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Court Rules On Case Regarding Location Savings

Finland
The Finnish Supreme Administrative Court has issued ruling KHO 2013:36 regarding the concept of Location Savings. Taxand Finland takes a look at the case which led to this ruling.

The legal question in this case was the arm's length nature of the contract fee when the imputed location savings were included in the cost base for the provision of manufacturing services. The case concerned the transactions performed in 2004 and 2005 between a Estonian subsidiary (B AS) and its Finnish parent company (A Oyj).

There are 2 significant discussion points that are at the core of this ruling. First is the concept of Location Savings described in Subsection E of Chapter IX of the OECD Transfer Pricing Guidelines and the allocation of such benefits between the transacting group entities. Secondly in the ruling the Court stated that the OECD TP Guidelines are not binding on the OECD Member States but they do have a position as a global standard when interpreting the arm's length principle. The Court also stated that although Chapter IX was included in the OECD TP Guidelines in the update of July 2010, it could be used as a reference when discussing the arm's length nature of the transactions conducted in 2004 and 2005 since it did not contain any fundamental changes to the interpretation of the arm's length principle.

The Court recognised the concept of Location Savings although it rejected the existence of such in this case and ruled that the judgment could not be based on the concept of Location Savings. The main argument was that although A Oyj had transferred part of its manufacturing to its Estonian affiliate, the Court stated that the manufacturing functions performed by B AS were significantly different from those performed by A Oyj in Finland and therefore this situation was not in line with the principles stated in the OECD Transfer Pricing Guidelines.


Your Taxand contacts for further queries are:
Janne Juusela
T. +358 9 6153 3431
E. janne.juusela@borenius.com

Jouni Honka-aho
T. +358 9 6153 3267
E. jouni.honka-aho@borenius.com

Taxand's Take

The Finnish Supreme Administrative Court has recognised the concept on Location Savings, therefore they should be analysed and taken into consideration when multinationals are conducting business restructurings which contain the transfer of functions to low cost jurisdictions.

Taxand's Take Author

Janne Juusela
Finland