Hannes Snellman Counsel to a Tax Payer in Supreme Administrative Court Yearbook Ruling Confirming US GAAP as Acceptable Basis for Transfer Pricing
3 June 2021
Hannes Snellman acted as counsel to a major multinational group of companies in a Supreme Administrative Court yearbook case confirming the acceptability of the application of a foreign accounting standard as a basis for transfer pricing and the level of the arm’s length operating margin.
In the case, a global group had determined the profit of the financial year of a Finnish low-risk distributor group company based on an operating margin of 0.5% under US GAAP, in accordance with the group transfer pricing policy. A corresponding transfer pricing adjustment had been made in the accounts of the Finnish company, whereby the profit of the company under FAS and the taxable income of the company of the tax year 2010 had turned negative. The Tax Administration found that the application of US GAAP and an operating margin of 0.5% as a basis for the transfer pricing adjustment did not lead to an arm’s length result. By, for example, dismissing loss-making comparables and applying the averaging method instead of the pooling method used by the group, the Tax Administration had demanded the application of a 1% operating margin. Furthermore, according to the Tax Administration, the profit of the Finnish company could not be adjusted based on an operating margin determined under US GAAP although it was the standard used by the group globally, but FAS should have been applied as a basis instead. The company had appealed the tax assessment decision to the Adjustment Board and onwards to the Administrative Court, which both had dismissed the appeals by the company.
Hannes Snellman acted as counsel to the taxpayer in the Supreme Administrative Court, where the company claimed that transfer pricing based on a 0.5% operating margin under US GAAP must be accepted. The Supreme Administrative Court issued a leave to appeal and accepted both the use of US GAAP as a basis for transfer pricing and the operating margin of 0.5%. The Court thereby overturned the previous decisions of the Tax Administration, the Adjustment Board, and the Administrative Court and returned the matter to the Tax Administration for the calculation of the taxable income based on the profit of the financial year, adjusted in accordance with a 0.5% operating margin under US GAAP.
Along with a number of transfer pricing rulings over the past few years, the new ruling further underlines the protection of the transfer pricing method determined by the taxpayer. The decision has been published as a yearbook ruling.