On 2 June 2021, the Finnish Supreme Administrative Court issued a decision regarding the acceptability of U.S. GAAP accounting standards as a basis for transfer pricing.

Background

The case concerned a Finnish company owned by a low-risk distributor whose parent company was a US company. The group had calculated the annual profit of the Finnish company according to the transactional net margin method (TNMM) on the basis of an operating margin of 0.5% according to US GAAP (generally accepted accounting principles) in accordance with the group’s transfer pricing policy. In its 2011 annual financial statements, the Finnish company revised its 2010 operating results downwards, taking into account the Group’s transfer pricing principles, and submitted a revised statement for 2010 to reflect the adjustment.

Tax administration claims

As per the tax administration’s views, the Finnish entity’s profit could not be adjusted based on a US GAAP operating margin, although this was the standard used by the group worldwide. The tax authority found that the application of US GAAP and an operating margin of 0.5% did not lead to an arm’s length result. In addition, the tax administration refused to include loss-making companies as comparables. As a result, the tax administration made adjustments that increased the company’s arm’s length operating margin from 0.5% to 1.0%.

Court Ruling

The Supreme Administrative Court granted a leave to appeal and accepted both the use of US GAAP as the basis for transfer pricing and the operating margin of 0.5%. In its judgment, the court came to the conclusion that the company’s operating margin can be determined according to US GAAP, since the consolidated financial statements were generally prepared according to this accounting standard and the Group’s transfer prices were monitored on the basis of US GAAP accounting. The Court also found that loss-making companies that meet the comparability analysis criteria should not be rejected simply because they have suffered a loss. The court thereby overturned the previous decisions of the tax administration, the adjustment board, and the administrative court and backed the matter to the tax administration for the calculation of taxable income on the basis of annual profit, adjusted according to a 0.5% operating margin according to US-GAAP.