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Finnwatch: Government failing to crack down on tax law loophole

A fresh report from the Finnish human rights watchdog Finnwatch accuses the government of failing to crack down on tax avoidance.

Kansalaisjärjestö arvostelee sähköverkkoyhtiö Carunaa verokikkailusta.
The NGO report claims electricity firm Caruna engages in tax evasion. Image: Henrietta Hassinen / Yle
Yle News

Finnwatch, an NGO keeping its eye on the human rights impacts of Finnish companies, says the government failed to implement tax law changes that could limit corporate tax planning.

The watchdog cites the case of Finland's electricity network provider Caruna. Two years ago, Yle reported that Caruna was taking advantage of legal tax avoidance schemes involving holding companies based in the Netherlands in order to pay just 1.6 percent tax on over 50 million euros in profit. The company's tax planning resulted in a loss of 12 million euros in tax revenue for the Finnish state in 2016.

Finnwatch says in its report that the loophole that makes this kind of tax evasion possible is known to lawmakers, but they have chosen to turn a blind eye to it in their ongoing talks leading up to a reform of Finnish tax laws.

"The government could fix this loophole, but commerce is lobbying against it," the report reads.

Finnish pension firms co-investors

In 2014, majority state-owned energy company Fortum sold its electricity transfer unit Caruna to three international equity funds: Borealis Sumosan, First State Investment, and CFS Managed Property Limited. The Finnish pension firms of Keva and Elo also hold 12.5 percent and 7.5 percent ownership in the company, respectively.

Caruna is currently Finland's largest electricity network company, with about 20 percent of the market. All in all, it serves about 670,000 corporate and private customers. Shortly before the news of the tax evasion broke, Caruna had announced 30 percent price hikes for many of its customers.

At the time, Prime Minister Juha Sipilä was critical of Caruna's actions.

"All in all, when it comes to systems set up for tax avoidance, you could say that selfishness in Finland already supersedes the degree of illness," the premier said in a 2016 interview.

Caruna claims debt due to investments

Caruna's Deputy CEO and CFO Jyrki Tammivuori denies Finnwatch's accusations that Caruna uses its foreign investor loans for tax planning purposes.

"No, it does not. The owners have invested a considerable amount of their own capital, in addition to pledging shareholder loans that we wouldn't have received on the market," Tammivuori says. "A significant investment phase is also underway in the electricity market, and foreign equity is necessary for this investment. Grid operators will invest eight billion euros by the year 2030."

Finnwatch says that such tax planning is due to "balance sheet release" wording in Finnish tax law that allows companies to deduct interest from their taxation if they can prove that the entire group is operating in the red.

According to the 2017 financial report from Caruna's Dutch parent company, the company carried more than 900 million euros in shareholder loans. Interest on these loans makes Caruna look as if it is heavily in debt.

Finnwatch estimates that there are about 60 companies in Finland that take advantage of the rule, although it says that not all of them resort to tax planning in order to receive the tax break.

Government bows to pressure?

Parliament is currently considering reforms to Finnish tax law to bring legislation into line with updated European Union directives cracking down on tax avoidance. In the original draft of the government's proposal from December 2017, the ministry of finance proposed that the "balance sheet release" wording be removed from the law, as it was recognized that it enabled tax avoidance.

The language was however restored in a new draft of the reform proposals submitted this September, in effect allowing the activities of Caruna and the other tax planning companies to continue.

Finnwatch claims in its report that the provision was left intact due to corporate lobbying efforts. Yle asked the CFO of Caruna if his company had lobbied politicians on the issue.

"No, but there has been internal discussion of the matter within our field. [The umbrella energy company group] Finnish Energy was the one making a statement," Tammivuori replied.

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