A new requirement will increase administrative burden for Multinational Enterprises ("MNEs") as well as transparency for financial results and operational activities.
Effective 1 January 2016, the Dutch Government has enacted new legislation that follows the guidance provided by the OECD in the report on BEPS - Action Item 13. According to the new legislation, MNEs that reach one of the two thresholds of consolidated revenues are required to file a Country-by-Country Report ("CbCR") in the Netherlands and/or to prepare transfer pricing documentation, consisting of a Master file and a Local file. A Dutch taxpayer must include the Master file and Local file in its administration, and needs to hand it over to the Dutch tax authorities on request.
The new requirements will increase the administrative burden on MNEs with operations in the Netherlands substantially, and will also increase transparency on financial results and operations of entities in all jurisdictions where the MNE operates. The documentation will be used by the Dutch tax authorities as an audit transfer pricing risk assessment tool. As such, MNEs should strategically consider what information is required to fulfil the new documentation requirements, and the story the documentation will tell. Moreover, MNEs may want to consider upfront what questions could be raised regarding the supply and value chain and the activities performed in various countries, and how this aligns with the MNE's financials.
The new Dutch legislation enacting Action Item 13, follows several other countries that have introduced similar legislation, or have announced that they will introduce similar legislation. To date, the number of countries that have effectively introduced the CbCR requirements is approximately 10.
Implications for MNEs from a compliance perspective
For fiscal years starting on or after 1 January 2016, the new documentation requirements will apply to "Group Entities" located in the Netherlands that are a member of a MNE, or that form the head of the MNE, if the conditions below are met:
- Group Entities that are part of a MNE with consolidated revenues of EUR750 million or more must prepare transfer pricing documentation that consists of a Master file and one or more Local files. In addition, a CbCR may have to be filed with the Dutch tax authorities;
- Group Entities that are part of a MNE with consolidated revenues of EUR50 million or more, but less than EUR750 million must prepare transfer pricing documentation that consists of a Master file and Local file. A CbCR is not required; and
- For entities that are part of a MNE with consolidated revenues of less than EUR50 million, the new transfer pricing documentation requirements do not apply. The pre-existing transfer pricing documentation requirements in the Netherlands, as contained in Article 8b of the Dutch Corporate Income Tax Act, remain applicable.
Group Entities, for the purpose of this legislation, are defined as those entities that are included in the consolidated accounts of the MNE group. The reference year in all three cases for determining whether an MNE meets one of the thresholds, is the fiscal year of the MNEs that started on or after 1 January 2015. If a Group Entity is required to file the CbCR, the report needs to be filed within 12 months after the end of the fiscal year. Hence, the first CbCRs should be filed in the Netherlands on 31 December 2017, covering the fiscal year that ended on 31 December 2016. From a content perspective, the CbCR and transfer pricing documentation requirements in general follow the proposals as issued by the OECD in its Action Item 13.
Automatic exchange of information
In addition to the proposed legislation covering the documentation requirements, the Dutch government has recently signed the multilateral instrument, which was published by the OECD on 27 January 2016, to enable efficient and secure automatic exchange of the CbCR. The multilateral instrument is in the first place signed by 31 jurisdictions.
Further, the European Commission published a Council Directive on 28 January 2016, which requires all EU Member States to implement CbCR legislation, in line with the recommendations from BEPS - Action Item 13, starting from 1 January 2017. This Directive also provides an instrument for the efficient and secure exchange of the CbCR between Member States.
U.S. Multinationals operating in the Netherlands
The CbCR requirement applies both to the ultimate parent entity of the MNE, as well as to other entities operating in the Netherlands, if the parent entity of the group is not required to file a CbCR or if the Dutch Tax Authorities do not receive this report (effectively) through automatic exchange pursuant to a treaty. As a result, MNEs operating with at least one entity in the Netherlands, may be subject to the CbCR requirements in the Netherlands, in particular if the parent entity of the MNE is not (yet) required to file a CbCR in its jurisdiction or where the CbCR file is not (effectively) exchanged.
One particular noteworthy development in connection with the introduction by the Netherlands of the CbCR requirements, relates to the U.S. developments. The U.S. has recently published draft legislation to introduce CbCR requirements. However, these requirements will not become effective before January 2017. Further, the current proposal reflects some differences, as compared to the Dutch reporting requirements. As a result of the differences in rules (both substance and timing), several technical and strategic issues may require further analysis and consideration.
Conclusion and required actions
Since MNEs need to file a CbCR in the Netherlands covering 2016, MNEs will have to assess whether or not the documentation requirements will apply starting from the fiscal year that commences on or after 1 January 2016, i.e., if they cross one or both thresholds during the prior year. It is therefore important for MNEs to evaluate as soon as possible if the documentation and reporting requirements apply, and in which country the MNE needs to file a CbCR. Moreover, MNEs should evaluate what information is required and they should consider the larger implications of the new requirements, including where the constituent entity is member (and not the head) of a MNE.