Nokian to appeal tax bill

On 30 December, Nokian Tyres received the unwelcome news that a reassessment made by Finland’s Tax Administration has determined the company must pay €26.9 million in additional taxes, plus punitive tax increases and interest, for the year 2007. The full amount will be recorded in Nokian’s 2013 financial statement and results. The company says it will appeal the ruling, however should it be upheld Nokian’s corporate tax rate will rise over the next five years to the maximum rate of 22 per cent, rather than to the previously announced 17 per cent.

The €26.9 million sum includes €16.0 million of additional taxes and €10.9 million in punitive tax increases and interest. The transfer pricing tax audit was carried out to investigate whether the intercompany transactions between Nokian Tyres plc and its subsidiaries were concluded based on market prices. According to Nokian, the Tax Administration’s reason for its decision on 2007 was that the transfer pricing was not market-based for the company’s Russian subsidiaries. The Tax Administration is said to consider Nokian’s Russian plant a “low risk contract manufacturer” and therefore ruled that “a significant part” of the Russian subsidiaries’ profits should be added to Nokian Tyres’ taxable income in Finland. Regarding the ruling, Nokian opines that “in practice this leads to double taxation of income, which is contrary to existing tax agreements.”

In a statement, the Finnish tyre maker writes that “Nokian Tyres plc has consistently applied transfer pricing according to tax laws prevailing at the time.” It adds that it prepared transfer pricing documentation, but alleges the Tax Administration ignored this during its 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,” Nokian adds. “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.”

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

Nokian Tyres’ management and Board have stated their disappointment with the Tax Administration’s ruling. CFO Anne Leskelä: “We have attempted to make every effort to assist the Tax Authorities to understand the operations of the Group and our Russian business. 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 company’s efforts and resources.”

Nokian was also audited for the years 2008 to 2011, but has yet to receive decisions regarding these years.