arm’s length criterion. This restriction limits the FTA’s ability to follow the OECD’s guidance on “the accurate delineation of the actual transaction”, as the Finnish transfer pricing provision does not justify the identification of the transaction based on its actual substance and disregarding its form. In its comments, the FTA mentions the example on intra-group guarantees in paragraph 10.161 in the OECD’s new guidance, and confirms that treating an intra-group guarantee partly as a loan from the guarantor to the debtor is not permitted under Section 31 of the AAP. On the other hand, with reference to the example mentioned in paragraph 10.37 of the new OECD guidance, replacing a long-term loan with a short-term loan when defining the arm’s length terms of the intra-group loan would fall within the scope of section 31 of the AAP and be permitted in Finland as well.
The FTA states in its comments that, as a general rule, the OECD guidance on the transfer pricing of financial transactions does not include fundamental changes to the arm’s length principle as it has been interpreted and applied to financial transactions in Finland. Consequently, the OECD guidance is also applied retroactively to the arm’s length assessments of previous years.
Implicit parent company support to be considered
However, the new OECD guidance on the effects of group affiliation and implicit support on the creditworthiness of a group company, and consequently the pricing, on the intra-group financial transaction deviates from previous Finnish tax practice. Previously, the FTA has considered the creditworthiness of the debtor entity on a stand-alone basis, while, according to the new OECD guidance, the company’s group affiliation should be taken into account. The FTA has stated that it will follow the new OECD guidance. All intra-group financial transactions agreed or renegotiated after the OECD issued its guidance (on 11 February 2020) should also take into account the effects of group affiliation and implicit support.
The FTA’s comments highlight the importance of proper documentation, and it may be noted that the new OECD guidance also includes guidance on documentation and relevant information in the arm’s length assessment. The FTA also suggests that companies contact the FTA at an early stage to discuss the transfer pricing. The unofficial procedures to obtain advance clearance and certainty are the unilateral pre-emptive discussion or bilateral cross-border dialogue.