An extract from The Transfer Pricing Law Review, 5th Edition
Effective on 1 January 2016, in addition to the pre-existing General Transfer Pricing Documentation requirements included in Article 8b, Paragraph 3 of the CITA (the General Requirements), (specific) Master File and Local File Transfer pricing Documentation requirements (the Specific Requirements) were introduced in Article 29g of the CITA. Dutch taxpayers do not need to file transfer pricing documentation with the Dutch Revenue under the General or Specific Requirements.i General Requirements
Article 8b, Paragraph 3 of the CITA requires Dutch taxpayers engaged in transactions with 'related entities' to include information in their books and records:
- that shows in which manner the transfer prices have been established; and
- from which it can be deduced that the transfer prices applied would have been agreed between independent entities.
As regards the contents of the General Requirements, the Parliamentary Papers to the introduction of Article 8b of the CITA indicate that documentation should include a description of the characteristics of the goods and services, a functional analysis of the parties involved in the contractual terms of the transactions, the economic conditions and the business strategies. In addition, the taxpayer should be able to support its decision for the transfer pricing method applied based on the relevant facts. Notably, the General Requirements do not oblige taxpayers to perform a benchmarking analysis to substantiate the arm's-length nature of the transfer pricing. The information included under the General Requirements will be able to allow the Dutch Revenue to evaluate the prices applied by the taxpayer against relevant facts of third parties in comparable circumstances. Therefore, not having an available benchmarking analysis does not lead to the shift of the burden of proof to the taxpayer.
Although, in principle, the General Requirement has to be met at the moment the transaction is entered into, the Parliamentary Papers provide Dutch taxpayers a 'grace period' if they do not have the required documentation when requested by the Dutch Revenue. This grace period ranges between four weeks and three months depending on the complexity of the transaction. Furthermore, Article 8b of the CITA applies to both cross-border and domestic transactions (including, in principle, transactions between companies that form part of a Dutch fiscal unity pursuant to Article 15 of the CITA).ii Specific Requirements
On the basis of Article 29g of the CITA, a Dutch taxpayer will need to include in his or her books and records a master file and a local file, provided that such taxpayer forms part of a multinational group of companies and that the multinational group reported (worldwide) consolidated revenue of at least €50 million in the preceding financial year. The Specific Requirements apply irrespective of whether the Dutch taxpayer was engaged in any inter-company transaction during the year under review. In principle, a Dutch holding company that only earns exempt income (i.e., under the participation exemption) will need to include the master file as well as the local file in its books and records.
The master file and local file will ultimately need to be included in the books and records of the Dutch taxpayer on the due date of the Dutch corporate income tax return. Where the taxpayer applies a financial year equal to the calendar year, the due date for the Dutch corporate income tax return is five months after the end of the relevant financial year (i.e., before 1 June 2022 for the financial year 2021). With a tax return filing extension, the Dutch corporate income tax will need to be filed within 16 months after the end of the relevant financial year (i.e., before 1 May 2022 for the financial year 2021). Although taxpayers are (legally) allowed to file the Dutch corporate income tax return before preparing the local file (or master file) and including them in their books and records, taxpayers are strongly recommended to apply the reverse order to ensure that the transfer pricing positions taken in the tax return are in line with, and substantiated in, the local file (i.e., if not, the taxpayers may bear the risk of being charged with intentionally filing an incorrect tax return). The information items to be included in the master file and local file, as specified in the Additional Transfer Pricing Documentation Regulation,13 are identical to the items listed in Annex I and II to Chapter V of the OECD Guidelines.
If a taxpayer does not (in time) include the local file and master file in his or her books and records, he or she will not meet Dutch administration requirements. As a result, the tax inspector is allowed to impose penalties and issue an 'information decision'. An 'irrevocable information decision' will shift the burden of proof to the taxpayer and will also increase such burden of proof (i.e., in contrast, not meeting General Requirements of Article 8b, Paragraph 3 of the CITA will only shift the burden of proof and not increase it). Where a taxpayer has not complied with tax filing requirements (i.e., filing a late or an incorrect tax return), a shift and increase of the burden of proof to the taxpayer does not require an irrevocable information decision. Because transfer pricing is not an exact science, i.e., transfer prices will generally be determined based on various subjective elements that are open to discussion with the Dutch Revenue (e.g., exit charges, compensation payments and profit splits), an increased burden of proof could have significant impact on transfer pricing corrections.iii An overview of the main differences between General and Specific Requirements
|Reference||Transactions between||Documentation standard||Timing||Burden of proof (in principle) with|
|General Requirements (Article 8b of the CITA)||Dutch and foreign related entities (including Dutch companies of a fiscal unity)||Open||FY + 16 months||Dutch Revenue|
|Specific Requirements (Article 29g of the CITA)||Foreign and Dutch related entities (including fiscal unity companies)||Fixed (based on OECD template)||Dutch Revenue Request + (maximum) 3 months||Taxpayer (if fixed standard not met)|
Country-by-country reporting (CbCR) requirements were introduced in 1 January 2016 in Article 29e of the CITA. In principle, a Dutch taxpayer will have CbC Reporting obligations if it forms part of a multinational group, which has reported consolidated (worldwide) group revenue of at least €750 million in the preceding financial year, and if no other group entity files the CbC Report. A CbC Report should be submitted within 12 months after the end of the financial year. The CbC notification should be filed by the last day of the financial year. Both the notification and the CBC Reports need to be filed digitally in a format described by the Dutch Revenue. Failure to meet the CbC Reporting obligations may result in a fine of €870,000 (i.e., for repeat offenders).
Presenting the casei Pricing methods
In the TP Decree, the State Secretary indicates that, in line with Paragraph 4.9 of the OECD Guidelines, the Dutch Revenue will conduct a transfer pricing audit from the perspective of the method applied by the taxpayer at the time of the transaction. Consequently, Dutch taxpayers have a certain degree of freedom regarding their choice for any of the five transfer pricing methods described in the OECD Guidelines, provided that the method applied leads to arm's-length results for the specific transaction. In practice, the TNMM with total cost or turnover as net profit indicator as well as the CUP for financing transactions are most often applied in practice. However, as a result of increased scrutiny on one-sided transfer pricing methods by Dutch and other tax authorities, the (residual) Transactions Profit Split Method is increasingly applied in practice.
Commonly-used database providers in the Netherlands include Bloomberg, Bureau van Dijk, Thomson Reuters and Moody's. For benchmark analyses, the Dutch Revenue generally allow these analyses to be based on pan-European database information. This is due to the fact that the limited size of the economy in the Netherlands prevents the availability of sufficient unrelated-party transactions. In practice, the Dutch Revenue may require taxpayers to account for incremental risk on certain transactions due to the location of the beneficiary through the use of, for example, country risk premiums. Furthermore, with the inclusion of example calculations thereof in the OECD Guidelines, the Dutch Revenue is more likely to accept comparability adjustments, such as working capital adjustments.
Notably, however, Dutch Revenue 'critically assesses' royalty benchmarks used to substantiate arm's-length charges for intra-group licensing arrangements (reference is made to Section 5.5 of the TP Decree in which the State Secretary indicates this view). In our practical experience, Dutch Revenue are specifically critical of databases used to determine royalties brand or trademark remunerations, or both, in business-to-business situations where such charges reduce the Dutch taxable basis. In the view of the Dutch Revenue, such benchmarks cannot be used because they are of the opinion that the information included in these databases is not sufficiently detailed to conduct an appropriate comparability analysis in a suitable manner.
An arm's-length compensation must, in principle, be determined on a transactional basis according to the OECD Guidelines. In practice, complications connected to this determination of prices on a transactional basis may occur. In the situation that an assessment per transaction is not possible, for instance when large numbers of similar transactions are involved, the transaction can be assessed on an aggregated basis to determine the arm's-length character. In these circumstances, the taxpayer is obliged to substantiate that the transfer price taken into account with regards to the aggregated transaction as a whole is in accordance with the arm's-length principle (reference is made to Section 2.2 of the TP Decree as well as to the Dutch car-importer case law of the Dutch Supreme Court).14
In the TP Decree, the State Secretary indicates that statistical tools, such as the interquartile range, can be applied to increase the reliability of the comparable data. He takes the position that a correction cannot take place if the price applied for the inter-company transaction is within this range. In addition, a taxpayer-initiated shift within the range will only be accepted by the Dutch Revenue where the taxpayer:
- has substantiated the changed circumstances justifying an adjustment of the transfer price; and
- formalised the amended pricing in an agreement and actually charged said price between the parties.
If the price applied falls outside of this range, the State Secretary takes the position that the transfer prices should be adjusted to the median (i.e., the middle point of a range of observations). Moreover, in respect to the use of multi-year data, the State Secretary takes the following position in respect to transfer pricing adjustments initiated by the Dutch Revenue:
- the Dutch Revenue will first have to assess whether the remuneration for the inter-company transaction falls within the arm's-length range determined for the year in question. No adjustment will be made if the remuneration falls within the annual range;
- if the remuneration falls outside the annual range, the Dutch Revenue will need to assess whether a moving average remuneration for the inter-company transaction, determined over a number of years, falls within the multiple-year range. If so, no adjustment will be made; and
- an adjustment will be made if the remuneration falls outside of both the arm's-length annual range and the multiple-year range.
The Coordination Group Transfer Pricing (CGTP) was established to ensure the coordination within the Dutch Revenue on the practical application of transfer pricing rules and the coordination of knowledge. Although the local tax inspectors are in charge of the assessment of the taxpayer's return, they are supported by the CGTP in transfer pricing matters. The CGTP also supports the Ministry of Finance in relation to transfer pricing policy and MAPs.
The Dutch Revenue mainly focuses on the topics included in the TP Decree, such as business restructuring (specifically involving transfers of part of the business out of the Netherlands), (the transfer and pricing of) intangibles, intra-group services, procurement activities, intra-group guarantees, captive insurance companies and Dutch participants in CCAs. Dutch Revenue also focuses on the transfer pricing position of group companies that incur continuous loss. In these discussions, particular attention is given by the Dutch Revenue to assess whether the relevant inter-company transaction is commercially rational from the perspective of the Dutch taxpayer as well as the related entity. A more recent trend is the focus of the Dutch Revenue on the arm's-length nature of valuations prepared by Dutch tax payers (i.e., reference is also made to Paragraph 5 of the TP Decree). This has led to the formation of the National Business Valuation team (NBVT) of the Dutch Revenue. The NBVT include registered business valuation specialists and can be contacted for tax related valuation discussions. Additionally, it has become common practice for members of the NBVT to review tax rulings that have a substantial valuation aspect. When it comes to obtaining a tax ruling for these cases, taxpayers should be prepared to have a thorough valuation report in place to substantiate their tax position (e.g., for obtaining a tax ruling in relation to the Management Participation Plan). Furthermore, where possible, the NBVT prefers the application of the Discounted Cash Flow (DCF) method instead of merely using a multiple valuation. When applying the DCF method, the taxpayer should provide explicit substantiation on how it has determined the discount rate and the respective free cashflows. For structures that have a valuation aspect but for which no tax ruling is obtained, it is equally important for a taxpayer to have a thorough valuation report available in his or her books and records.
Upon the introduction of the Specific Requirements, the State Secretary indicated that master file and local file documentation could be requested by the Dutch Revenue following a risk assessment of the CbC Report. However, recent experience shows that the Dutch Revenue have requested master file and local file documentation in relation to the assessment of the tax return or even as more of a general request. The Dutch Revenue have also been requesting master file and local file documentation from Dutch taxpayers in the scope of an internal documentation review pilot programme.
A Dutch taxpayer is required to provide the Dutch Revenue with all information that could (hypothetically) be reasonably relevant for the levying of Dutch taxes on the taxpayer. The Dutch Revenue may also ask information on the relevant taxpayer from third parties that are required to maintain an administration under Dutch tax law (e.g., Dutch companies). Dutch taxpayers are not, however, required to provide the Dutch Revenue with (1) advice received by the taxpayer from a tax advisor or accountant and (2) correspondence between the taxpayer and his or her attorney (in their function as an attorney).