New Dutch Transfer Pricing Decree released
At a time when transfer pricing is at the forefront of the international tax debate, the Dutch Ministry of Finance published a new transfer pricing decree on November 26, 2013 (no. IFZ2013/184M) (the "Decree").
Summary of the Decree
- The Decree replaces two previous transfer pricing decrees released in 2001 (no. IFZ2001/295M) and 2004 (no. IFZ2004/680M). The most relevant additions and changes are as follows:
- The Decree recognizes that the OECD Transfer Pricing Guidelines are under further development in light of the recent intangibles debate and the Base Erosion and Profit Shifting (also referred to as “BEPS”) debate. As a result, the Decree foresees that future changes to the Decree may be required.
- •More interestingly, the Decree specifically identifies three possible areas of profit shifting and the manner in which such profit shifting may be addressed. The three areas include (i) transactions involving intangibles; (ii) centralized procurement activities; and, (iii) the transfer pricing treatment of captive insurance companies.
- In addition to these three specific areas, the Decree specifically addresses the next frontier of transfer pricing by focusing on financial transactions.
Other significant transfer pricing themes addressed by the Decree include:
- Alignment with the EU Joint Transfer Pricing Forum, in particular in the area of low value services and documentation;
- Treatment of guarantees;
- Additional guidance on shareholder costs; and,
- Documentation obligations.
Actions to consider
- Ensure that terms and conditions of key intercompany transactions, including financial transactions are documented in intercompany agreements.
- Review of functional profiles and alignment with transfer pricing policy, in particular in the area of intangibles, procurement, and captives;
- Review of intercompany services transfer pricing policy in light of alignment with EU Joint Transfer Pricing Forum;
- Review of treatment of shareholder costs; and,
- Review of financial transactions, including guarantees in light of the Decree.
Although the Decree accounts for an impressive 24 pages, much of its content leverages from the prior transfer pricing decrees. The Decree confirms that the Netherlands in general continues to follow the OECD Transfer Pricing Guidelines, while maintaining a pragmatic and economic approach towards transfer pricing matters. That said, some of the new additions, could be viewed as a more prescriptive approach.
As noted above, the Decree has added several specific provisions that may result in non arm’s length profit shifting. First, pertaining to captive insurance companies (i.e., in-house (re)insurance companies of a multinational), the Decree stipulates that a captive should only be entitled to a routine remuneration where it does not perform certain key (re)insurance related activities such as product development, asset and liability management, insurance accreditation, and active risk diversification. The position in the Decree does not come as a complete surprise though, in light of jurisprudence and audit experience.
Second, the Decree provides guidance relating to the allocation of benefits realized by centralizing procurement activities. The Decree states that benefits resulting from discounts obtained due to increased purchasing power should be allocated among the affiliates. The central purchasing company is only entitled to more than a routine return to the extent that (additional) discount results from the specific knowledge and skills of the central purchasing company. Allocation of profits to procurement companies beyond a routine return, will require a clear demonstration that the procurement activities constitute a core function.
Third, and perhaps one step ahead of the OECD discussion on intangibles, the Decree includes guidance on the transfer of intangible assets. The right functions are key as regards to the management and control of the intangible assets in order to be entitled to intangible related returns. Although generally in line with the Revised Discussion Draft on Transfer Pricing Aspects of Intangibles (released July 30, 2013), one could argue that the Dutch guidance on this topic is premature since no consensus within the international tax community has been reached yet.
All three areas underscore the increased importance of functions.
One section of the Decree is dedicated to guarantees, noting that guarantees are subject to the arm’s length standard. The Decree describes the treatment of both implicit guarantees and explicit guarantees. In case of explicit guarantees that result in more favorable terms and conditions, a service fee is due. Any determination of such a service fee however, should eliminate the effects of an embedded implicit guarantee.
Something [out of the] blue
Finally, the other major addition to the Decree concerns financial transactions. To date, financial transactions have received limited specific guidance under domestic transfer pricing rules and at the OECD level and thus, the addition of the section on financial transactions can be considered one step ahead of the curve. Pursuant to the guidance provided in the Decree, the arm’s length evaluation of financial transactions should include an assessment whether the terms and conditions (including the pricing) of the intercompany loan are comparable to third party transactions. If not, one should, if possible, firstly make a pricing adjustment (interest) and, to the extent not possible, adjustment of the other terms and conditions should be considered. Finally, in the extreme cases where an adjustment of price and or conditions does not lead to an at arm's length result, (part of) the loan may be ignored or reclassified.
The Decree furthermore emphasizes that a key component of any transfer pricing analysis of intercompany financial transactions is credit rating / creditworthiness analyses. In the Decree, it is stipulated that in determining the credit rating of a group company (not the parent), the credit rating of the group needs to be considered, i.e., one has to consider whether the pure stand-alone rating of the subsidiary needs to be adjusted for the “Halo-Effect,” in particular any deemed implicit support from affiliates. Moreover, intercompany loans granted to affiliates that have a credit rating below investment grade (i.e., a credit rating below BBB-) will be scrutinized and the taxpayer needs to substantiate the arm's length nature of such transaction.