In the past five years, and including 2008, the Ministry of Finance in Finland has launched many packs of patchwork on tax laws and the systemic tax reform has been much awaited. Now the Ministry has appointed a new working group to consider the Finnish tax regime as a whole. Not a task to be accomplished in few weeks: the deadline is to issue the report by the end of 2010.
Tax regimes are generally reconstructed in pieces. This piece-meal approach may have a negative impact on decisions by companies and households. Corporations make long term plans and consistent tax system and practice is an important element in planning. This holds true also in investment plans of private individuals. When the tax system is evaluated as a whole, it is possible to estimate how the tax system influences the economy, the society and consider desired targets.
In international tax, competition countries have selected different approaches. Many countries have decreased their statutory corporate tax rates. As the rate race continues, a global reduction of economic activity and demand for government spending put more emphasis on indirect taxation. In the global economy companies and their profits are mobile whereas it is difficult to avoid tax on consumption. In Europe many jurisdictions are fueling growth and innovation through R&D tax credits, and various tax incentives for financing activities are still popular.
The Ministry of Finance wants to have a holistic view. When nominating the working group in September it was clearly stated that changes in the environment have to be observed. Four key transformation items were mentioned. Firstly, the population is getting older which increases the need to be more efficient in the private and public sector. Secondly, growth in productivity and profitability is more and more focused on know how and intangible property. The third element is that challenges in respect of sustainable development are bigger than ever and fourthly, the economic environment is more open than before.
What would the focus areas be for the new Finnish tax regime? The Ministry asked the group to consider especially the following:
- structural changes in the tax regime in light of favourable growth in profitability, high employment and entrepreneurship
- sustainable tax burden within healthy public sector
- encouraging balance between social security programs and work
- changes in corporate taxation and capital income taxation that support productivity and employment observing international development, especially in the EU
- competitiveness of the tax regime.
Excellent targets, and certainly a motivating agenda. It is guaranteed that the pending work will get a lot of attention from corporations and private individuals in Finland and elsewhere.
Setting the standard on transfer pricing documentation
Finland launched transfer pricing documentation requirements in 2006 and now the tax authorities are reviewing the first documentation packs.
One of the leading transfer pricing experts of the Finnish tax authorities recently stated that the tax authorities have been somewhat surprised with the level of documentations they have received. On one hand, a lot of the documentation packages reviewed have been very good at meeting the required content structure. On the other hand, however, the economic analysis is, in many cases, either lacking completely or very thin.
Not surprisingly, the Tax Office for Large Tax Payers (“LTO”) in Finland has announced that they will select some 20 multinationals for a transfer pricing documentation review within the next 12 months. The selection process is random, though the companies selected will be from the customer base of the LTO. If a company is selected for a review, it will be asked to submit its transfer pricing documentation to the LTO. After the review the tax payer will be informed on whether or not the transfer pricing documentation is deemed adequate. If this is the case, the tax authorities have stated that this should give the tax payer some level of comfort and that a specific transfer pricing audit should not be launched at least for the year(s) under review. If the case is the opposite, ie the documentation is deemed essentially incomplete or inaccurate a transfer pricing audit will be initiated.
Withholding taxes may be claimed back
Shareholders residing in the European Economic Area should take a look at withholding taxes they have paid on Finnish source dividends since 1995. The Central Board of Taxation has recently issued a ruling (CBT 27/2008) and the Supreme Administrative Court (SAC 2008:23) has given a decision, coupled with ECJ Stauffer case (C-386/04), which is likely good news for international investors. The Central Board of Taxation stated in its decision that the dividend paid by a non-listed Finnish corporation to a Swedish corporate shareholder is exempt from withholding tax. This is because dividends between Finnish companies would have been tax exempt under the same facts and circumstances. The exemption requires that the non-resident shareholder is located within the European Economic Area, there is an agreement on exchange of information in force and the tax withheld at source cannot fully be credited in the home state.
The SAC ruled in its decision that a UK resident individual receiving dividends from Finnish corporations cannot be heavier taxed on dividend income than a Finnish resident under same circumstances. Resulting from these decisions and the Stauffer case, the government has issued a proposal which changes the Finnish withholding taxation. It may well be worth looking back and assessing whether there is an opportunity to claim back previously paid taxes.
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