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Introduction to The Netherlands transfer pricing
Transfer pricing rules
- The Dutch transfer pricing (TP) legislation is included in the Dutch transfer pricing decree no.2018/6865 (TP Decree) with additional documentation regulations implemented through the Dutch decree DB/2015/462M (Documentation Decree). Furthermore, the transfer pricing regulations are based on the arm’s length principle as per Article 9 of the OECD Model Tax Convention on Income and Capital and nationally implemented in Article 8b of the Wet op de Vennootschapsbelasting 1969, ie it follows the OECD Transfer Pricing Guidelines (OECD TPG). The rules are not heavily formulaic but instead are principle-based.
- The starting point of the arm’s length principle is that for tax purposes associated enterprises are assumed to act towards each other under the same conditions as independent companies would act under similar circumstances.
- The TP rules apply to all Dutch taxpayers that are involved in cross-border intercompany transactions, including Dutch branches of foreign companies.
- The Dutch Tax Administration (DTA) deems transfer pricing adjustments necessary when a transaction is not considered to be at arm’s length.
- Taxpayers are obliged to prepare transfer pricing documentation that describes how transfer prices have been established, substantiating the arm's length nature of the transfer prices. The documentation must be included in the administration of the taxpayer. If the DTA requests the transfer pricing documentation, the taxpayer would typically have to provide it within a term of between 14 and 30 days. The exact transfer pricing requirements depend on the consolidated turnover of the multinational group to which the Dutch company belongs.
- The Dutch transfer pricing rules follow the OECD TPG, which was last updated in July 2017. The OECD TPG are regocnised as a source for explanation and clarification of the arm’s length principle, in the pre-amble of the TP Decree.
- The OECD regularly releases new guidance, such as its report on Permanent Establishments in March 2018 or on Financial Transactions in February 2020. The DTA generally views these new reports as clarification of existing rules, rather than new rules and regulations, which would not apply retroactively.
Transfer pricing methods
- According to the OECD TPG, the most appropriate transfer pricing method should be selected on a transaction by transaction basis, providing the most reliable measure of an arm’s length result in each case. The current OECD methods, namely the comparable uncontrolled price, resale price, cost plus, transactional net margin, and profit split methods are all accepted but the method used must be in line with the functional and risk profile of the entity. Other methods can also be used if justifiable and appropriate.
- The TP Decree indicates that the DTA will always start its transfer pricing investigation from the perspective of the method used by the taxpayer at the time of the transaction. The taxpayer is in principle free to choose a transfer pricing method, provided that the chosen method leads to an arm’s length result for the specific transaction. Furthermore, the TP Decree indicates that in general, the comparable uncontrolled price method is difficult to apply in practice because comparable uncontrolled transactions are almost impossible to find. This is one of the reasons why, in practice, the TNMM is often used as the transfer pricing method.
Documentation available in taxpayers’ administration and burden of proof
- In the Netherlands, transfer pricing documentation should be available in the taxpayer’s administration when the DTA requests it. There is a ‘tick box’ on the corporate income tax return form for taxpayers to confirm their eligibility with the local file, master file, and CbCR requirements and to notify if there were any business restructuring or transfers of intangible properties during that fiscal year. The DTA requires taxpayers to make computational adjustments in cases where transactions, as recorded in the statutory accounts, are not on an arm’s length basis and the taxpayer is potentially advantaged in respect of Dutch corporate income tax.
- In the Netherlands, not having transfer pricing documentation available in the administration may lead to shifting the burden of proof regarding the arm’s length nature of the transfer price used to the taxpayer.
Transfer pricing documentation
Preparation of transfer pricing documentation
- The exact requirements for the preparation of transfer pricing documentation depend on the consolidated turnover of the multinational group to which the Dutch entity or branch belongs.
- All Dutch entities, that transact with related parties, are obliged to prepare documentation that describes how transfer prices have been established and substantiate the at arm’s length nature of the transfer prices. The documentation must be included in the administration of the taxpayer. There are no regulations dictating the form in which this document, however, it must include sufficient information to enable the DTA to evaluate the arm’s length nature of the transfer prices applied between related parties.
- Dutch law requires companies that meet the threshold of €50 million of consolidated (global) group revenues, to prepare transfer pricing documentation (group master file and local file) in accordance with BEPS Action 13. This may be prepared in either the Dutch or English language.
- The local file must be prepared in accordance with Dutch rules and regulations and contain information specific to the local entity/entities. Regarding the master file, however, a centrally prepared master file would usually suffice, provided it is prepared in or translated into English or Dutch and is prepared in accordance with BEPS Action 13.
- The Netherlands has also introduced Country-by-Country Report (CbCR) regulations which are effective for fiscal years starting on or after 1 January 2016 for multinational groups with revenues in excess of €750 million. A Dutch entity or branch must either file the CbCR locally or file a notification with the DTA indicating which group entity is filing the CbCR. Such notification must be filed before the end of the corresponding fiscal year.
- Documentation is to be prepared when the Corporate Income Tax return for the corresponding fiscal year is filed and kept on file by the taxpayer. Whereas there is no obligation to file the formal transfer pricing documentation, a taxpayer must be able to produce it, upon request, within a reasonable term (between 14 and 30 days).
- If a company cannot provide the applicable transfer pricing documentation within a reasonable term, it will be considered not to have met its administrative obligations of the General Tax Code, which may lead to penalties and a reversal of the burden of proof.
Dutch local file and group master file
- Although the Dutch documentation requirements are based on the international standard, as proscribed by the OECD, Dutch policy is decisive in determining how the master and local File must be structured.
- Pursuant to the Documentation Decree, a Dutch local file must include:
- Background to the company, a local organization chart, a description of local management, and to who they report, a detailed description of the local business, the business strategy adhered to, and whether the business has been affected by business restructuring or involved in the transfer of intangibles.
- Analyses of all significant intercompany transactions and the context within which they take place. This includes preparing a functional analysis, describing functions performed, assets employed and risks assumed by relevant parties.
- Economic analyses should be performed to determine the most appropriate transfer pricing method to test the intercompany remuneration and assess what functionally comparable parties, performing similar activities or services, earn in the marketplace.
- A financial reconciliation, presenting the taxpayer’s financial accounts, and describing how the intercompany remuneration of the covered transactions impact the financial accounts.
- A master file must include:
- A general description of the group’s business(es), including important profit drivers, the supply chain for the main products, the group’s geographical presence, summaries of the functional analyses of each company, and descriptions of any important business restructurings that occurred during the fiscal year.
- A description of the group’s intangibles, including the overall strategy for the development, ownership, and exploitation of intangibles, including the location of principal R&D facilities and location of R&D management
- A description of the group’s financial activities, including important financing arrangements within the group and with unrelated lenders.
- A description of the group’s tax positions, including a list of all tax rulings with local jurisdictions.
Risk factors attracting scrutiny
- Some activities attract a higher amount of scrutiny from the DTA. These are by no means forbidden transactions or business models, but additional care should be taken to document these, in case questions arise. Examples include:
- High-risk business models include commissionaire and toll manufacturing.
- Limited risk distributor and contract services/ contract R&D arrangements could also potentially be affected, especially where significant people functions are in the Netherlands.
- Incurring losses whilst being characterized as a low-risk entity.
- Payments related to intangible assets, such as license fees, royalties, and cost-contribution agreements.
- Any payments to low tax jurisdictions.
- Business restructurings, or changes in the TP model, especially when such a change is not accompanied by significant operational changes.
Penalties and tax interest
- Penalties in relation to transfer pricing documentation are derived from the General Tax Code, pertaining to administrative requirements. Apart from penalties, a tax inspector may attempt to reverse the burden of proof. Finally, whilst technically not a penalty, the tax inspector may impose interest on amounts of Corporate Income Tax not paid.
- The penalty for not preparing a Dutch local file and for not preparing a master file is up to € 5.278; half that amount when it is the first offense. In case of intentional non-compliance, the penalty may be as high as € 20.250 and 6 months imprisonment.
- Not preparing CbCR or the CbCR notification may attract a penalty as high as € 870.000.
- When a taxpayer has not prepared formal transfer pricing documentation, the tax inspector may request a judge to reverse the burden of proof. If this is granted, the Inspector may estimate the taxable profits, which the taxpayer must then disprove.
- If the taxpayer is found to have underreported taxable profits, any unpaid tax must be repaid with a compound interest of 8%. As transfer pricing inquiries typically go back 4 years and even as far back as 12 years, the amount of interest can quickly exceed any penalties
Economic analysis and how to demonstrate an arm’s length result
- A taxpayer is free to choose which transfer pricing method to apply in pricing a transaction, provided that the chosen method leads to an arm’s length result. Pursuant to the TP Decree, the DTA is bound to using this method in conducting a transfer pricing investigation, unless it can demonstrate that this method can not lead to an arm’s length outcome for that transaction. .. Furthermore, the Dutch decree indicates that, in general, the comparable uncontrolled price method is difficult to apply in practice because comparable uncontrolled transactions are almost impossible to find. This is one of the reasons why, in practice, the TNMM is often used as the transfer pricing method.
- Pan-European comparable companies are generally accepted for the economic benchmark analysis.
- The OECD TPG state that tax administrations may determine that, as long as the operating conditions remain unchanged, the searches in databases for comparables may be updated every three years rather than annually, with comparables’ financial information being rolled forward on an annual basis. This can be considered as a common practice in the Netherlands.
- In cases where an singular unequivocal transfer price cannot be determined, a range of values can be used, as per common practice in the Netherlands. In determining a range, a distinction must be made between situations in which the comparables consist of readily comparable figures and a situation of less accurate comparables are used. If less accurate comparables are used, it might be necessary to increase the reliability of the comparables by applying statistical methods, for example, the interquartile range approach.
- For the independency of the comparable companies, the DTA prescribes excluding comparables that are part of a group, i.e. with a shareholder that exceeds a shareholding position of 50%.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
- The Netherlands is well-known for the wide array of possibilities to converse with the DTA, both to amicably settle differences and to negotiate advance pricing agreements (APAs) and advance tax rulings.
- APAs are written agreements between a taxpayer and the DTA, in which the classification and remuneration of (intercompany) transactions and/or the profit allocation for permanent establishments can be established.
- APAs typically have a term of 5 years, but this may be extended up to 10 years if the circumstances demand it. As long as the critical assumptions are met, the DTA is bound to the agreement, providing great certainty in terms of the tax burden.
- In recent years, the Dutch ruling practice has been criticized for appearing to be too favorable for the taxpayer and its lack of transparency. As a result of this critique, a new ruling practice decree was established in 2019, which aims to increase transparency, formalize procedural best practices, and limit the topics on which a ruling can be obtained. The following limitations have been imposed:
- A taxpayer must be fully up-to-date with its administrative obligations, including preparing formal transfer pricing documentation;
- A taxpayer must meet the economic nexus in the Netherlands, implying that operational activities are commensurate with the taxpayer’s role in the group. This is often measured in the amount of FTEs in the Netherlands versus worldwide; and
- No rulings can be obtained for transactions that are structured with the principal purpose to avoid Dutch or foreign taxes; nor for transactions with entities in low tax jurisdictions.
- The DTA prefers bilateral and multilateral APAs over unilateral APAs, but will not impose this on taxpayers.
- The Netherland has an extensive network of bilateral tax treaties, and a Mutual Agreement Procedure (MAP) will often be available when double taxation occurs. However, on MAP cases can take a long time to resolve.
- The Netherlands has committed to compulsory arbitration in cases where MAPs do not offer a solution. This procedure can be based either on the Multi-Lateral Instrument (MLI) or the EU Arbitration Convention. Where the other country (treaty partner) has also opted in, compulsory arbitration is available to settle double taxation disputes. Keep in mind that this must be checked on a country-by-country basis.
- There are exemptions for the preparation of a local and master file for small- and medium sized enterprises (SMEs), i.e. who have a group revenue of below 50 million EUR. However, a Dutch taxpayer is still obliged to prepare transfer pricing documentation according to article 8b CIT.
- There are no safe-harbors which exclude local file or master file documentation for Dutch entities who are subjected to prepare transfer pricing documentation.
- As the Coronavirus will most likely have a lasting impact on economies worldwide, this could have a significant impact on group earnings as well. Transfer pricing models might have to be reviewed and reconsidered in some cases.
- Transfer pricing model should adhere to the following rules:
- Entrepreneurial risks are borne by the company that decides whether to take on these risks and that performs the associated risk management function.
- The intercompany agreement should reflect this risk allocation.
- Expected profits increase with functions performed, assets used and risks borne.
- Entities performing routine functions should be entitled to a stable, guaranteed return.
- However, as the group as a whole might be affected, the guaranteed return for routine entities might exacerbate losses at the headquarter level, and a group might want to reconsider their TP model.
- The DTA has indicated that changes to the TP model should be motivated and substantiated well, to demonstrate that independent companies would act similarly under the circumstances.
- International groups should be reviewing their potential exposure to transfer pricing enquiries and updating documentation accordingly.
- Where supply chains have been disrupted or work brought to a halt due to lockdown measures, expected profits may not eventuate. Comparable companies will often have been affected in the exact same way as multinational groups, but evidence must be gathered and documented contemporaneously.