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Browsing by Author "Bussman, Andreas"

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  • Bussman, Andreas (2014)
    The main purpose of transfer pricing provisions is to ensure that associated enterprises, when conducting intra-group business, transact at arm´s length. Traditionally this has been considered implying that the pricing of transactions between associated enterprises must be at arm´s length. However, lately tax authorities´ focus has shifted from the pricing of transactions to the transaction structures. It is evident that also the transaction structure affects the division of profits between the associated enterprises. The purpose of this study is to look into the arm´s length provisions, as they are formulated in both tax treaty context and domestic law, in order to conclude whether the current wordings of the provisions allow the tax authorities to question the transaction structures chosen by the taxpayer, i.e. to restructure transactions. In Finnish domestic law the arm´s length principle is expressed in VML § 31. In tax treaty context, the arm´s length principle is expressed in Art. 9(1) of the OECD Model Tax Convention. The wordings of the provisions are not identical but both are said to replicate the arm´s length principle, as expressed in the OECD Transfer Pricing Guidelines. The Guidelines state that the recognition of the actual transaction is the principal rule, but that restructuring of transactions is allowed in exceptional circumstances. However, neither the wording of Art. 9(1) nor VML § 31 seem to directly support such possibility. Even in a tax treaty context, the taxation must be based on domestic law. The tax liability can never be based solely on the tax treaty provisions. It follows that tax treaties can restrict the application of domestic law, but can never broaden the taxing rights under domestic law. This has been called the golden rule of tax treaty law. It follows that even if Art. 9(1) would be interpreted as to allow the restructuring of transactions, also VML § 31 must be able to be interpreted in such a way. The application and interpretation of tax rules is subject to the principle of legality, as expressed in Section 81 of the Constitution of Finland. It follows that taxes must be governed by law. The taxpayer must be able to recognize the basic factors affecting the tax liability and the amount of payable tax straight out of the wording of the provision. These factors cannot be regulated or specified on a subordinate level. Due to the strict principle of legality, the interpretation of tax rules is governed by the wording of the provision. The interpretation cannot result in an outcome that is contrary to the wording of the provision, not even in cases where the purpose of the provision would support such outcome. But when the wording of the provision leaves the interpretation open, other sources of interpretation must be used to support the wording. Due to the general formulation of VML § 31, the accurate scope of the provision is determined in case law. Hence, case law has an emphasized influence on the interpretation of the provision.