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Finland launches ‘The Risk Phenomena to International Taxation’
The Finnish tax administration launched a new 2 year initiative at the beginning of 2014. The aim of the initiative - called ‘The Risk Phenomena Related to International Taxation’ - is to reduce international phenomena affiliated fiscal risks. Taxand Finland explains the background to the initiative and the potential impact for multinationals.
The initiative is designed to ensure that no tax shortfall is incurred in relation to certain international situations through developing guidance, supervision and international co-operation between tax authorities.
The risk phenomena (in addition to transfer pricing) are:
- Carried interest arrangements
- The situations of international electronic commerce
- Foreign transactions
In 2012 the Finnish tax administration launched its transfer pricing programme, which has already led to an additional tax income of nearly EUR 900M via conducted corporate tax audits. However, most of the cases are now pending in appeal processes and some cases have already been lost by the tax administration. The ‘Risk Phenomena Related to International Taxation’ initiative will extend the Finnish tax administration’s activity to other situations considered as high risk, other than TP.
The new initiative consists of 7 separate sub-projects. As the TP programme kicked off in 2012 by transferring the handling of TP cases to the Large Taxpayer’s Office, a Finance Division was simultaneously established. The aim of the Finance Division has been to unify the tax procedure related to financing and the identification and classification of financing phenomena such as hybrid instruments. The Finnish tax administration’s new initiative introduces a sub-project on tax evasion resulting from foreign transactions focusing on tax evasion arrangements which take advantage of states with a low tax burden or tight banking secrecy laws.
As there seems to be a global trend to condense the tax authorities’ co-operation, there is a sub-project for collecting reference data of the financial field and developing the utilisation possibilities of said data in monitoring tax compliance.
A sub-project on electronic commerce analyses and reviews new operations models and pilot projects of electronic commerce. The initiative will aim to give guidance to different types of operators for managing taxation in the right manner in different commercial situations, and ensure that the collection of taxes is timely and the proper amount.
There is also a sub-project on the taxation of the profits of carried interest arrangements. The purpose of this sub-project is to clarify the arrangements, fiscal risks and sources of reference data related to carried interest. In addition, the project aims to find out whether compensations that are ‘earned income’ have been converted into capital income eg by using certain ownership arrangements.
It should be noted that Finnish legal practice does not contain published decisions on carried interest arrangements. It seems that taxpayers are left to wait and see how aggressively the Finnish tax administration will ‘tackle’ the alleged tax evasion linked to these arrangements.
The list of the risk phenomena in relation to international taxation does not end with the above. One sub-project spanning for a year focuses on value added tax (VAT) frauds within the European Union’s internal market. The aim is to develop and organise the prevention of VAT fraud. The means of achieving this have not yet been described. The initiative will also closely monitor the OECD base erosion and profit shifting (BEPS) project and make sure that the outcomes of BEPS project are implemented in Finland.
Only the future will tell whether the actions taken for meeting the goals of ‘The Risk Phenomena Related to International Taxation’ initiative are going to be aggressive, in the same way as the actions taken for meeting the goals of the TP programme have clearly been. The tax administration claims that ‘The Risk Phenomena Related to International Taxation’ initiative is mostly about anticipatory guidance, yet the first part of the initiative, the TP programme, can be said to prove otherwise.
The initiative may lead to unpleasant surprises and potentially lengthy litigation processes involving more than one jurisdiction. In order to avoid such, multinationals conducting business in Finland should be aware of the Finnish tax administration’s new initiative and its content, since it covers a large spectrum of hot-topic concepts related to international taxation.
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