Nokian Tyres takes a knock with €27m tax bill

ERJ staff report (TP)

Nokia, Finland − Nokian Tyres received a reassessment decision on 30 December from the Finnish Tax Administration, according to which the company is obliged to pay €26.9m in additional taxes for the tax year 2007.

Payment must be made in January 2014, but the company announced it will make a “complaint” against the decision.

The total sum demanded by the tax authorities comprises €16m of additional taxes and €10.9m of punitive tax increases and interests. The company said it “will record them in full to the financial statement and result of year 2013”.

The Large Taxpayers Office in Finland carried out a transfer pricing tax audit regarding tax years 2007-2011, investigating if the intercompany transactions between Nokian Tyres and its subsidiaries were concluded based on market prices.

Reassessment decisions regarding 2008-2011 have not been received yet. The Tax Administration states in the reasoning of its decision concerning 2007, that the transfer pricing was market-based with all other but the Russian subsidiaries. According to Tax Authorities the success of Russian business is not based on the modern and efficient production plant in Russia combined with the sales and logistic network covering the whole of Russia.

Tax Administration considers the Russian plant as a low risk contract manufacturer. The Tax Administration has ruled that a significant part of the Russian subsidiaries' profits should be added to Nokian Tyres’ taxable income in Finland. In practice this leads to double taxation of income, which is contrary to existing tax agreements.

Nokian Tyres said it “has consistently applied transfer pricing according to tax laws prevailing at the time. The company has prepared a transfer pricing documentation which the Tax Administration has ignored during the tax audit. The company considers the reassessment decision of the Tax Administration as unfounded and is going to appeal against it by leaving the claim for rectification to the Board of Adjustment and, if necessary, the company will continue the appeal process in the Administrative Court. If needed, the company will also require the competent authorities to negotiate on the elimination of the double taxation. The company is also considering a separate process to determine the legality of the procedures used in the tax audit by Tax Administration and tax inspectors”.

The Tax Administration's ruling does not affect the company's dividend distribution. The Board of Directors will propose to the Annual General Meeting that the dividend per share for the year 2013 would be at least on the previous year’s level.

If the claim to the Administrative Court does not lead to annulment of the tax decision, the group's corporate tax rate is expected to rise in the next five years, from the previously announced 17 percent to a maximum of 22 percent.

Nokian Tyres said its management and board are disappointed with the Tax Administration’s ruling.

CFO Anne Leskelä said: "We have attempted to make every effort to assist the Tax Authorities to understand the operations of the group and our Russian business. [The] previous tax audit in the company ended to fiscal year 2006, and in its tax audit report the Tax Administration did not require any corrections to the transfer pricing between the company and its subsidiaries already operating at that time in Russia.

“The interpretation that the Tax Administration has now made does not contribute to the predictability of taxation. When enforced, the decision would force the company to consider carefully how the group's businesses will be organised. In any case, the process will take years, and will require [the] company’s efforts and resources."

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Press release from Nokian Tyres