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Documentation and reporting
Rules and procedures
What rules and procedures govern the preparation and filing of transfer pricing documentation (including submission deadlines or timeframes)?
Articles 29b to 29h of the Corporate Income Tax Act enact the master file and local file documentation and country-by-country reporting obligations in line with the Organisation for Economic Cooperation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action 13 Report.
The threshold for the master file and local file documentation for a multinational group is set at a consolidated revenue of at least €50 million of the year prior to the reporting year. Both files must be readily available when filing of the tax return is due for fiscal years starting on or after January 1 2016. Provisions are available which allow for extended filing of tax returns.
The threshold for country-by-country reporting for a multinational group is set at a consolidated revenue of at least €750 million of the year prior to the reporting year. From 2016, a constituent group entity which is tax resident in the Netherlands also must notify the tax authorities on a yearly basis before the end of the fiscal year, when country-by-country reporting is due by the group. When the ultimate parent entity or a surrogate parent entity has its tax residency in the Netherlands, it must file a country-by-country report in the Netherlands.
The general transfer pricing documentation requirement, which applies to small and medium-sized enterprises, is set out in Article 8b, Section 3 of the Corporate Income Tax Act. This section creates an open norm. Documentation based on this article also falls under the general documentation requirement of Article 52 of the General Tax Act and must be available at the request of a tax inspector.
Content requirements
What content requirements apply to transfer pricing documentation? Are master-file/local-file and country-by-country reporting required?
The content requirements for the master file and local file documentation are completely in line with the outcomes of the BEPS Action 13 Report. They were also published in a ministerial regulation. The same goes for country-by-country reporting.
For transfer pricing documentation for smaller groups, there is a more open standard. The starting point when enacting Article 8b of the Corporate Income Tax Act was that the extra administrative burden should be restricted as much as possible. In this sense, a tailor-made approach can be followed. It is stated in the Transfer Pricing Decree that the principle of proportionality should play a major role in assessing whether the documentation is sufficient according to Article 8b, Section 3 of the Corporate Income Tax Act.
According to the Transfer Pricing Decree, the Code of Conduct on Transfer Pricing Documentation for Associated Enterprises in the European Union fits within the Dutch transfer pricing documentation requirement of Article 8b, Section 3. The proportionality principle is also applicable on this form of documentation.
The Transfer Pricing Decree mentions the possibility of obtaining certainty from the competent inspector as to whether the documentation requirement of Article 8b, Section 3 of the Corporate Income Tax Act has been complied with. The reason for this is that the open standard might create uncertainty over whether the existing documentation is in line with the documentation requirement. A request can be sent to the tax inspector. This possibility is not frequently used, because having transfer pricing documentation in place in principle shifts the burden of proof to the tax authorities when determining whether the related transactions are entered into according to the arm’s-length principle.
Penalties
What are the penalties for non-compliance with documentation and reporting requirements?
Master file and local file documentation falls under the general documentation and bookkeeping requirements of Article 52 of the General Tax Act. Non-compliance can lead to a shift of the burden of proof and to imprisonment of up to six months or a fine of up to €8,300. For intentional non-compliance, imprisonment of up to four years or a fine of up to €20,750 can be imposed. A decision requiring information will be necessary to shift the burden of proof. In practice, this is used only when a taxpayer is not willing to cooperate with the tax authorities in providing information that can be relevant for the levying of taxes with regard to the taxpayer.
The abovementioned also applies to the general transfer pricing documentation requirement of Article 8b, Section 3 of the Corporate Income Tax Act.
For non-compliance with notification and filing obligations for country-by-country reporting, a penalty of up to €830,000 can be imposed, where non-compliance is attributable to an intentional act or gross negligence on the part of the reporting entity.
Best practices
What best practices should be considered when compiling and maintaining transfer pricing documentation (eg, in terms of risk assessment and audits)?
It is important for a taxpayer to continuously check whether its transfer pricing system reflects its current economic reality. According to the OECD Transfer Pricing Guidelines, in principle documentation must be updated annually. However, in many cases there may be no significant changes to the business descriptions, the functional analysis and the descriptions of the comparables. Therefore, in order to simplify compliance burdens for taxpayers, tax administrations may determine that benchmark studies are to be updated once every three years, rather than every year. The financial data of the comparables should nonetheless be updated every year. The Dutch tax authorities take a pragmatic approach in this context, but tend to follow the OECD Transfer Pricing Guidelines.
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