background image
Finnish Supreme Administrative Court Holds Taxpayer May Base Transfer Pricing on U.S. GAAP — Orbitax Tax News & Alerts

Finland's Supreme Administrative Court issued a decision on 2 June 2021 regarding a taxpayer's use of U.S. GAAP accounting standards in applying the transactional net margin method (TNMM). The case involved a Finnish company that belonged to a group whose parent company was a U.S. corporation. The Finnish company operated as a limited risk distribution company for the group in Finland. In determining the market (arm's length) conditions for the group companies' transfer pricing, the transactional net margin method was used with determinations made on the basis of U.S. GAAP.

In its 2011 financial statements, the Finnish company made a downward adjustment of its 2010 operating profit, taking into account the group's transfer pricing principles, and filed a revised return for 2010 to account for the adjustment. However, in reviewing the revised return for the year, the Finnish tax administration determined that the company's transfer pricing must be determined on the basis of financial statements prepared according to Finnish accounting standards. Further, the tax administration rejected the inclusion of loss-making companies as comparables. As a result, the tax administration made adjustments resulting in an increase in the company's arm's length operating margin from 0.5% to 1.0%.

In its decision, the Supreme Administrative Court rejected and annulled the tax administration's decision. The Court found that the Finnish company's arm's length operating margin could be determined in accordance with U.S. GAAP accounting standards because the financial statements in the group were generally prepared in accordance with U.S. GAAP and the group's transfer pricing was monitored on the basis of U.S. GAAP. The Court also found that loss-making companies that meet the conditions of the comparability analysis should not be rejected solely because they suffered a loss.