Who generated the loopholes? A case study of corporate tax advisors’ regulatory capture over anti-tax avoidance legislation in Finland

According to the public interest theories of regulation, governments should regulate in order to maximize the social welfare of a society as a whole (Boehm 2007). In this sense, regulation could be considered economic policy intervention that should aim to correct market failures that threaten social welfare (Pigou 1932). However, as the corporations strive to maximize short-term profits, their interest is often in conflict with the welfare of the whole society. The conflict is evident in the given context of corporate taxation, because income tax means direct regulatory cost for a corporation, but the corporate benefits of taxation emerge indirectly and within a longer time frame. For this reason, the corporations have an incentive to influence regulation to help themselves. This might result in government failures if a regulatory agency such as a ministry or parliament advances the interests of some corporations over the public interest leading to a net welfare loss for the society. This phenomenon described as the concept of regulatory capture but also often called policy capture, was introduced by Nobel Memorial Prize in Economic Sciences laureate George J. Stigler (1971) in an article entitled The Theory of Economic Regulation. Regulatory capture occurs when all these three criteria are met within a policy process (Carpenter and Moss 2014, OECD 2017a):

There is an explicitly defined policy goal that either helps or harms the public interest.

Regulatory capture is often driven by corporate lobbying, but these two concepts must be distinguished as regulatory capture is not necessarily a goal or a consequence of lobbying, because not all influence on policy harms the public interest (Boehm 2007). This harm derives from a process through which regulatory capture not only leads to a misallocation of resources, but also creates economic and social inequality that reduces trust in democratic society and thus deprives it of its legitimacy (OECD 2017a, see section 3).

Stigler focused specifically on the corporations’ role in policy processes, but later theoretical and empirical contributions have presented a more nuanced picture by also discussing remedies of regulatory capture (Shapiro 2012) as well as the influence of other interest groups and civil society organizations that lobby things such as human rights (Becker 1983; Peltzman; 1976; Posner 1975; Forstater and Christensen 2017). However, such organizations do not target regulatory capture as they do not extract rents for their beneficiaries and usually support public interest based on their bylaws.

The decomposition between strong capture and weak capture introduced by Carpenter and Moss (2014) clarifies the different circumstances in which regulatory capture occurs. A strong capture means the corporations have been able to set the agenda, i.e., the initiative to enact or amend legislation comes from them. The case study in section 5 describes the context of a weak or corrosive capture, when other groups such as civil society organizations, individual whistleblowers and the media, have set the regulatory agenda of anti-tax avoidance. In this case, the regulatory capture is restricted merely to reducing or limiting regulative costs for the industry.

Several empirical approaches have been used to study regulatory captures. A stream of studies has exploited econometric methods in the search for evidence on lobbying. Several studies have pointed out the statistical correlation between the political connections of firm executives and board members and the economic performance of the firms (Amore and Bennedsen 2013; Cingano and Pinotti 2013; Coviello and Gagliarducci, 2010; Deniz and Mishra 2014; Faccio, Mazulis, and McConnell 2006; Goldman, Rocholl, and So 2013; Khwaja and Mian 2005). However, these statistical methods fail to address the clear causality between actual lobbying and its results since they do not identify any lobbying event or its direct outcome. The outcome of these studies also lacks generalizability since each is tied to their specific empirical context.

Hertel-Fernandez, Mildenberger, and Stokes (2018) have used observational analysis and surveys to find evidence of a mechanism by which corporate interest groups are able to influence US Members of Congress through their staffers. Botzem (2008) draws from an analysis of developments in the organizational body that sets accountancy standards and argues that private sector accountants play the main role in rule-setting. However, Young (2012) was not able to find straight-forward evidence on how the private sector was able to influence Basel II rules on banking in his study based on archive material and interviews. These studies considered the institutional setting of regulatory capture, but do not identify the capture itself as I do in my case study.

The research on Finnish lobbying has focused on the role of interest groups on legislative processes at a general level as well as the election funding of political parties. Vesa, Kantola, and Binderkrantz (2018) have used surveys of interest groups and civil servants to study the involvement of interest groups in policy-making. They found corporate interest groups and trade unions have important role in Finnish policy making and use their influence in working groups and public administration consultation processes rather than in parliament. Blom (2018) arrives at similar results through interviews of policymakers from the perspective of political history. However, a recent report (Hirvola et al. 2021) based on various methods indicates the corporate interest groups and institutional organizations have emerged as more significant lobbyists compared to the trade unions. This study also highlighted the importance of early influence in legislative drafting processes as well as different channels of lobbying where also informal contacts play important role. Kuusela and Kantola (2019) show how the ultra-wealthy have considerable control over the Finnish corporate interest groups. These contributions provide evidence of the influence of certain groups at a general level, but the approach does not systematically focus on results or the means of lobbying in individual cases.

Regulatory capture is not limited to legislation processes, but public agencies’ functions could also be captured when they apply laws and treaties. Korkea-aho and Leino (2017) analyzed the decisions of the EU courts and the European Ombudsman and found evidence showing that third parties have an influence on EU agencies’ decisions on the public disclosure of documents. Kramnaimuang King and Hayes (2017) arrived at similar results on the corporate influence on risk regulation based on analysis of relationships between regulators and the Australian pipeline industry.

Regulatory captures specifically in the context of corporate taxation and tax avoidance have been discussed within the discipline of international political economy. These studies have identified the technicality of tax legislation as a key factor (Surrey 1957; Peters 1991; Seabrooke and Wigan 2016). The current international corporate tax regime was created in the 1920s in the League of Nations and its deficiencies undermining welfare were highlighted in academic research already in the 1960s when cross-border trade started to grow exponentially (OECD 2013; Ylönen 2016). However, this critical discussion decelerated with very little impact by the end of 1970s and the regime remained more or less the same until the beginning of the 2010s. The highly technical nature of international tax legislation, and the relatively closed communities of officials, practitioners and researchers that mastered the laws and the practices, contributed to protecting the regime from political interventions (Forstater and Christensen 2017). Finally, the end of the first decade of 2000s saw an increase in public interest about tax avoidance caused by several data leak scandals that coincided with the financial crisis of 2007–2008. Consequently, many countries have adopted anti-tax avoidance rules in their recent tax reforms to answer the public call and patch national budgets. This development has been led by the OECD (2021) BEPS project, initiated in 2013. However, the corporate lawyers’ technical expertise and superior corporate lobbying resources have played their part in corroding the resulting OECD recommendations and subsequent national anti-tax avoidance legislation (Christensen 2020a).

Earlier research on the global wealth chains has also highlighted the specific role of tax advisors and accountants in facilitating profit shifting (Seabrooke and Wigan 2016, 2017; Baden and Wigan 2017; Finér and Ylönen 2017; Finnwatch 2017). The global wealth chain theory is also useful in analyzing the role of advisors and accountants who serve multinational corporations, influencing legislation in their clients’ favor (Christensen 2020a). This influence is bolstered by the epistemic nature of transnational tax specialist communities that has an impact on how civil servants and tax scholars take part in political processes such as legislative drafting (Carpenter 2007; Genschel and Rixen 2015; Finnemore and Sikkink 1998; Keck and Sikkink 1998).

There have also been a few recent empirical contributions specifically related to tax avoidance regulation. A case study by Sikka (2008) shows how the Big Four accounting firms

The term Big Four refers to KPMG, EY, Deloitte and PwC that are global networks offering audit and tax consulting services.

Raitasuo (2018 and 2019) has used empirical court material to show that many – or perhaps most – publishing tax scholars in Finland have their clients’ interest at stake in tax avoidance cases related to their research. This might impact their interpretation of law and political involvement (Eisenberg 1993). For this reason, Raitasuo (2019) calls tax law research the science of tax avoidance. Christensen (2020a) used qualitative content analysis (Schreier 2012) of two public consultations and interviews of informants involved in the policy process to analyze how private sector tax specialists and civil society organizations influenced the OECD country-by-country reporting (CBCR) standard

The CBCR standard defines how multinational corporations must report their business activities and taxes accrued in different countries.

Tax avoidance that exploits interest deductions has been discussed in Finland within ministry working groups since the 1970s when Canada had already adopted an IDLR (Ruf and Schindler 2015). However, this discussion remained mostly private between tax specialists until 2009, when the Ministry of Finance prepared a preliminary report on options to introduce IDLRs in 2009. The report studied IDLRs in ten reference countries and included a statistical study that showed the increase in interest deductions in Finland

The author received a copy of all the consultation materials from the Ministry of Finance as the documents are public information in Finland.

Eleven of the stakeholders responded to the request and two other groups submitted a statement (see Figures 1 and 2 and Table 1). Most of the respondents represented private interests as the consultation involved six corporate interest groups and a tax advisory interest group. The consultation also involved an economic research institution, two tax scholars and three public entities. However, the consultation did not involve any civil society organization or other entity representing general public interests

The public entities in Finland are generally considered not to represent any systematic political views as their responsibilities are defined by law and other means of political steering. However, e.g., tax authorities pay attention to aspects such as governance of tax system and equal tax control that are meaningful from the perspective of their responsibilities defined in law. Tax professors and researchers do not represent any specific perspective as their personal political views and other interests vary. They are generally considered to represent the views of their academic discipline.

Figure 1

Figure 2

The views on adoption of IDLR varied according to the interests of different groups. The corporate interest groups and the tax advisors were generally against any IDLR (see Figure 1). Two of the corporate interest groups did not present any clear view for or against the rule whatsoever. In contrast, all the tax professors and public entities considered Finland should adopt an IDLR.

Also, the views on the facts regarding tax avoidance varied a lot. The Confederation of Finnish Industries EK (Elinkeinoelämän Keskusliitto)

EK is considered to be the most powerful corporate interest group representing 15 300 member companies including the largest corporations operating in Finland.

EK cited no empirical evidence to confirm these claims that were in contrast with the data referred to in the statements of tax authorities and tax professors that showed debt shifting erodes the Finnish tax base. E.g., Professor Helminen from the University of Helsinki stated

Professor Helminen is the supervisor of the author's doctoral thesis.

The Large Taxpayers’ Office responsible for tax control of all major MNCs presented detailed case examples of debt shifting as well as statistical information of possible tax losses in their statement. They studied more closely 23 companies with high interest expenses that had paid out intra-group interest expense of total € 350 million in 2006 and € 494.6 million in 2007. In most of these 23 cases, a company had received a group contribution that more or less matched the interest paid abroad. This consequently eroded the Finnish tax base by over € 100 million

The CIT rate in Finland was 26% back then. The total base erosion caused by thin capitalization could have been much higher as the case study covered only 23 companies. The 60 companies with largest interest costs had paid out intra-group interest worth over €1.4 billion in 2006 and €1.6 billion in 2007.

Some of the corporate interest groups admitted the base erosion in their statements:

The Finnish Chamber of Commerce considers that the Finnish legislation allows certain tax avoidance arrangements that could be considered leading to results that are not in line with general principles of international taxation and cause inequality between taxpayers.

Despite this, The Finnish Chamber of Commerce concluded that the deductibility of interest should not be limited at all in the current economic situation (financial crisis).

Some of the corporate interest groups proposed that Finland should facilitate base erosion instead of protecting its tax base with an IDLR. The Association of Finnish Tax Advisors suggested “Finland should also consider rules that favor equity contributions that are available e.g., in Belgium and in the Netherlands". Also the Family Business Network Finland proposed the adoption of notional interest deduction (NID) for equity contributions. However, the European Commission (2015) has considered deductions of this kind to be to harmful tax competition as they facilitate profit shifting.

The views on the content of the possible IDLR also divided between the different groups (Figure 2). The corporate interest groups and an association representing private sector tax advisors claimed that the application of the possible rule should be limited to merely artificial arrangements and only to major cross-border intra-group transactions. These targeted rules could be considered to be ineffective in tackling anti-tax avoidance as their application requires an ambiguous case-by-case assessment of taxpayers’ motives similar to the application of GAAR (OECD 2017b). Because of this, the Large Taxpayers’ Office proposed an explicit IDLR, whose “application should not be based on possible motives of taxpayers as it is extremely difficult for authorities to prove if there are no business reasons for such arrangements”. Also, the Finnish Tax Administration concluded such fixed ratio rule would be better as it would increase legal predictability by being of benefit to the taxpayers as well.

The 2009 consultation did not materialize into the legislative drafting process of the IDLR before the change of right-wing coalition government after the 2011 parliamentary elections. Therefore, it is possible that the corporate interest groups were able to delay the application of the rule with their statements, indicating a weak or corrosive regulatory capture. The new six-party coalition government with parties from both left and right in the parliament was led by Prime Minister Jyrki Katainen of the center-right National Coalition Party. The Finance Minister Jutta Urpilainen responsible for tax legislation drafting was from the center-left Social Democratic Party.

The adoption of the IDLR was not included in the government program (Prime Minister's Office, 2011) that merely contained a general statement that “Finland will be active in tackling international tax flight”. However, the situation changed on November 17, 2011, when the Keskisuomalainen newspaper had a scoop about the thin capitalization of Mehiläinen, a major health care corporation (Martinmäki 2011). This caused much upset as nearly all of Mehiläinen's turnover came from public sector health service procurements. Just four days after the scoop, Finance Minister Urpilainen published a press release on November 21 in which she stated that the rules on interest deductions would be amended to tackle debt shifting. The Ministry of Finance published a similar press release the next day (Ministry of Finance 2011). Due to this, the IDLR is also referred as the Mehiläinen law (Bernitz 2013).

Consequently, the regulatory drafting of the IDLR began in the Ministry of Finance and it launched public consultation of the first IDLR draft in April 2012. The proposed rule was much against the will of the corporate interest groups in the 2009 consultation

All the consultation documents are available at https://vm.fi/hanke?tunnus=VM044:00/2012.

The Ministry of Finance made estimates about the impact of the rule based on 2007–2010 corporate tax returns. It estimated the rule would be applied to around 300 companies and consequently annual CIT income would have increased between € 111–149 million

Approximately 3% of total Finnish CIT income of €4,443 million in 2010.

In total, 25 parties took part in the first consultation round (Table 2). Again, majority of the statements (14) were from corporate interest groups and tax advisory groups. Two tax researchers and the Finnish Tax Administration also provided statements similar to 2009.

In contrast to the 2009 consultation, this time civil society was involved as one non-governmental organization and a trade union submitted statements. Both supported the aim of anti-tax avoidance. Their statements differed extensively from others as they were on a general level with no technical proposals or comments. Many of the other statements included detailed technical comments, specifically the ones by the tax advisors.

Another significant change compared to 2009 was the fact that six parties representing a specific public interest took part in the consultation. These public entities included municipalities’ institutions, publicly owned entities involved with public infrastructure projects and an alliance presenting public employee pension funds. All these parties brought attention to the risk that the proposed rule might affect the financing of their projects or investments. These groups considered the IDLR to be justified, but argued their specific situation deserves an exemption from the rule as their activities promote the public interest. This highlighted a phenomenon, by which public entities representing a narrow perspective resist a rule such as the IDLR that strives to promote the welfare of the society. In some circumstances, this could result in harmful sub-optimization within the public sector as from its viewpoint tax payments and other monetary transfers between public entities could be considered a zero-sum game. This highlights the need for coordination within the public sector when seeking to achieve cross-sectoral policy targets.

Like in 2009, the views presented in the statements varied greatly according to the interests of the various groups. The corporate interest groups and tax advisors were generally strongly against the proposed IDLR (see Table 2 and Figure 3). In contrast, both the tax professors, the Finnish Tax Administration, and civil society considered that Finland should adopt the IDLR. These parties also generally considered the proposed fixed ratio rule to be well functioning (see Figure 4). However, all the corporate interest and tax advisory groups proposed amendments to the rule that would have made it less extensive in tackling tax avoidance. Over half of the corporate interest and tax advisory groups demanded three moderations to the rule: (1) an equity escape rule (EER); (2) an exemption for the real estate business; and (3) the delay of effective date of the rule by a year from 2013 to 2014 (see Table 2). For example, the Finance Finland additionally requested the rule should not cover finance companies.

Figure 3

Figure 4

This time the corporate interest groups based their argumentation on the claim that such a rule would harm the competitiveness of the Finnish tax system and consequently investments. They also claimed that the proposed fixed ratio rule would apply to finance not related to any tax avoidance. EK was again clear with its claims:

Interest costs should be as widely deductible as they are currently and the proposed IDLR should not be put forward.

- -

The proposed general limitation of interest deduction will be applied to all Finnish groups independent of if there is any tax avoidance. This will harm finance of nearly all Finnish corporate groups.

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The IDLR will increase investment costs and decrease the desire to invest in Finland.

Similar claims about negative consequences for the economy were presented by all the corporate interest and tax advisory groups. However, these statements did not refer to any supporting empirical evidence

An exception to this was the statement by the Finnish Venture Capital Association FVCA that included a reference to the working paper that had assessed the likely impacts of IDLR on tax avoidance and investment (Büttner et al. 2008). The paper used a cross-country panel data approach and indicated that thin capitalization rules would be effective in curbing tax planning and have an adverse effect on foreign investment (see also Büttner, Overesch, and Wamser 2018). Other studies have not found any significant effect on investment due to thin-capitalization rules (Weichenrieder and Windischbauer 2008; Ruf and Schindler 2015, Harju, Kauppinen, and Ropponen 2017). However, none of the studies referred to above have assessed the impact on total investments or in the long run. The venture capital investors are the most prone to thin capitalization arrangements, as the great majority of publicly-discussed tax avoidance arrangements in Finland have been made by them (Finnwatch 2016).

The statements by other parties were contrary to those of the corporate interest groups. The Finnish Tax Administration did find the proposed rule would be an effective way to tackle thin capitalization. It also claimed that thin capitalization arrangements had become more popular not only among foreign corporations investing in Finland, but also Finnish MNCs had shifted profits abroad with debt arrangements. Additionally, the Corporate Income Tax Specialist Group, whose members included Ministry of Finance officials and tax researchers favored the proposed IDLR in its memo (Ministry of Finance 2013).

Corporate lobbying against the IDLR had begun after the government announced its plans to adopt the rule in November 2011 (Interview 2019). However, according to the two interviews (2019 and 2020) conducted for this article, the details of the first legislation draft described above were designed by civil servants without significant political influence. The high technicality of international tax avoidance and IDLR also limited the direct influence of the political parties in the legislative details (Interview 2020). The idea was that the political decisions on the details could be based on the consultation round of the draft. Both interviewees said that the corporate lobbyists’ proposals and arguments had some impact on the second draft of the IDLR in September 2012. Corporations were directly in contact with major political parties but also some academics opposed the proposed rule with corporate interest groups at the meeting of the International Fiscal Association Finnish branch in 2012 (Interview 2019 and 2020). The goal of this lobbying could be perceived in the statements of the corporate lobbyist groups (see Table 2).

The lobbying efforts of the corporate interest groups and tax advisors had some impact on the second draft. According to an interview (2019), some of these compromises were made specifically because of requests by Prime Minister's the center-right National Coalition Party (Kansallinen Kokoomus) that has close connections with corporate interest groups (Koiranen et al. 2017). Moreover, the civil servants endorsed some of the amendments as they considered prompt adoption of the rule and wide consent of the details among the government parties was important for the legislation to pass in the parliament (Interview 2019 and 2020). The precautionary principle also played a role in the decisions, as such a rule had not been used before in Finland.

Nevertheless, the explicit fixed ratio rule approach was preserved also in the second draft September 2012, but several major exceptions were included based on the corporations’ and their advisors’ statements that made rule more generous:

The equity escape rule (EER) was included. It meant that the IDLR would not be applied to a group company at all if the equity ratio of the whole group was the same or below the equity ratio of the given group company (OECD 2017b). The justification was based on a claim that such ratio would indicate that interest costs have not been created in tax avoidance structures

However, no evidence backing this claim has been presented. Professor Viitala argued in 2018 that this claim on EER lies on merely hypothetical assumptions (see section 5.4). I discuss the specific features of Finnish EER in section 3.

According to the Ministry of Finance's estimates, these amendments reduced the impact of the IDLR by roughly half compared to the previous version. The number of companies affected decreased from around 300 to 185. The decrease in real estate business is not included in the estimate, which means the actual decrease was higher (see footnote 27). The Ministry estimated the annual CIT income would increase by € 70 million compared to the € 111–149 million in the previous draft.

It could be considered these four amendments promoted by the corporations and their tax advisors facilitated profit shifting, which compromised public interest and thus can be deemed evidence of a weak regulatory capture

I discussed the impact of EER in section 3, the impact of the exemption for real estate business was discussed in the parliamentary consultation. There is also later evidence on thin capitalization in the real estate business (Finnwatch 2020b).

In the second consultation round, 11 stakeholders submitted their statements (see Table 3). Six of them were from corporate interest groups. These groups were still critical of the adoption of the IDLR, but also acknowledged the amendments were positive from their perspective. Therefore, their criticism was less pronounced

However, EK and the Finnish Chamber of Commerce requested in their statements the lowering of the CIT rate from 24.5% to 20% due to the IDLR. This is notable as the government made the decision to reduce CIT correspondingly the following year. This was a significant tax reform that reduced tax revenue by nearly €1 billion, which benefited the corporations and their owners. See government bill HE 185/2013 available at https://www.eduskunta.fi/FI/Vaski/sivut/trip.aspx?triptype=ValtiopaivaAsiat&docid=he+185/2013.

To conclude, the second consultation round did not include any significant new argumentation. Neither did it have a major impact on the final government bill presented to the parliament in November 2012

HE 146/2012 available at https://www.eduskunta.fi/FI/vaski/sivut/trip.aspx?triptype=ValtiopaivaAsiat&docid=he+146/2012.

The IDLR took effect from the beginning of the 2014 tax year. However, it was amended before the effective date as the EBITDA rule was amended to the EBITD

The amortization and value changes of financial assets were no longer included in the formula.

The European Commission made a proposal on the Anti-Tax Avoidance Directive (ATAD) in January 2016 as part of its Anti-Tax Avoidance Package (European Commission 2016). The previous work in the OECD BEPS project played a significant role in enabling the proposal as the EU was committed to the BEPS project and neither the Commission nor the member states had paid much attention to harmonizing thin capitalization rules prior to BEPS (Interview 2020). This is evident as the recommendations prepared in the OECD (2017b) formed the basis of the Commission's proposal.

The proposed ATAD

COM/2016/026 final.

Before forming their view on the Commission's directive proposal, the committees of the Finnish Parliament consulted twelve stakeholders on a few occasions from March to May 2016 (see Table 5)

All the documents are available at https://www.eduskunta.fi/FI/vaski/KasittelytiedotValtiopaivaasia/Sivut/U_7+2016.aspx.

The corporate interest groups and tax advisors were against the proposed directive (see Figure 5). Some of them argued that the directive should not be passed without a more thorough assessment of its economic impact, which was one of the shortcomings of the directive proposal (Interview 2020)

It must be noted that the exact fiscal implications of tax avoidance and its tackling are often impossible to measure (Finér and Ylönen 2017). This was also shown in the BEPS assessment made in Finland the following year, that could only provide numeral estimates regarding thin capitalization but not on other means of aggressive tax planning (Ministry of Finance 2017).

Figure 5

Figure 6

The tax professors, tax authorities and the civil society supported the ATAD. This time, some of civil society organizations also made technical comments as human rights based NGOs Finnwatch and Kepa (predecessor of Fingo) provided detailed proposals to make the rules more effective against tax avoidance

The author worked for Finnwatch at the time.

Agreement about the ATAD in the EU process was agreed exceptionally quickly in June 2016, less than six months after the Commission's proposal

Council Directive (EU) 2016/1164.

However, the final ATAD was somewhat less ambitious than the Commission's proposal, as one of the six anti-tax avoidance rules – namely the switchover rule – was dropped. Also, the interest deduction minimum standard was compromised as the minimum threshold of deductible net interest costs was increased from € 1 000 000 to € 3 000 000, the member states were provided with the chance to use more liberal EER than the Commission had proposed

In the Commission's proposal, EER could only be applied to companies whose interest payments to associated enterprises do not exceed 10% of the group's total net interest expense. The Commission's EER was close to the German version and might have forced Finland to amend its more generous EER (see section 3).

The ATAD minimum standard meant that Finland had to revise its IDLR before the beginning of 2019 to meet the standard. Changes had to be made as the ATAD IDLR covered third party interest costs in contrast to Finnish rule that merely covered intra-group interest. Also, the ATAD did not allow an exemption to real estate business. Consequently, the Ministry of Finance drafted amendments to the law and launched a public consultation for comments in January 2018

All the documentation is available at https://vm.fi/hanke?tunnus=VM169%3A00%2F2017&fbclid=IwAR3lDnL6pDwt2BrEijehIV5e54j7vl7Q-dKDq3zY4Svik7aLsEtDMRAK1H4.

The Ministry of Finance estimated the proposed amendments to the IDLR would increase CIT income by € 46 million annually compared to the effective rule. The long run full annual tax increase potential was estimated at € 106 million. The new rule would apply to 290 companies compared to the 185 affected by the effective rule. The estimates were cautious as they did not include most real estate business (see footnote 27).

The exclusion of the EER was the most significant proposal. The Ministry of Finance had two separate justifications for the exclusion. First, exemption had been used in base eroding tax avoidance. The impact assessment showed the exemption had been applied to 67 companies and the excluded interest costs at € 280 million were one-third of the otherwise non-deductible intra-group interest costs. Second, the EER had harmed taxpayers’ legal security and equality as it had been open to different interpretations.

These proposals attracted unparalleled interest from stakeholders compared to the previous consultations, as the Ministry received 45 statements (see Table 6). The corporate interest groups, tax advisors and private companies submitted 19 statements. As in 2012, parties representing a specific public interest formed another major stakeholder group with 16 statements. In addition to municipalities and other public entities that had also contributed in 2012, this time, several non-profit housing associations as well as non-profit energy companies expressed their view. Tax professors (5), civil society organizations (4)

The author worked at the time for the Social Democratic Parliamentary Group that submitted one of the statements.

Like all previous consultations on IDLRs, the views presented in the statements varied greatly according to the interests of the different groups. The corporate interest groups and tax advisors argued for rules that should generally apply the sheer ATAD minimum standard (see Figure 7). Most of these stakeholders (16/19) representing private interests also demanded that the EER should be preserved and none of them argued for its abolition (see Figure 8). This was much in contrast with the other 26 statements, in which only two stakeholders argued reservedly for preservation of the EER and six stakeholders favored the Ministry's proposition of abolishing the rule. These six parties included civil society as well as tax administration and the Association of Finnish Municipalities. The four civil society organizations supporting human rights and other public interests also insisted on a generally more extensive rule compared to the Ministry's proposal

They e.g. argued the interest to EBITDA ratio of the rule should be lowered to 10%. The current 25% ratio could be considered ineffective to tackle debt shifting based on the OECD best practice approach (see footnote 15).

Figure 7

Figure 8

The preference of public entities presenting specific public interest generally was that the IDLR should exclude their specific activities including non-profit housing, nonprofit energy production and public infrastructure investment.

The corporate interest groups argued in favor of less extensive rules that were mostly based on a claim that extensive rules harm the competitiveness of Finnish enterprises. Diverging from previous consultations, a couple of tax scholars also gave their support to these claims

This corporate view was most visibly shared in the statement of Professor Penttilä, who compared choosing rules exceeding the ATAD minimum standard to “shooting oneself in the foot”. Penttilä has connections with private interests as he has worked for PWC and provided legal statements for companies in legal cases concerning tax avoidance over a long time period (Raitasuo 2019).

The Confederation of Finnish Industries EK was again unambiguous in its argument in favor of a less extensive anti-tax avoidance rule:

Unfortunately, the draft proposal would limit interest deductions more than the directive requires even though these measures cannot be justified based on tackling tax avoidance.

--

The proposal should be amended, and Finland should apply all the possible options in the ATAD to make the rule less extensive in order to secure the competitiveness of Finnish enterprises.

--

If the proposed rule is put forward against our conception, the enterprises should be compensated for increases in tax costs by reducing the CIT rate by at least two percentage points [€ 600 million].

Also, the Finnish Chamber of Commerce argued that the EER would not facilitate tax avoidance by referring to legal praxis:

The current EER can be considered to be well-functioning based on legal praxis. The Supreme Administrative Court has ruled its application in decisions KHO:2018:2 and KHO T 65 10.1.2019 in a way that e.g. artificial ownership restructurings cannot be used to apply the exemption. If these situations are still considered problematic, clarifying the definition of concept would effectively limit interest deductions.

However, the argument could be criticized as generalizations could not be drawn based on the court cases as they only covered very specific arrangements (Vesikansa and Stellato 2018)

I have discussed the issue more thoroughly in my blog (Finér 2018a and 2018b).

The extensive lobbying by the corporate interest groups had an influence as several amendments were included in the final government bill after the consultation

See the government bill HE 150/2018 available at https://www.eduskunta.fi/FI/vaski/KasittelytiedotValtiopaivaasia/Sivut/HE_150+2018.aspx.

The Ministry of Finance estimated that after these amendments, the impact of the IDLR was € 10 million more than the then effective rule, which was less than a quarter compared to the € 46 million impact estimate of the previous draft version. Nearly all of the decrease was due to the inclusion of the EER. Because of these changes, the number of affected companies decreased from 290 to 221. The impact on real estate business has not been included in the estimates (see footnote 27).

These amendments indicate a similar weak regulatory capture compared to 2012 as it could be considered they harmed public interest in favor of a few dozen corporations (see section 5.2). Also, this time, the amendments requested by several entities representing specific public interest might have supported the claims to amend the legislative draft.

The final parliamentary consultation in fall 2018 did not lead to any notable amendments to the IDLR (see Table 7). However, some opposition left-wing and center parties demanded abolishing the EER and introducing other more extensive measures to tackle tax avoidance such as reducing the EBITD threshold to 10% in line with the OECD recommendation

See footnote 15 and Finance Committee memo VaVM 21/2018 available at https://www.eduskunta.fi/FI/vaski/Mietinto/Sivut/VaVM_21+2018.aspx.

The theory of regulatory capture is drawn from the notion that corporations’ profit-seeking is not limited to the given regulatory framework. The corporations are also active political actors that extract rents and minimize their regulatory costs by influencing the regulatory framework in their favor (see also Karlsson and Matthiasson 2015). In this article, I presented a thorough case study that allows nuanced analysis of the mechanisms of regulatory capture based on several public consultations covering 148 stakeholder statements on interest deduction limitation rules (IDLR) in Finland over a nine-year period. Thus, I answered the call from Carpenter and Moss (2014) by describing how and to what degree regulatory capture works in a particular setting.

These findings show how corporate interest groups were able to affect the anti-tax avoidance regulation in favor of some corporations (see also Viherkenttä 2020; Väisänen 2020). This weak regulatory capture was supported by tax advisory interest groups. Tax advisors benefit from their corporate clients’ tax avoidance, since it is facilitated by tax advisory services (Finnwatch 2017; Seabrooke and Wigan 2017; Sikka 2018). These findings present unique evidence on weak regulatory capture as I was able to analyze how specific interest groups’ statements influenced the wording of the law, thus abusing the public interest. The inclusion of the equity escape rule (EER) in the IDLR after both 2012 and 2018 consultations was the most evident proof of the weak regulatory capture, but the case studies also provide additional evidence (see section 5). The adoption of EER alone has caused tax losses of at least tens of millions of euros each year. The Ministry of Finance assessments show the EER benefited only several large MNCs. These MNCs gained a competitive advantage compared to over 100,000 other Finnish firms that do not have similar opportunities to avoid tax (see section 3).

The case study shows how corporate lobbyist groups and tax advisory firms not only benefit from tax law loopholes but also actively generate and preserve them, allowing them to increase their share in the global wealth chains (see section 2.2). This interaction of regulatory captures must be understood when analyzing reactions to regulation as the political profit-seeking could have an impact on the market behavior as well.

However, the corporate interest groups and their advisors were not able to set the agenda as my research material shows they have consistently opposed all measures tackling thin capitalization over the nine-year period. Nevertheless, they were able to corrode the effectiveness of the enacted anti-tax avoidance measures indicating a weak regulatory capture (Carpenter and Moss 2014). This resulted from tens of statements in which corporate interest groups and tax advisors consistently argued for less extensive anti-tax avoidance measures (see section 5). These views are highlighted by the contrast to all the other groups involved in the consultations over the nine years that generally supported more effective IDLRs or were merely neutral. The evident division of views based on the self-interest of different groups supports the regulatory capture theory that assumes corporations extract rents in regulatory processes.

The initial anti-tax avoidance agenda came from the civil society as well as international organizations, specifically the OECD (Interview 2019; OECD 2013). Additionally, the role of investigative journalism was highlighted in several data leaks that made the public more aware of the consequences of tax avoidance (Finnwatch 2016). The initial Finnish IDLR has been called the Mehiläinen law after a tax-avoiding medical corporation inspired the legislation process (Bernitz 2013).

Perhaps surprisingly, my findings show the role of Finnish tax scholars was relatively remote in setting the anti-tax avoidance agenda as well as in the legislative drafting process of the IDLR. In the first consultations in 2009 and 2012, the tax scholars generally supported action to tackle the wide-spread thin capitalization but provided little detailed commentary on how this should be done. I.e. tax scholars did not propose amendments to the IDLR draft. Consequently, their influence in the details of the final IDLR was nominal in contrast to the significant effect by the corporate interest groups and tax advisors. The lack of policy-relevant profit shifting research in Finland by the early 2010s might have been a major factor behind this. However, the tax scholars also failed to refer to empirical studies conducted abroad. A reason for this might be that the Finnish tax scholars have mostly relied on legal-dogmatic research method that merely describes the application of current legal framework, but generally does not assess its implications and alternatives from the social perspective (Smits 2017).

The epistemic nature of tax specialist communities might also have restricted tax scholars from expressing proposals that were in conflict with the corporate interest (Anesa et al. 2019). The scholars and officials are closely connected to the corporate tax advisors in these communities, as many of them also work for the private sector at some stage of their careers. Some tax scholars are also regularly involved in the corporate tax advisory business (Raitasuo 2018 and 2019). Previous research has shown that this epistemic nature of tax specialist communities has an impact on how tax officials and scholars take part in political processes (see section 2.2). Raitasuo (2019) previously showed in his case study that the scholars’ involvement in the tax advisory business could “introduce bias into legal interpretation for purposes of advantage to private interest groups”. My findings raise the question whether this phenomenon that Koskenniemi (2006) has named structural bias could as well extend to tax policy drafting processes as scholars’ involvement in tax advisory business might result in scholarship functioning as a vehicle of private interest. Specifically, in the later IDLR consultations of 2016 and 2018, a couple of the tax scholars were notably critical to more extensive anti-tax avoidance regulation without citing previous literature such as recent Finnish empirical evidence that was much in conflict with their critic (Harju, Kauppinen and Ropponen 2017). Perhaps further research could address this question more thoroughly.

The role of civil society has been notable in setting the anti-tax avoidance policy agenda in the 2000s. The human rights and other civil society organizations could be considered to represent the public interest as public finances and tax justice are necessary to advance human rights (OECD 2011; Knuutinen and Pietiläinen 2017; Quentin 2019; Reisch 2020). However, my case studies show that the role of NGOs in the actual drafting process of anti-tax avoidance legislation has been limited. In the initial consultation in 2009, the human rights-based NGOs were not represented at all. Since then, the role of civil society has increased, but even in the 2018 consultation round, the statements representing corporate interests outnumbered statements presenting wider public interests such the human right perspective by 19 to 3. This ratio is a picture of the superiority of private resources in tax lobbying that produces imbalances in the interests in the legislative drafting processes that could have an impact on the outcome (Shapiro 2012). The resource superiority is also highlighted by the fact that in 2018 the three NGOs employed only one full-time tax professional in contrast to tens of tax professionals representing the corporate interest groups and private tax advisors

This information is available from the websites of the interest groups as well as in the statements. E.g., the Confederation of Finnish Industries EK alone has employed three full-time tax specialists.

In my case studies, early involvement was essential for successful lobbying as all the significant amendments in the legislation were made in the early phase of regulatory drafting before the government bill was submitted to the parliament. This is in line with earlier lobbying research that highlights the importance of timing (Hirvola et al. 2021). In the Finnish political system, the view of the parliament is generally transmitted through the government, whose parties have controlled the majority in the parliament for several decades. It is likely that the composition of the government has some impact on regulatory captures, but it is beyond the scope of this article to discuss this in more detail.

The global wealth chains theory has particularly emphasized the role of high technicality of international tax regulation that allows tax professionals to affect where the wealth is accrued (see section 2.2). My findings supplement this picture by showing specifically the technical comments regarding EER influenced the legislative drafting process of the Finnish IDLR. In line with the previous research, I also show corporate tax advisors facilitated a corrosive regulatory capture that protected the regime from political intervention (Forstater and Christensen 2017). The technicality of anti-tax avoidance legislation seems to have resulted in the absence of other disciplines’ scholars from the legislative processes. The economists are often involved in tax policy discussions but their role in the consultations in my case study was nominal (see also Ylönen et al. 2020). On the other hand, this shows that transparency and simplicity of regulation is necessary to support public interest in a democracy. Technicality and the epistemic communities of tax professionals have been effective in keeping public debate on anti-tax avoidance regulation at bay. The consequences of the technicality of the IDLR could have been emphasized by the lack of policy-relevant research regarding the rule. Further research could address the possible impact by using a similar method to conduct a study in a context of a more researched rule that facilitates tax avoidance.

The domination of corporate lobbying and the limited role of tax scholars in the IDLR legislative drafting process emphasized the role of officials. The role of the civil servants in the Ministry of Finance and the Finnish Tax Administration was decisive in drafting the initial Finnish IDLR in 2012 (Interview 2019 and 2020). This highlights that policy goals of democratically elected politicians might not be accomplished if the civil servants do not spontaneously identify possible legislative shortcomings and solutions to them. This is relevant specifically in the context of tax avoidance that requires technical knowledge on tax law and accounting.

The case study in section 5 also represents some less-flattering aspects of corporate lobbying. Some corporate interest groups continuously diminished the significance of profit shifting and claimed the phenomenon is nonexistent even though this was in conflict with empirical research and officials’ observations (see section 5.1). They also argued that the EER does not facilitate tax avoidance even though there was empirical proof about such tax avoidance structures (Ministry of Finance 2018; Finnwatch 2018 and 2020a). The corporate interest groups argued against IDLR mostly based on a claim that extensive anti-tax avoidance rules harm investment and competitiveness of Finnish enterprises. However, they did not support the argument with empirical evidence or research. This shows that limited knowledge on the impact of tax avoidance structures allows unfounded argumentation. This emphasized the need for a comprehensive impact assessment of legislation (Interview 2020). It could also be concluded that tackling regulatory capture requires acknowledging interests of lobbyist groups as well as basing legislative decisions on empirical research and other verifiable evidence (Anesa et al. 2019; Shapiro 2012).

In contrast to ordinary lobbying, the regulatory capture is harmful to welfare by definition (see section 2.1). My case study is an analysis of the context and mechanisms of regulatory capture that allows assessing how it could be tackled. The case study highlights specifically two elements that facilitated the regulatory capture. First, the high technicality of thin capitalization and anti-tax avoidance legislation. Second, the significant imbalance of resources between parties representing the corporate and public interest. I conclude my article by briefly discussing remedies of these elements.

To be realistic, it must be taken for granted that the international corporate tax regime will always be complex. It is also obvious that the corporations will always have the need and resources to employ great numbers of tax advisors to advance their interest. Therefore, it is necessary to provide adequate counterforce to represent the public interest (Levine and Forrence 1990). Otherwise, the lack of recognition of different perspectives and groups undermines social justice (Fraser 1998).

The governments could invest in independent research organizations whose objective should be to preserve the public interest such as tackling harmful tax practices. The Norwegian Centre for Taxation is an example of such a publicly funded institution. It is also necessary that the tax authorities and other public entities share their policy-relevant data on tax avoidance. Another option would be to enhance the independence of scholars in universities and other research institutions. A first step could be the transparency of scholars’ economic interests and secondary occupations. Decreasing the dependency of universities from private project funding could improve academic independence and thus the validity and reliability of their research (Eisenberg 1993).

Additionally, the autonomous NGOs representing e.g. human rights or other groups such as the trade unions could serve the public interest in certain tax matters. In this sense, the government could provide a favorable operational environment for the civil society. The civil society organizations and trade unions could pay attention to hiring enough technical tax expertise to enhance their influence.