Finland has lost about 90 million euros in tax revenue over the past five years due to tax arrangements made by the country's largest electricity distribution companies, according to a new report issued by corporate watchdog Finnwatch on Tuesday.
While electricity transfer firms have been in the media spotlight in recent years due to significant transfer fee hikes, Finnwatch said that less attention has been paid to the companies' aggressive tax planning.
Finnwatch noted that the two firms have a combined one-third market share in the country's transmission market.
The group's tax expert, Saara Hietanen, said that electricity firms Caruna and Elenia were taking advantage of Finland's corporate tax rules.
Finnwatch said that financial statements from the past three years showed that the companies were both heavily in debt and that their operations and assets were almost completely financed with debt, rather than owner-based equity investments. The NGO said this practice, known as undercapitalisation, was a common form of aggressive tax planning.
It added that both companies' tax planning was based on the use of shareholder loans and Finland's weak tax legislation.
"Caruna continues to use the so-called balance sheet exemption in its tax planning, which allows it to deduct all interest expenses paid to company shareholders in its taxable income," Hietanen said.
Loose laws and loopholes
The watchdog noted that Finland's laws on such practices are loose and feature loopholes that can help firms avoid paying taxes.
Two years ago, Finnwatch issued a report which accused the government of failing to crack down on tax avoidance. Around that same time, it was reported that Caruna had paid tax at a rate of just 0.28 percent on its profits.
Caruna is partly owned by the Finnish pension fund companies Elo and Deva as well as by Canadian-based investment firm Omers Infrastructure and Australian-based First Sentier Investors.
Meanwhile, Elenia is owned by the State Pension Fund of Finland along with German based international investment giant Allianz Capital Partners as well as Australian investor Macquarie Infrastructure and Real Assets.
Debt heavy
According to Finnwatch, Caruna Group's Finnish parent company had loans on the books of about 775 million euros and that the related interest expenses for that debt was about 75 million.
Elenia, the watchdog reported, had funneled shareholder loans to its Finnish mother company via Luxembourg and the Netherlands. Finnwatch said it expected the firm to take advantage of the balance sheet exemption and claimed it is looking for higher deductibility of interest expenses.
"In practice this means that through such an arrangement, the firm expects to avoid taxes of around 100 million euros over the next 10 years," Hietanen said.
Finnwatch noted that changes were made to Finland's interest rate deductions a couple of years ago but that the balance sheet exemption law was still on the books.
A Finnwatch survey of parliamentary parties last summer found that, with the exception of the centre-right National Coalition Party, most parties were in favour of tightening interest rate deduction restrictions.
The Centre and the Swedish Peoples' Party were the only parties that did not take a position on the matter, according to Hietanen.