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Policy, trends and developments
Describe the general government/regulatory policy for transfer pricing in your jurisdiction. To what extent is the arm’s-length principle followed?
In the Netherlands the arm’s-length principle was codified in 2002 in Article 8b of the Corporate Income Tax Act, and is regarded as a basic principle. It also applies in domestic situations, although the impact in practice will be smaller.
Before it was enacted, the arm’s-length principle was already applied in practice but the highest court of justice ruled in a case that it was unclear how the Netherlands followed the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines. At that time the Netherlands was internationally under suspicion of undertaking harmful tax practices. Therefore, it was decided to codify the arm’s-length principle in line with Article 9 of the OECD Model Tax Convention, so that it is clear that the arm’s-length principle is applied in the Netherlands and that it is interpreted in accordance with Article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines.
Trends and developments
Have there been any notable recent trends or developments concerning transfer pricing in your jurisdiction, including any regulatory changes or case law?
Since 2016 new documentation requirements have been enacted regarding master file and local file documentation and country-by-country reporting in Articles 29b and following of the Corporate Income Tax Act. Through these requirements, the Netherlands implemented the measures proposed by the OECD Base Erosion and Profit Shifting Action 13 Report. Local file and master file documentation is required in the Netherlands when the multinational group has a consolidated revenue exceeding €50 million. A ministerial regulation provides further guidance on the contents of the documentation.
The potential penalty for not having the required documentation is imprisonment of up to six months or a fine of up to €8,200. Intentional failure to maintain the required documentation is subject to imprisonment of up to four years or a fine of up to €20,500. The consequences of incomplete documentation have yet to be tested; it is likely that the amount of any penalty would be reduced.
For country-by-country reporting there is an obligation in the Netherlands to notify before the year’s end where the multinational group must file a country-by-country report. The threshold for country-by-country reporting is set at a consolidated group revenue of €750 million. A constituent entity of the multinational entity group which is a tax resident in the Netherlands must notify the tax inspector. If there are more Dutch group entities, these can be included in one filing. In principle, the ultimate parent entity must file the country-by-country report in the country where it has its tax residency, but it can also be the case that a surrogate ultimate parent entity must file. At minimum, the report must be filed in a country with which the Netherlands has signed an agreement that foresees the automatic exchange of country-by-country reports. The fine for non-compliance with filing or notification requirements can reach €820,000 each.
Domestic legislation and applicability
What primary and secondary legislation governs transfer pricing in your jurisdiction?
The arm’s-length principle is codified in Article 8b of the Corporate Income Tax Act and the master file and local file documentation and country-by-country reporting obligations are enacted in Articles 29b and following of the act. The state secretary for finance has issued several decrees providing guidance and insight on how the tax authorities apply the relevant rules. The most relevant decrees are:
- DB2015/462M, providing guidance on the contents of the master file, local file and country-by-country report;
- DGB 2014/3098, providing guidance on advance pricing agreement procedures;
- DGB 2014/3099, providing guidance on advance tax rulings procedures;
- DGB 2014/3101, providing guidance on intra-group financial services activities;
- DGB 2014/3102, providing additional guidance on intra-group financial services activities in Q&A format;
- DGB 2014/296M, on the organisation and competence of the ruling team (for advance pricing agreements and advance tax rulings);
- DGB 2004/1339M, on the installation of the transfer pricing coordination group;
- IFZ 2010/457M, on attribution of profits to permanent establishments;
- IFZ 2013/184M, on the application of the arm’s-length principle; and
- IFZ 2008/248M, on mutual agreement procedures.
Are there any industry-specific transfer pricing regulations?
No industry-specific policies have been made publicly available. However, there is a specific policy for financial services entities (including royalties) which meet specified substance requirements and do not bear ‘real risk’. This is codified in Article 8c of the Corporate Income Tax Act. Among other things, the entity must hold board meetings in the Netherlands and employ qualified personnel. The real risk criterion means that the entity must bear real risks (eg, credit, operational and market risks) related to the transactions that it enters into. The taxpayer must perform an intermediary financing function and the equity at risk must amount to 1% of the total loan volume or €2 million.
The taxable profit is then separately calculated based on the arm’s-length principle. Under this arrangement, the taxpayer is not allowed to deduct source taxation as a tax credit. The policy is further explained in Decrees DGB 2014/3101 and DGB 2014/3102.
What transactions are subject to transfer pricing rules?
All transactions between associated entities are subject to transfer pricing rules.
How are ‘related/associated parties’ legally defined for transfer pricing purposes?
The definition of ‘associated’ enterprises is provided in Article 8b in the Corporate Income Tax Act. It follows the arm’s-length principle and the definition of ‘associated enterprises’ in Article 9 of the Organisation for Economic Cooperation and Development (OECD) Model Tax Convention and Transfer Pricing Guidelines. An ‘associated enterprise’ is an entity that directly or indirectly participates in the management, supervision or capital of another entity. This is deliberately a broad definition. The state secretary for finance has stated that the relevant criterion is whether there is an ability to influence the pricing between affiliates. For this reason, there is for example no fixed minimum shareholding requirement. This is the same for Article 9 of the OECD Model Tax Convention and its Commentary. Once an entity falls within the scope of the definition, it must document and substantiate its intercompany transactions. In this case, the ‘apply or explain’ principle is applicable.
Are any safe harbours available?
There are no safe harbours in the Netherlands.
To a certain extent, having appropriate transfer pricing documentation can be regarded as a safe harbour, because a consequence is that the burden of proof regarding the applicable pricing is shifted from the taxpayer to the tax authorities.
Which government bodies regulate transfer pricing and what is the extent of their powers?
The Ministry of Finance works on equitable and solid tax legislation. The Dutch tax authorities fall under the responsibility of the Ministry of Finance and are responsible for levying and collecting taxes. The minister of finance is responsible for the state budget and monetary policy while the state secretary for finance is mandated with overseeing tax legislation and the functioning of the tax authorities.
Within the Dutch tax authorities there is an advance pricing agreements team, which is mandated to conclude advance pricing agreements with taxpayers in order to provide advance certainty regarding intra-group pricing. The coordination group on transfer pricing is assigned to ensure consistent transfer pricing policy among tax inspectors. A tax inspector must seek the advice of a member of the coordination group on transfer pricing where transfer pricing issues are at stake. There is also a team within the tax authorities which is dedicated to country-by-country reporting; this team resides within the coordination group on transfer pricing.
Which international transfer pricing agreements has your jurisdiction signed?
The Netherlands is an OECD member country and as such has agreed to comply with Article 9 of the OECD Model Tax Convention and its Commentary and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2017.
To what extent does your jurisdiction follow the Organisation for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines?
It is generally accepted that Article 9 of the OECD Model Tax Treaty, its Commentary and the OECD Transfer Pricing Guidelines can be used as guidance to apply the arm’s-length principle as codified in the Netherlands in Article 8b of the Corporate Income Tax Act. The state secretary for finance has explicitly stated in the Transfer Pricing Decree that the OECD Transfer Pricing Guidelines are considered as a suitable interpretation and clarification of Article 8b of the Corporate Income Tax Act.
Transfer pricing methods
Which transfer pricing methods are used in your jurisdiction and what are the pros and cons of each method?
In line with the OECD Transfer Pricing Guidelines, the tax administrations must begin a transfer pricing examination from the perspective of the method selected by the taxpayer. Nonetheless, the taxpayer must be able to substantiate why the chosen method is the most appropriate in view of the relevant facts and circumstances. The Transfer Pricing Decree refers directly to the OECD Transfer Pricing Guidelines. In Chapter II of these guidelines the following methods are described, which can be used to substantiate arm’s-length pricing between associated enterprises.
Traditional methods The following traditional methods are regarded as the most suitable and direct means of establishing a transfer price, as the price can be traced directly:
- The comparable uncontrolled price (CUP) method compares the price charged for the transfer of property or services between associated enterprises with the price charged for comparable property or services transferred under comparable circumstances between unrelated parties, in order to find a CUP. The CUP method is particularly reliable where an independent enterprise sells the same products in the same quantity and under the same conditions as those sold between associated enterprises. Relevant data for finding a CUP is frequently not available. The CUP can also be used when a taxpayer sells products to an associated enterprise as well as to an independent enterprise. The CUP can be quite strict in its application. If products, quantities or parties involved in the transaction are not comparable from a two-sided perspective, this will possibly lead to non-acceptance. The advantage is that it is the most direct and reliable manner to find a comparable price.
- The cost-plus method increases the relevant costs incurred with an appropriate mark-up. Based on the OECD Transfer Pricing Guidelines, the cost-plus method is considered most useful where:
- semi-finished goods are sold between associated enterprises;
- associated parties have concluded joint facility agreements or long-term buy-and-supply arrangements; or
- the controlled transaction is the provision of services.
In the Netherlands, in practice the costs that are included in the cost base for applying the cost-plus method can be subjected to close scrutiny.
- The resale price method deducts an appropriate margin from the resale price to an independent third party to determine the intercompany price for a product purchased from an associated party. The margin is set in a way that enables the reseller to cover its selling and operating expenses and make an appropriate profit. According to the OECD Transfer Pricing Guidelines, the resale price method is most useful where it is applied to marketing operations. In practice, it is important to compare the selling and other operating expenses of the comparables, as this will be a good indicator of the comparability of the functions and risk profiles. It can also be useful to perform a sanity check on operating profit level, as tax authorities can argue that the resale price method is a one-sided method and the tested party should then be entitled to a routine profit.
Transactional methods The following transactional methods examine the profits that arise from transactions between associated enterprises:
- The most frequently used method is the transactional net margin method (TNMM). The TNMM compares the profits which comparable independent entities realise while performing comparable functions. The TNMM measures the profit relative to, for example, costs, sales or assets. Compared to the cost-plus method, the TNMM on costs remunerates a percentage over all costs. The TNMM has the advantage that it compares the functional profile of an entity instead of specific transactions. Therefore, it can be easier to find comparables. Another advantage is that it gives the taxpayer a degree of certainty over the corporate income tax due. In practice, this can also cause the TNMM to be a preferred method for the tax authorities when the choice for this method is in line with the functions and risk profile of the entity. To apply this method, the tested party should be considered as the least complex entity.
- The transactional profit split method divides the combined profit realised from transactions between associated enterprises based on an economically valid key on which unrelated parties could have agreed. This method is used when both entities make unique and valuable contributions, or where operations are highly integrated and a one-sided approach would not be appropriate. An advantage of applying this method is that the allocation of profits may be based on the division of functions between the entities, especially when there is no more direct evidence of how independent parties would split the profit in comparable circumstances. This means that internal company data can be used to determine an allocation key. The transactional profit split method is mostly used in bilateral or multilateral situations, as more countries then have to agree with the applied allocation key.
Multinational enterprises can also use methods not described in the OECD Transfer Pricing Guidelines, although it should then be explained why such method is considered more appropriate.
Formulary apportionment is in principle not applied in the Netherlands, as it is considered not to be in accordance with the arm’s-length principle.
Preferred methods and restrictions
Is there a hierarchy of preferred methods? Are there explicit limits or restrictions on certain methods?
There is no hierarchy of methods in the Netherlands, nor are there any restrictions. In principle, the taxpayer is free to choose any method where it reaches an arm’s-length outcome. The taxpayer must substantiate why it chose a certain method. The starting point for an examination by the tax authorities should then be the method applied by the taxpayer.
What rules, standards and best practices should be considered when undertaking a comparability analysis?
According to Chapter III of the OECD Transfer Pricing Guidelines, it is of primary importance for the taxpayer to perform a broad-based economic analysis, supplemented with a description of the market in which it operates. The taxpayer must then delineate the controlled transactions and the functions performed, assets used and risks assumed in order to choose a tested party. It should then perform a benchmark study, which demonstrates and explains to the tax authorities the various steps taken in performing the benchmark and comparable selection process. On this basis, the tax authorities should be able to assess the reliability of the comparables used.
Are there any special considerations or issues specific to your jurisdiction that associated parties should bear in mind when selecting transfer pricing methods?
There are no specific considerations where an arm’s-length outcome is reached. However, where this outcome is questionable, a critical assessment of the chosen method or the comparables may follow.
For instance, application of the CUP method can be critically assessed where the application results in profits that are not in line with the functions performed by one of the parties involved in a transaction. Then it can be assessed whether the size of the transaction, bargaining power of the parties involved in the transaction and any further relevant circumstances are closely comparable.
As for the cost-plus method, the Transfer Pricing Decree stipulates that prices will generally be determined in advance based on budgeted costs and that a higher expense as a result of inefficiency will be at the expense of the contracting party providing the performance. The reason for this is that the contracting party can influence this expenditure. Aside from this, costs which tend to be passed on to the client separately and which have the character of disbursements should be left out of the cost base for applying the cost-plus method. It can also be critically assessed whether a mark-up is applied on all relevant costs.
When applying the resale price method, a sanity check on operating profit can be useful, because comparables can be subjected to close scrutiny when taxable results are not satisfactory according to the tax authorities.
With profit-based methods (eg, TNMM and profit split), discussions will more likely concern whether the functions and risk profile of the entity are properly taken into account.
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. 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. 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.
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.
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 €8,200. For intentional non-compliance, imprisonment of up to four years or a fine of up to €20,500 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 €820,000 can be imposed, where non-compliance is attributable to an intentional act or gross negligence on the part of the reporting entity.
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.
Advance pricing agreements
Availability and eligibility
Are advance pricing agreements with the tax authorities in your jurisdiction possible? If so, what form do they typically take (eg, unilateral, bilateral or multilateral) and what enterprises and transactions can they cover?
In the Netherlands, an advance pricing agreement team deals with requests for such agreements. Bilateral advance pricing agreement requests are a possibility, a copy of which will be sent to the competent department within the Ministry of Finance, which will subsequently send the request to the other country involved. It is also possible to request a multilateral advance pricing agreement. When one or more countries do not want to cooperate, the request will be handled as a request aimed at concluding multiple bilateral advance pricing agreements.
An advance pricing agreement request can cover all intercompany transactions of the taxpayer and multiple associated enterprises. This does not mean that a request will be handled in isolation; all relevant facts and circumstances will be taken into account. For instance, where a taxpayer incurred losses in the past and the tax authorities challenge these losses, an advance pricing agreement request can in practice be put on hold.
According to the Transfer Pricing Decree, there is also a possibility to ask for certainty in advance from the local tax inspector as to whether an activity qualifies as either intra-group services for the benefit of group companies or an activity carried out as a shareholder.
Rules and procedures
What rules and procedures apply to advance pricing agreements?
The advance pricing agreement request must be sent to the local competent tax inspector with a copy to the advance pricing agreement/advance tax ruling team located in Rotterdam. In practice, the request is frequently sent directly to the advance pricing agreement team. A case management plan will then be agreed between the taxpayer and the tax authorities. In this way, the taxpayer can make a realistic estimation of the time that it will take to conclude an advance pricing agreement. The tax administration endeavours to minimise the time that it takes to conclude agreements. There is a possibility to ask for a pre-filing meeting, in which the information that is especially of interest and the elements to be scrutinised are discussed.
How long does it typically take to conclude an advance pricing agreement?
In general, the tax authorities endeavour to conclude advance pricing agreements within eight weeks. However, complex cases might take longer in practice.
What is the typical duration of an advance pricing agreement?
According to the Advance Pricing Agreement Decree, the term for the agreement can be based on the request of the taxpayer. In general, an advance pricing agreement will cover three to five years.
The taxpayer may file a request for the extension of the term of the agreement.
What fees apply to requests for advance pricing agreements?
No fees are charged for the advance pricing agreement process.
Are there any special considerations or issues specific to your jurisdiction that parties should bear in mind when seeking to conclude an advance pricing agreement (including any particular advantages and disadvantages)?
The advantage of concluding an advance pricing agreement is certainty about the tax authorities’ acceptance of the taxpayer’s transfer pricing system. It can also be expected that the tax authorities will defend the taxpayer’s case in any upcoming mutual agreement procedure.
Some companies perceive it to be a disadvantage that the ruling will be exchanged with EU and Organisation for Economic Cooperation and Development countries that are connected to the entity with which the ruling is concluded.
Review and adjustments
Review and audit
What rules, standards and procedures govern the tax authorities’ review of companies’ compliance with transfer pricing rules? Where does the burden of proof lie in terms of compliance?
Article 52 of the General Tax Act contains a bookkeeping requirement, also applicable to transfer pricing bookkeeping, based on which fiscal rights and obligations and any relevant data of a taxpayer should be evident from its documentation.
The tax return following from it should be complete clearly, positively and without reservation. As a matter of principle, the taxpayer subsequently has the burden of proof for costs and expenses, whereas the tax authorities have the burden of proof for income when correcting a tax return. Where a taxpayer has proper transfer pricing documentation, the burden of proof lies with the tax administration.
Do any rules or procedures govern the conduct of transfer pricing audits by the tax authorities?
The tax authorities can ask for any data and information that can be relevant for the levying of taxes with regard to the taxpayer. This is enacted in Article 47 of the General Tax Act. Its application is broad.
The Transfer Pricing Decree stipulates that the tax authorities should take into account that determining transfer prices is not an exact science, and that on this basis tax administrations are encouraged to be flexible in their approach.
What penalties may be imposed for non-compliance with transfer pricing rules?
A possible penalty is a shift of the burden of proof. Before reaching that conclusion, the tax administration must decide that more information is required. The taxpayer will then be given time to produce the relevant documentation. The taxpayer can also file an objection to such a decision.
Where the tax return was incorrectly filed either intentionally or due to gross negligence and this can be demonstrated by the tax authorities, a fine of up to 100% of the tax due may be imposed. The interest calculated on the tax due is 8% for corporate income tax.
What rules and restrictions govern transfer pricing adjustments by the tax authorities?
The tax authorities have three years after the end of the relevant fiscal year – plus any suspension period granted for filing the tax return – to impose an assessment. If the tax inspector discovers any ‘new facts’ (ie, which it could not have reasonably been aware of previously), the period for additional assessments will be five years from the end of the relevant fiscal year plus any suspension period granted.
How can parties challenge adjustment decisions by the tax authorities?
According to the General Administrative Law Act, the taxpayer must file an objection within six weeks of the imposition of any corrections or additional assessments.
Mutual agreement procedures
What mutual agreement procedures are available to avoid double taxation arising from transfer pricing adjustments? What rules and restrictions apply?
In the Netherlands, the taxpayer can ask the tax inspector for a corresponding adjustment when corrections in other countries are final. On request, the tax inspector can resolve the issue unilaterally. In general, when applying for a mutual agreement procedure, the taxpayer must file a request within three years after the moment that double taxation can be reasonably expected. The terms can vary per bilateral treaty, so it is important to check the relevant treaty. The taxpayer must send its request for a mutual agreement procedure to the International Tax Policy and Legislation Directorate of the Ministry of Finance, details of which are set out in the Mutual Agreement Procedure Decree.
What legislative and regulatory initiatives has the government taken to combat tax avoidance in your jurisdiction?
Article 10a of the Corporate Income Tax Act sets out an anti-abuse rule regarding interest paid to associated entities. Where tainted legal acts are concluded (eg, dividend distribution, capital contribution or (partial) acquisition by the taxpayer) which are financed with debt from associated entities, the interest can be deducted only if the legal act and the financing are commercially motivated. Article 13l (participation interest) and Article 15ad (acquisition interest) of the Corporate Income Tax Act also contain interest deduction limitations.
To what extent does your jurisdiction follow the OECD Action Plan on Base Erosion and Profit Shifting?
The Netherlands adopts the measures under the Base Erosion and Profit Shifting Action Plans when international consensus about such measures is reached. The Netherlands also complies with EU anti-tax avoidance directives. The Netherlands advocates coordinated and binding international changes at multilateral and EU levels.
Is there a legal distinction between aggressive tax planning and tax avoidance?
Measures against tax avoidance should in principle be codified in tax law, while aggressive tax planning can be relevant to the way that tax authorities cooperate with a company. ‘Aggressive tax planning’ is not legally defined.
What penalties are imposed for non-compliance with anti-avoidance provisions?
Non-compliance with anti-avoidance provisions can lead to increased scrutiny from the tax authorities, as they act responsively with regard to their supervisory duties. The tax authorities try to cooperate with taxpayers, but taxpayer non-compliance can lead to different treatment. This is described in a published guideline on supervision of bigger enterprises.