Client Alert Client Alert December 2015 For more information please contact: Magreet Nijhof +31 20 551 7543 [email protected] Antonio Russo +31 20 551 7963 [email protected] Country-by-Country Reporting and additional Transfer Pricing Documentation requirements, effective starting from 2016 Recent developments On September 15, the Dutch government released its Budget for 2016, containing the Tax Plan 2016, which includes proposed amendments to Dutch tax law. The proposals were recently accepted by the Lower House (Tweede Kamer) of the Parliament, but they are still subject to approval by the Upper House (Eerste Kamer). The Tax Plan contains several legislative proposals that impose additional transfer pricing documentation requirements on Multinational Enterprises ("MNEs"), which will increase the administrative burden on MNEs substantially, but will also increase transparency on financial results and operations of entities in all jurisdictions where MNEs operate. The legislation will become effective in the Netherlands on January 1, 2016. The government has announced that further regulations will be issued on the requirements for the content and form of the documentation. The proposals follow the recommendations of the OECD regarding transfer pricing documentation requirements (BEPS project - Action Item 13), consisting of a three-tiered approach; meaning that a Master file, Local file, and Country-byCountry Report (“CbCR”) should be prepared. Many other countries have announced already that they will introduce similar regulations. The new documentation requirements require much more detail on the overall operations of the MNE and on the location where profits are generated. The resulting documentation will be used by tax authorities as a risk assessment tool, for example to determine the focus of audits. As such, MNEs should strategically consider what information is required to fulfil the new documentation requirements, and the story their documentation will tell, once provided to or filed with various tax authorities. Moreover, MNEs may want to consider upfront what questions could be raised regarding the supply chain and the activities performed in various countries, and how this aligns with the MNE's financials in these countries. Implications for MNEs from a compliance perspective For fiscal years starting on or after January 1, 2016, the new transfer pricing documentation requirements will apply to entities located in the Netherlands that are a member of a MNE, or that form the head of the MNE. Entities that are part of a MNE with consolidated revenues of €750 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; Entities that are part of a MNE with consolidated revenues of €50 million or more, but less than €750 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 €50 million, the new transfer pricing documentation requirements do not apply. The current transfer pricing documentation requirements in the Netherlands, as contained in Article 8b of the Dutch Corporate Income Tax Act, remain applicable. 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 January 1, 2015. Master file and Local file For MNEs with consolidated revenues of €50 million or more in the prior fiscal year, the Master file and the Local file should be included in the taxpayer's administration within the term for filing the corporate income tax return, i.e., in principle within 5 months after the end of the fiscal year (it is not clear what the impact is of an extension of the deadline for filing the tax return). As such, the Netherlands effectively introduces "contemporaneous transfer pricing documentation requirements". The current proposal is in line with the content requirements as recommended by the OECD. The Master file must contain, among others, details on the activities of the MNE, the supply chain, the transfer pricing methods used, the allocation of income, financial activities, and the tax positions within the MNE. The Local file must contain, among others, descriptions of the intercompany transactions entered into by the Dutch entity(ies), a comparability analysis of the intercompany transactions, and the transfer pricing methods applied. Further guidance on the required content for the documentation is expected. The OECD has advised that the Local file should contain information on all intercompany transactions that are considered material from the perspective of local tax law of the country in which the specific entity is located. The Dutch government has not included a threshold for materiality in its current proposals. The Master file and the Local file should be prepared in Dutch or English. Country-by-Country Report MNEs with consolidated revenues of €750 million or more, may - in addition to the preparation of a Master file and Local file - be required to file a CbCR with the Dutch tax authorities. The deadline for filing the CbCR is within 12 months after the end of the fiscal year. The filing requirement applies to the Ultimate Parent Entity ("Parent") of a MNE if this Parent is located in the Netherlands. Further, the filing requirement also applies to other entities in the Netherlands that are part of a MNE, in case the Parent is not located in the Netherlands and the Dutch tax authorities are not able to receive a CbCR through the automatic exchange of information with the country of the Parent. Assuming that the additional regulations will follow the OECD proposed wording and guidance, the CbCR should contain aggregate tax jurisdiction-wide information on the global allocation of income, the taxes paid in each country, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE operates. The file also requires a list of all the relevant entities for which financial information is reported, including the tax jurisdiction, as well as the nature of the main business activities carried out by these entities. If an entity has no jurisdiction for tax purposes, this entity should also be disclosed in the CbCR. The relevant entities that should be included in the CbCR include: i. Entities that are included in the consolidated financials of a MNE; ii. Entities that are not included in the consolidated financials, solely based on size or materiality grounds; and iii. Permanent establishments of the MNE, provided that separate financial statements are prepared for the permanent establishment. In its current proposal, the Dutch government has not defined the revenues that should be reported in the CbCR. According to the definition of the OECD, however, these revenues will include revenues from sales of inventory and properties, services, royalties, interest, premiums and other amounts. The revenues are excluding payments from other relevant entities that are treated as dividends in the jurisdiction of the taxpayer. As long as the MNE's financial reporting is consistent and based on the same sources from year-to-year, the MNE may choose the source of its data, e.g., its consolidation reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts. Sanctions Failure to comply with the information and documentation obligations mentioned above can result in a reversal of the burden of proof from the tax authorities to the taxpayer, or administrative penalties. Intentionally not meeting aforementioned obligations or gross negligence may also result in criminal prosecution. Automatic exchange of information In addition to the proposed legislation covering the documentation requirements, the Dutch government has also announced that it will implement the multilateral instrument that is proposed by the OECD for the automatic exchange of information. This multilateral instrument should also apply to CbCRs that are filed in various countries. However, this multilateral instrument is still to be developed. Conclusion and required actions Provided that the proposed legislation will be implemented in Dutch law, MNEs will have to assess whether or not the documentation requirements will apply starting from the fiscal year that commences on or after January 1, 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. If the documentation and reporting requirements apply, this will substantially increase the administrative burden on MNEs. Moreover, MNEs should evaluate what information is required and they should consider the larger implications of the new requirements. Baker & McKenzie International is a Swiss Verein with member law firms around the world. 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