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The genesis of exemptions from the scope of Finnish CFC rules

JFT 3/2024 s. 26–104
2.7.2024
Asiantuntija-artikkeli

Capital market liberalization, technical development and outdated structures of international taxation have enabled individuals and multinational companies to use foreign entities to attempt to avoid taxes in their countries of residence. These arrangements have been partly facilitated by harmful tax competition, in which countries attract income accumulated in another country by using various tax incentives. Numerous states have strived to prevent the shifting of profit to entities subject to low taxation by introducing Controlled Foreign Corporation (CFC) provisions. These rules, which are now mandatory in the EU, define the boundaries of legal tax planning and protect against the erosion of a country’s domestic tax base by eliminating any benefit from the diversion of income to CFCs.

This article examines why and how exemptions from the scope of application of the Finnish CFC regime were enacted and, in some respects, subsequently amended. More specifically, the research assesses which factors and circumstances affected the decisionmaking process and why some stakeholders, contrary to the ministry’s opinions and the standard protocol presented in previous studies, managed to significantly decrease the scope of application of the rules in these particular cases. The article also investigates the decisive factors in successful and unsuccessful lobbying efforts in these legislative processes. Moreover, the risk factors of regulatory capture are identified in those cases where lobbying efforts succeeded in affecting to the content of the law and the outcome harmed the public interest. In addition, the article discusses the consequences of the chosen regulatory solutions and examines whether the regulator had viable alternatives.

The analysis covers the legislative drafting process in working groups and the Ministry of Finance as well as decision-making in committees and parliamentary plenary sessions. The legislative drafting processes of 1994, 1998 and 2008 are addressed with a specific focus on the exemptions. The possibilities for answering the research questions are limited by the fact that, although Finland is an international leader in governmental and ministerial transparency, parliamentary transparency is lacking. Moreover, deficiencies in archiving practices and consultation processes severely hindered the investigation into the factors affecting the decisions in these three legislative processes. Consequently, it was necessary to use various methods to answer the research questions (see section 1.4). In each legislative process, the statements and debate chosen for analysis focused on exemptions from the scope of the CFC rules; thus, no other elements of the regime, such as the deductibility of losses and creditability of foreign taxes, are addressed in this context. Furthermore, the current Finnish CFC rules as well as harmonization initiatives by the EU and OECD are excluded from the scope of the analysis. (Edilex editorial team)

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