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Can the Cost-Plus Method Be Used to Determine the Arm’s Length Interest Rate of an Intra-Group Loan?
Observations of the A Oyj Case
On May 21st, 2021, the Supreme Administrative Court of Finland overturned the Helsinki Administrative Court’s decision, KHO 2021/36(66), that the interest rate should reflect the borrower’s credit rating, on the grounds that the taxpayer was providing a service of borrowing on behalf of the subsidiary for which it should have only received a cost-plus service fee instead a financing transaction. Within that context, the key question of the case is whether cost plus is the proper transfer pricing method to determine the arm’s length interest rate considering that the tax assessments of A Oyj for the tax years 2009 to 2011 were adjusted to the taxpayer’s disadvantage.
1. Facts of the Case
The A parent group’s company, A Oyj, was in control of the group’s centralized financial activities. It owned D Oy and B Oy’s entire share capital. In turn, D Oy owned the entire share capital of ZAO C, a Russian corporation.
A Oyj had raised funds from outside the group and lent them to its Finnish subsidiary B Oy, which had then lent them to ZAO C. B Oy charged interest on the loans to ZAO C based on the cost of A Oyj’s external financing. In addition, the interest rate included a margin of 0.55 % in...