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Power transmission firm paid just 0.28% tax rate after sell-off

Electricity grid manager Caruna paid tax at a rate of just 0.28 percent on its profits last year. The Caruna grid was sold off by majority state-owned power firm Fortum in 2014, and is now owned by international private equity firms and Finnish pension funds. Last year the firm was forced to moderate planned 30 percent price increases after a public outcry.

Caruna.
Image: Petteri Paalasmaa / AOP

The company that controls some 20 percent of Finland’s electricity grid, and planned massive price hikes last year, paid a tax rate of just 0.28 percent in 2016.

The company has achieved such a low rate by borrowing money from parent companies in other tax jurisdictions, and then using profits to pay back that debt and interest. In 2014 the company paid just 1.6 percent tax on profits of 50 million euros, prompting criticism from Prime Minister Juha Sipilä.

"All in all, you could conclude from tax avoidance arrangements that levels selfishness in Finland have become sickeningly high," Sipilä told Yle.

In 2016 the company made profits of 150 million euros but ended up paying tax at a rate of just 0.28 percent, thanks to some 193 million euros of debt owed to its parent company. That’s thanks to a complicated ownership structure established by the new owners of the previously state-owned infrastructure.

Huge network

Their holding companies are based in Luxembourg, Holland and the Cayman Islands, among the Caruna owners to avoid as much tax as possible.

Caruna runs the 80,000km of cables that supply power to some 660,000 domestic and corporate customers. It was created as an independent firm in 2014, when it was sold off by Finland’s largest power firm, Fortum—which is majority owned by the Finnish state through its investment holdings firm Solidium.

The sell-off was controversial, as electricity grid networks are natural monopolies. That is, it is not economically viable to build a second electricity grid, so whoever controls this one has a great deal of power in setting prices. That power is supposed to be tempered by regulators, in this case by the Energy Authority.  

Then-Minister for the Economy Jan Vapaavuori claiming the responsibility lay with the then-Minister for state ownership steering, Pekka Haavisto. He in turn claimed the matter was the responsibility of the government as a whole.

Heavy investment

In the end Finnish municipal pension fund Keva took a 12.5 percent stake in Caruna, and private pension fund Elo gained 7.5 percent of the firm. This eased the concern about key infrastructure being controlled by foreign capital, which in this case came in the form of First State Investments, which took a 40 percent stake, and Borealis Infrastructure, which bought a similarly-sized stake.

The company claims it is not engaged in tax planning, but is part of a ‘capital intensive’ industry in which debt and loans are an important tool. Storm-damaged transmission cables need to be repaired at a cost of two billion euros, says Caruna, and that costs money that is borrowed from banks and institutional investors as well as holding firms.

"We are investing around two hundred million euros per year in improving the electricity grid over the next decade," said the firm’s CEO Jyrki Tammivuori. "Loans have been taken out from Caruna’s Dutch holding firm, to whom of course we repay the capital and the interest."

According to Tammivuori it is misleading to look at Caruna only through the company’s profits and taxes paid.

Natural monopolies in the spotlight

"It’s like failing to take into account a person’s interest costs on their housing loans," said Tammivuori.

Natural monopolies were a major topic on the news agenda in the winter of 2016, with Yle not immune from the discussion. Yle used to own the broadcast transmission networks in Finland, before selling them off piece by piece in the 2000s to Digita.

Digita is now owned via holding companies in Luxembourg, with First State Investments one of the owners. As the network is a natural monopoly (it is not financially viable to build a competing network), the firm has a free hand to set prices.

"Digita announced the price, just said ‘that’s it now'," said former Yle Director General Mikael Jungner to Helsingin Sanomat in 2014. "The prices weren’t really negotiated, their position was extremely inflexible."

Yle used the money raised from the sale to fund digitisation of its broadcasts.

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