Finland to ensure tax responsibility in development cooperation

Aggressive tax planning, utilisation of tax havens and tax holidays that distort fair competition are not allowed in development cooperation.

The Ministry for Foreign Affairs published today a policy which aims to ensure that companies receiving development cooperation funding operate in a tax responsible manner. The policy is part of the Finland's Taxation for Development Action Programme (2020-2023) implementation.

• Tax responsibility principles in Finland's development cooperation funding to the private sector
• Taxation for development – Finland's Action Programme 2020–2023

The policy specifies the basic principles to which the companies receiving funding must commit.

1. Aggressive tax planning is not allowed. Aggressive tax planning refers to arrangements made by companies to either artificially reduce taxable income significantly or avoid taxes completely. A company practicing aggressive tax planning may, for example, transfer income generated in a poor developing country to be taxed in another country where the tax rate is lower. In this case, the country that should have received the taxes loses income that would be used for important basic services.
2. The policy also prohibits the utilisation of tax havens for investments made with development cooperation funding which are not made directly in the target country but through a fund or company located in another country. In the policy, a tax haven refers to countries or areas with a low or non-existent tax rate and low regulation which have been deemed non-transparent by the OECD or the Council of the European Union. Investment arrangements made through these countries could present a risk of tax evasion.
3. Companies receiving development cooperation funding should also not require tax holidays which distort fair competition for themselves, in other words, tax exemptions or reliefs. Otherwise, tax holidays and other benefits available to all investors offered on similar grounds by the country are allowed.
4. In order to monitor and ensure companies’ tax responsibility, it is also required that companies act and report their business operations transparently as required by the tax authorities in the countries where they operate.

The policy concerns all Finland’s development cooperation funding to the private sector. Special implementation instructions on the policy will be provided for the Ministry for Foreign Affairs’ private sector instruments, such as the business partnership programme Finnpartnership promoting business operations between Finland and developing countries and the development finance institution Finnfund investing in companies operating in developing countries.

Finnfund has strengthened its expertise in international taxation

Finnfund renewed its tax policy in 2018 and assessed its implementation simultaneously with the policy work. Finnfund’s intermediate evaluation is available on Finnfund’s website.

“We want to be a pioneer and promote tax responsibility and related discussion. It is an essential part of our responsibility work and development financing work. It has been great to note the tax policy has strengthened the role of tax responsibility in Finnfund’s responsibility work and investment responsibility assessments. At the same time, it has supported the strengthening of our personnel’s tax expertise,” says Helena Arlander, Deputy CEO of Finnfund.

Companies are significant development cooperation partners

The private sector is an important partner in achieving the sustainable development goals as a solution creator, employer, service provider and financier. Private companies are crucial partners for Finland’s development policy. The sustainable development goals cannot be achieved solely with official development cooperation funds, but investments from companies are also required. Companies play an especially important role in creating jobs.

Taxes and tax-like payments paid by companies comprise a large part of the tax base in developing countries. With tax income, developing countries can offer basic services such as education and health care to their citizens. For the development of societies, it is important that taxes are collected in the countries where the taxable income has been generated.

It is important in terms of internationally fair taxation that tax systems and administrations are functional and that corruption and illicit financial flows do not obstruct the appropriate collection of taxes and other payments.

“It is important that Finland requires tax responsible actions from companies receiving development cooperation funding. This is also a question of Finnish values: good governance and bearing shared responsibility,” says Pekka Hirvonen, Director, the Ministry for Foreign Affairs.