Recent developments

Starting from January 1, 2016, the Dutch government has introduced specific transfer pricing documentation requirements for Multinational Enterprises ("MNEs"). These include the requirement to prepare and file a Country-by-Country Report (“CbCR”). This legislation, aimed at increasing transparency, substantially increases the administrative burden on MNEs.

The legislation follows the recommendations of the OECD under the BEPS project, and specifically Action 13, which outlines a three-tiered approach to transfer pricing documentation. Herein, the OECD recommends countries to implement transfer pricing documentation requirements based on three pillars, comprising a Master file, a Local file and a CbCR. To date (as of April 2016), approximately 15 countries have already implemented, or are in the process of implementing, similar regulations, while many others have announced or pledged that they intend to implement the recommendations of Action 13.

The new documentation package requires much more detail on the overall operations of MNEs and on the location where their profits are generated. This reflects the emphasis on value creation stemming from the BEPS project and the intent of monitoring whether operations are disconnected from the location where profits are accrued/reported. The resulting documentation, and especially the CbCR, will be used by tax authorities as a risk assessment tool to, for example determine the focus of audits.

As such, MNEs should strategically consider what information is required to fulfill the new documentation requirements, and the story their documentation will tell, when read and analyzed together, once provided to or filed with various tax authorities. Moreover, MNEs should consider upfront what questions could be raised regarding the “value chain,” as described in the Master file and Local file, and how this ties up with the CbCR details for those countries.

Implications for MNEs from a compliance perspective

For the fiscal years starting on or after January 1, 2016, the new transfer pricing documentation requirements will apply to entities located in the Netherlands as detailed below:

  • entities that are part of a MNE with consolidated revenues of at least €750 million 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 if certain conditions are met, as further indicated below;
  • entities that are part of a MNE with consolidated revenues of at least €50 million but less than €750 million must prepare transfer pricing documentation consisting of a Master file and a Local file (a CbCR is not required); and
  • entities that are part of a MNE with consolidated revenues of less than €50 million will not be required to comply with the new transfer pricing documentation requirements (please note that 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 a MNE meets one of the thresholds is in respect of the fiscal year of the MNE that started on or after January 1, 2015.

CbCR and automatic exchange

The transfer pricing documentation requirements in the Netherlands apply, in the first instance, to entities that are the ultimate parent entity of a MNE. In addition, generally speaking, the legislation applies to subsidiaries of a foreign MNE only in the event that: (1) the ultimate parent entity is not required to file a CbCR based on local legislation; (2) the Dutch tax authorities have not entered into a competent authority agreement with the tax authorities of the country of the parent entity; or (3) the Dutch tax inspector has notified the Dutch subsidiary of systemic negligence of the country in which the parent entity of the MNE is located, as a result of which the CbCR will not be exchanged with the Netherlands. If the Dutch subsidiary is required to file a CbCR, it may also appoint a surrogate parent, which will then file the CbCR on its behalf. A Dutch subsidiary of a foreign MNE should, in any case, notify the Dutch tax inspector whether or not it is required to file a CbCR on the last day of the book year that ends on or after December 31, 2016.

As such, based on point 2 above, Dutch subsidiaries of a MNE are, in principle, not required to file a CbCR in the event the Dutch tax authorities have entered into an agreement for the exchange of the CbCR with the tax authorities governing the parent entity of the group. To date, 32 competent authorities of countries have entered in a Multilateral Competent Authority Agreement (“MCAA”), subject to which competent authorities of each signing country will exchange (on a bilateral basis) the CbCR with other signatories (in case the MNE is operating therein).

By signing the MCAA, the 32 countries have further pledged that they will implement the CbCR requirements ultimately before the end of 2017. In addition to the MCAA, the European Union has also published a Council Directive regarding the automatic exchange of CbCRs. As part of this Directive, the 28 Member States of the EU are also expected to implement the CbCR requirements before the end of 2017. Hence, as a result of these developments, at least 40 countries are expected to have CbCR legislation enacted by the end of 2017. To date, the United States has not yet adhered to the MCAA.

All countries will, in principle, implement the legislation according to the recommendations made by the OECD in Action 13. However, countries will generally implement the legislation according to their own preferences, and by taking into account existing local legislation. Therefore, it is inevitable that inconsistencies will arise (and in fact have already arisen) in local laws.

Are you ready for CbCR?

For MNEs, it is important to realize that many decisions need to be made before the CbCR can be prepared and analyzed. For example, for various items in the list of information to be provided there is flexibility in terms of the standard for the report (e.g., local GAAP, IFRS, US GAAP, etc.). However, once a certain approach has been taken, the taxpayer is expected to prepare the CbCR in a consistent manner in the following years.

As such, it is critical for a MNE to start early when preparing the CbCR, in order to be able to analyze and structure the outcome of the CbCR. Various elements should be assessed before and during the preparation of a CbCR, of which we have highlighted only a limited selection below:

  • An overview of the countries in which the MNE is located, including an analysis of countries that have already implemented, or that are expected to implement, the increased transfer pricing documentation and CbCR legislation.
  • If the country of the ultimate parent entity of the MNE does not require a CbCR, it may be relevant to select a surrogate parent that will file the CbCR on behalf of other subsidiaries located in countries that allow for such surrogate parent filing (including, among others, the Netherlands). A surrogate parent can be elected based on the reputation of the local tax authorities, and the status of signing into the MCAA and/or the EU Council Directive on the exchange of information on CbCRs.
  • An assessment of whether all required data, including the required level of data, is available and can be extracted from the MNE’s reporting systems. In addition, the amount of time that it will take to prepare and extract such data should be considered.
  • In case the MNE is operating using a CV-BV structure, a decision needs to be made on where the revenues and profit earned by the CV will be reported. From a Dutch tax perspective, a CV is transparent and, as such, the income is assumed to be generated by the participants in the CV directly. Therefore, it would make sense to also report this income at the level of the partners, which is in accordance with the draft CbCR legislation of the United States. However, from the perspective of other countries, it may be that a CV is regarded as a non-transparent entity. Hence, if a CbCR is prepared from the perspective of another jurisdiction, it may be that the CV income will need to be reported, for example, in the “stateless-income” category, since typically the CV itself is not located in any jurisdiction.
  • Entities and data that will be reported as “stateless income”. Generally, revenues and profits generated by entities that are not located in any tax jurisdiction should be reported as stateless income. However, it is not explicitly mentioned where income that is generated in a country where no corporate income tax is levied should be reported. We assume that this income will need to be reported in the “stateless income” category as well.
  • In case a MNE operates via permanent establishments (“PEs”) or branches, it needs to be analyzed exactly what the data on these PEs or branches reveals. Generally all data relating to a PE or branch needs to be reported in the jurisdiction of the PE, except for stated capital and accumulated earnings. The latter two items should be reported in the jurisdiction of the head office of which the PE or branch is a part. Hence, this may create a mismatch in reported data, which may need to be explained in table 3 of the CbCR.
  • With regard to activities or data of MNEs that only occur during part of the CbCR reporting year, this should be analyzed if this data must be disclosed in the CbCR. The CbCR requires various data elements that must be reported on a cumulative basis during the year (revenue, income, etc.), as well as elements that are to be reported based on the value on a particular date (stated capital, accumulated earnings, the number of employees and tangible assets). As such, if activities are unwound during the year, or if data is no longer present on the reporting date for CbCR purposes, the latter category will likely not be reported in the CbCR. These elements may also require an explanation in table 3 of the CbCR.
  • Once a draft CbCR (or preliminary statistics) has been prepared, the story that the CbCR tells to the reader, including any potential future readers, should be assessed. Hereby, it should also be taken into account that the EU is considering introducing an additional requirement for EU operations of MNEs to prepare a publicly available version of the CbCR.
  • How any “optically questionable” messages told by the CbCR can be interpreted by and/or explained to the reader of the CbCR. It may be relevant, for example, to pre-emptively include an explanation in the annual report of a MNE addressing the outcomes of the CbCR.


As a result of the increased transfer pricing documentation requirements, including the requirement to file a CbCR in the Netherlands, MNEs will have to make smart choices as to their transfer pricing documentation compliance. Secondary reporting and the election of surrogate parents are among those. It is important to note that addressing the new requirements will be – for many – very time consuming and complex. Given the flexibility in relation to certain choices (e.g., format of the information, date of reference, etc.) and the consequent structuring option, it is important for MNEs to address CbCR sooner rather than later, especially in order to align the outcome across documents and reports.

Next on the Agenda

On April 12, 2016, the European Commission published a proposal to amend the EU Accounting Directive (Directive 2013/34/E), to require MNEs with consolidated revenues of at least €750 million, and that have operations within the European Union, to publish annually a report disclosing key financial information in each Member State on a country-by-country basis. The proposal further requires reporting on a country-by-country basis for the MNEs’ operations in certain tax havens that are identified on a list that will be drafted and maintained by the EU. In addition, MNEs are required to report financial information in all other countries in which they operate on an aggregate basis. This information should be published on the company website of European MNEs or their European subsidiaries, and will remain available for 5 years. The required financial information comprises taxes paid and due, profit before tax, turnover, number of employees, nature of activities, and accumulated earnings.

The proposal is now submitted to the European Parliament and Council for their consideration. Final adoption of the proposal will only require a qualified majority approval of the Council, as the proposed legislation forms an accounting measure, rather than a tax directive. If the proposal will be adopted, the amended Directive would have to be transposed into national legislation by all EU Member States, within one year after its entry into force.