Nokian Tyres Transfer Pricing Case 2007-2010 European and International Tax Law Krista Kannos 27.4.2014 19.4.2015

Transfer pricing (TP) principles TP means the setting of the prices for goods and services sold between controlled or related legal entities within an enterprise. A transfer price should follow the arm’s length principle and be equivalent to a fair market price between independent parties. Companies operating in different markets with varying tax rates have however used internal transactions and transfer prices for shifting profits to areas with low taxes and showing a lower profit in a high tax country. Thus most countries have created transfer pricing rules and granted the tax authorities a right to adjust the taxpayer’s taxable income if transfer pricing documentation is not acceptable or tax audit results ( testing of prices) are not satisfactory. 19.4.2015

Methods of Transfer pricing testing 1) Arm’s length standard = price is within the range of prices charged between independent parties. This principle requires the items compared to be rather identical (mainly goods apply). Also terms of sale , market and geographic conditions vary and thus affect the comparability. Here the testing is typically done on transaction level. 2) Comparable profits method: profit levels of similarly situated companies in similar conditions may be compared 3) Profit split methods are econometric analyses of company profit distribution between it’s locations Determining the correct TP for services, intangible property and cost sharing can be very difficult. 19.4.2015

Functional analysis (FA) When conducting a TP audit the tax administration must perform a FA; it consists of identifying and reviewing the functions performed by parties to a transaction, the resources used by these parties, the risks taken by the parties and the allocation of responsibilities between the parties. 19.4.2015

Nokian Tyres (NT) as a company Nokian Tyres supplies tyres for cars, trucks and heavy machinery. In addition they own the tyre chain Vianor, which operates as a wholesaler and retailer in all NT’s core markets Their production facilities are located in Finland and Russia. In 2012 a new, modern factory was opened in Vsevolozhsk near St. Petersburg. Based on the amount of NT investments ( approx. 730 m eur in 2003-2014) the Russian government has supported them by tax agreements. Sales by markets: Russia and CIS 26% Other Europe 24% Scandinavia 35% North America 10% 19.4.2015

Case Nokian Tyres Finnish Large Taxpayer’s Office carried out an audit regarding company’s transfer pricing documentation for tax years 2007-2010 and as a result levied EUR 100.3 m additional taxes with punitive tax increases and interests. They reasoned that the transfer pricing was market based with all other but the Russian subsidiaries. They also claimed that the success of the Russian business was not based on modern and efficient production plant, but illegitimate reclassification of legal transactions. TA sees, that a significant part of Russian subsidiaries’ profits should be added to NT’s taxable income in Finland. Nokian Tyres left the claim for rectification on 19.2.2014 since they had applied TP according to tax laws and OECD guidelines consistently. Also the tax administration had not presented any appropriate grounds to ignore Company’s TP documentation. The Board of Adjustment annulled the decision on 3.12. 2014 , because the Tax administration neglected the obligation to hear the taxpayer. 19.4.2015

Process as a timeline Measure Result Tax Audit Reassessment of NT’s TP documentation, additional taxes EUR 100.3 m NT request to see the detailed audit documentation (interview notes) TA refusal, stating that they have presented the preliminary audit report, functionality analysis draft and the final report to the client. NT files a complaint 19.2.104 The Board of Adjustment annuls the decision on 3.1.2014 and returns the case for processing NT requires compensation of 37 t EUR for legal costs Supreme court approved 3 t EUR compensation 19.4.2015

Impact & Conclusions NT had already written off the additional taxes in their 2013 reporting -> the amount of 100.3 m will be returned as profit for Q1 2015 reporting, resulting additional profit taxes in 2015. They also expect the TA immediately return the sum of 43.1 m EUR already set off during the process. The reassessment was annulled because of the procedural fault of the TA and the case has been returned back for reprocessing. The Board of adjustment did not consider the actual substance of the matter. So the case is not over, Finnish TA must now provide the documentation required by NT, who in turn will do everything to proof TA’s reasoning unjust. Most likely the TA is not willing to give up their lucrative earnings of 100.3 either. 19.4.2015

Laws applied Administrative procedure Act : §42- for the integrity and reliability of government actions it is necessary to record all oral information used as evidence material like interviews. §74- the faulty procedure shows a mistake in the the conduct of a public servant authority and therefore government must compensate legal costs occurred to the client Act on the openness of government activities: §5- defines the nature and formats of official documents §3- states the objectives for promoting openness and good practice in government information management 19.4.2015