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March 4, 2021

Finnfund assesses the implementation and results of its tax policy

In early 2018, Finnfund introduced a tax policy to support responsible tax practices in its projects. Now, Finnfund has reviewed the implementation, results and potential development needs of that policy. How has Finnfund’s tax policy been implemented in practice? What kind of results have we achieved because of this policy?

Finnfund’s tax policy is founded on the idea that promoting responsible tax practices is an essential part of Finnfund’s role as a development financier and impact investor: Finnfund’s mission is to promote economic and social development in developing countries. For this to take place, target countries require tax revenue and payment of other tax-like fees. Tax revenue and other tax-like fees paid by companies to the public sector in developing countries constitute one of the development aims of Finnfund’s work with the companies it finances.

“Our tax policy has enhanced the role of tax responsibility as a focus area in Finnfund’s work and in our assessment of our investees’ responsibility and sustainability practices. The policy has also improved our own employees’ understanding of tax matters. The tax policy has made our process of analysing tax-related impacts more systematic,” says Legal Counsel Veera Mäenpää, who has played a key role in the drafting and implementation of the tax policy.

Responsible tax practices are an essential part of Finnfund’s responsibility work

The tax policy has made responsible tax practices an essential part of Finnfund’s efforts in promoting responsibility and sustainability: Finnfund assesses the tax responsibility practices of potential projects before granting them funding, and clauses on responsible tax practices and reporting are now included in the investment agreements Finnfund enters into.

Finnfund also monitors the projects it finances closely and encourages the project companies to draft their own tax policy. The taxes and other tax-like fees paid by Finnfund’s project companies to their host countries are monitored by Finnfund on an annual basis. The tax footprint of companies financed by Finnfund is published in Finnfund’s annual report. This information is reported on a country-by-country basis.

“International taxation and country-specific tax practices are often complicated, which is why we have endeavoured to improve our legal and investment teams’ know-how in this area by providing them with relevant training. We also consult external experts whenever necessary,” says Mäenpää.

Finnfund has also formed an internal tax working group that consists of experts from its legal, development impact and investment teams. Finnfund’s Board of Directors gained more international expertise in April 2018 when the Director for International Tax Affairs at the Ministry of Finance, Antero Toivainen, joined the Board.

Transparent ownership and financial structures

For the purposes of assessing the implementation of its own tax policy, Finnfund’s professionals reviewed more than 50 tax analyses that had been prepared as part of the pre-investment analysis. The purpose of these tax analyses is to ensure that Finnfund is aware of investees’ group structures, and financial structures before an investment decision is made. Finnfund assessment focuses particularly on checking whether income tax revenue is generated by the operating results of project company in the developing country in question. Finnfund aims to ensure that its investee companies’ financial returns and taxes paid from those financial returns are not reduced artificially. Before making the decision to finance a project, Finnfund wants to ensure that the project company’s income and taxes paid to the developing country in question are not reduced artificially. Finnfund also monitors this throughout the project.

“It has been interesting to assess the implementation of the tax policy. It proves that systematic assessment of our project companies’ tax practices has made their tax structures more transparent and generated important dialogue between us regarding their responsible tax practices. At the same time, our own teams have gained more experience, and we have been happy to notice that the quality of our tax analyses continues to improve,” Mäenpää explains.

The assessment of tax responsibility of Finnfund’s investees concentrates on five areas:

  • tax holidays and concessions;
  • existence and use of holding companies;
  • transfer pricing and intra-group transactions;
  • thin capitalisation and potential misuse of intragroup loans; and
  • hybrid structures weakening responsible tax practices.

As an example, Finnfund has yet to encounter situations where a project company’s tax holidays or incentives would not have been compliant with Finnfund’s tax policy. In other words,up to date, Finnfund’s investees had not received such tax benefits which woud not have been available to other similar investments in the country in question. With respect to transfer pricing, in few instances Finnfund has demanded further information from some of its investees’ regarding their transfer pricing practices to ensure that their pricing was at arm’s length and that the investees complies with the tax policy.

Taxes help develop societies and services

When tax revenue accruals are assessed, the focus is often on corporate taxes. However, it is important to understand that other tax-like fees paid by businesses and cash flows generated by sales taxes, value-added taxes and various licence fees are also an important source of income to governments in developing countries. For example, if we examine Finnfund-financed companies’ payments to their respective governments, we notice that the total amount of taxes and other tax-like fees is 40 per cent higher than the mere corporate tax revenue.

For example, in 2019, companies financed by Finnfund paid 638 million euros in taxes and tax-like fees to their respective countries of operation.

Updated tools – no need to revise the policy

In addition to its own tax policy, Finnfund has committed to comply with the Responsible Tax Principles of European Development Financiers (EDFI). In comparison to EDFI’s principles and other financiers’ tax policies, Finnfund’s tax policy and assessment process are considered to be very detailed and comprehensive.

“We want to pioneer and promote responsible tax practices and engage in discussion in this topic. This is an important part of our principles of responsibility & sustainability and of our work as a development financier. In order to achieve results, we must identify and select the right places and means where we can impact the world through our investments – without compromising our principles,” says Mäenpää.

The set of questions used for the tax responsibility assessment process and the clauses relating to responsible tax matters used in Finnfund’s investment agreements were reviewed and updated in 2020, on thebases of experiences gathered. The tax policy itself has worked as a firm foundation for Finnfund’s practical work and for now, it was found that there is no need to revise the policy. Finnfund continues to monitor the development of international tax regulations and practices and will update its policy and tools as and when necessary.

You can read the tax policy assessment memorandum here: Finnfund’s assessment of the implementation, impact of and potential development needs for its responsible tax policy.

Photo: Finnfund’s tax policy was released in 2018. The preparation phase involved many discussions and meetings with various experts and stakeholders.

Read more:
Finnfund’s responsible tax practices and tax policy
Responsible tax – our work in practice

Further information:
Veera Mäenpää, Legal Counsel,, tel. +358 40 641 1587
Kaisa Alavuotunki, Head of Impact,, tel. +358 41 522 3693

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