KHO:2013:36 Transfer pricing -case

1. KHO:2013:36Transfer pricing -case 32E29000 European and International Tax Law, Spring 2014 Karoliina Mäkelä

2. Parties • A Oy, the Finnish mother company • B AS, the Estonian subsidiary • Owned 100% by A Oy A Oy makes orders to B AS who manufactures the products. A Oy sells the products forward

3. Responsibilities • A Oy bears the greater part of the risk • A Oy owns the manufactured products in the whole manufacturing process • B AS has bought the production equipment from A Oy in August 2004 • B AS has developed the working methods to be more productive • B AS has created a unique know-how which is valuable

4. Transfer price method • Transactional net margin method, TNMM • Arm’s length principle was analyzed by comparative data search • Charged matters • The service • The locations savings • Not raw materials • Location savings • For the savings which was obtained when function is done in low cost country and not in high cost country • It is computational charge

5. Tax audit 1.7.2004-31.12.205 The Finnish Tax Office made tax audit to A Oy and B AS manufacturing services transfer pricing method. The decision was given at 13.11.2006 and after that A Oy has made appeals. First A Oy appealed to tax administration The answer they received wasn’t satisfactory Then A Oy appealed to the Administrative Court The answer they received wasn’t satisfactory Finally A Oyappealed to the Supreme Administrative Court The final decision

6. Tax administration • Tax administration decision at 13.11.2006 • Increases to the taxable income and tax increases for years 2004 and 2005 • Based on the Tax Office tax audit report • Increases to the taxable income • 1 353 475 € for 2004 and 2 814 572 € for 2005 • Tax increases • 67 673 € for 2004 and 140 728 € for 2005 • Tax administrator board of adjustment responses for A Oy complain at 12.6.2007 • Rejection for complain for increase to the taxable income • Tax increases reduced to 800 € for both years

7. Administrative Court • A Oy Appeal • A Oy in its appeal has demanded that the Tax Office adjustment board decisions are revoked and the taxes and tax increases are refunded • A Oy claims that the Tax Office has without decent argument override the company’s presentation of the arm’s length principal they have followed • A Oy has formed detailed description how the Tax Office has made incorrect interpretation of the transfer prices method

8. Administrative Court • Administrative Court rejected the appeal The comparability analysis comprises well the whole activities • Including the location savings The manufactured products and raw materials are owned by A Oy The cost savings belongs in full to A Oy • B AS developments are ordinary  The Administrative Court sees that cost base deducted by raw-materials leads to arm’s length end result

9. Supreme Administrative Court • A Oy appealed and demanded that the decision of the Administrative Court has to be revoked • A Oy has formed detailed description how the Administrative Court has made incorrect interpretation of the transfer prices method • Tax recipients legal service unit has given answer, where it asks the appeal to be rejected • A Oy has given their answer

10. Decision of the Supreme Administrative Court • The decision of Administrative Court is revoked and new amounts of increase of taxable income is given. • Demand of tax increase removal is rejected • Tax administration changes the taxation for the decision of the Supreme Administrative Court Supreme Administrative Court presents their arguments for the decision

11. Conclusion of the Supreme Administrative Court • Location savings charge is rejected • The business function wasn’t the same in Estonia than it was before in Finland • Transfer price method is accepted • Cost base is changed • Cost base includes: raw material and services • Acceptable charge