Transfer pricing by companies cuts state tax revenue
Multinationals sometimes manipulate finances to show greatest profits in countries with low corporate taxation
The Finnish state fails to collect an estimated EUR 4-8 billion in tax revenues that it is owed. A report by the Audit Committee of the Finnish Parliament reports that about EUR 1.6 billion of this sum is attributed to transfer pricing by companies.
The sum is the equivalent of a single year’s child allowances, or the student grants that are paid out in a single year.
Transfer pricing is practiced usually by large international corporations with operations in several countries, allowing them to manipulate their internal cash flow in such a way that they show their greatest profits in countries with the lowest corporate tax rates.
"Finland is efficient in fighting the grey economy and corruption. In dealing with the problems of transfer pricing we are just beginning", says MP Tuija Brax (Green), who is the chairwoman of the Parliament’s Audit Committee.
The aim of the report is to get the government to take action in the matter. "The problem is ignorance, indifference, and insufficient resources for enforcement", Brax says.
Tax authorities are hoping to tackle abuses in transfer pricing more efficiently than before.
Earlier in the year the tax authorities set up a group of 40 employees to study corporate transfer pricing and the possible violations of rules that might be taking place. The group was given a three-year period in which to operate.
The investigation of suspected violations is nevertheless slow and cumbersome, says Pekka Ruuhonen, director of the corporate taxation unit of the tax administration.
"Each year we investigate dozens of suspicious cases. The investigation of a single case can take years because of the complexity of the matter", Ruuhonen says.
Transfer pricing is legal if it is done according to set regulations. Companies are required to operate according to "market conditions".
This means that a company is not allowed to use prices that are too high or too low in internal invoicing as a way of artificially weakening their results.
It is up to tax authorities to evaluate whether or not market conditions have been adhered to. To aid in the consideration, the OECD has drawn up guidelines for use in keeping tax evasion through transfer pricing under wraps.
More on this subject:
BACKGROUND: Transfer pricing – a hypothetical scenario: