Transfer pricing and country-by-country (CbC) reporting 

Transfer pricing documentation in the Netherlands – Part IV 

Welcome back to the transfer pricing in the Netherlands series – Part IV: country-by-country (“CbC”) reporting. In this comprehensive article, we delve deeper into the intricacies of CbC reporting. Our aim is to provide insights into this essential aspect of multinational group compliance, addressing frequently asked questions and shedding light on crucial aspects of CbC reporting. Discover the purpose and significance of CbC reporting, explore the requirements to ensure compliance with Dutch legislation, and learn about the potential consequences of non-compliance. Stay tuned to uncover how Crowe Peak can assist you in navigating the complexities of CbC reporting effectively. Want to discuss your company’s reporting with an expert directly? Contact us.  

What is a CbC and what is its purpose?  

A CbC Report (“CbCR”) can be seen as similar to the Master File in the sense that it provides further insight into the group. However, the CbCR focuses on the global allocation of the group’s income and taxes paid, together with certain indicators of the location of economic activity within the group. CbCRs also require a list of all the entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that entity. CbC comes in two forms – either as a CbCR or a CbC Notification (“CbCN”) and the form that is applicable to you will depend on where in the shareholding hierarchy you are (discussed further in the paragraph below). A CbCR is especially helpful for high-level transfer pricing risk assessment purposes and may be used by tax administrations in evaluating other Base Erosion and Profit Shifting (“BEPS”) related risks. Please note, however, that a CbCR is not considered to be a substitute for a detailed transfer pricing analysis and will not constitute conclusive evidence that the group’s transfer prices are or are not appropriate. 

When is it required to prepare/submit a CbC? 

Article 29c(5) of the Dutch CITA, 1969, states that CbC reporting requirements do not relate to any group entities of a multinational group which, in the year under review, immediately preceding the year to which the CbC relates, have less than 750 million EUR in consolidated group revenue. While the wording might be a little confusing if your entity is part of a multinational group that earns above 750 million EUR in the relevant financial year, you will be required to submit a form of CbC reporting.  

As mentioned above, the form you will be required to submit will depend on where you are in the group’s structural hierarchy. If your entity is the Ultimate Parent Entity (“UPE”) (i.e., the entity responsible for reporting in the group) or the Surrogate Parent Entity (“SPE”) (i.e., an entity of the group that has been appointed by such group, as a sole substitute for the UPE, to file the CbCR in that entity’s jurisdiction of tax residence, on behalf of such group, when certain conditions apply), then you will be required to prepare and submit a CbCR, if you are not a UPE or SPE, then you will be required to prepare and submit a CbCN. Article 29d of the CITA requires that if you are not a UPE or SPE, you will need to inform the tax inspector by the last day of the reporting year, through a CbCN, of the identity and tax residency of the Reporting Entity. Article 29c (1) of the CITA requires that the CbCR be completed and submitted within 12 months of the financial year end of the year under review.  

What requirements need to be met to consider the CbCR compliant with Dutch legislation? 

As per Section 10.1 of GG-26874, 2022, The Transfer Pricing Supplementary Documentation Requirements Regulations of 30 December 2015 (“DB2015/462M”) lays out the requirements for the contents of the CbCR. The DB205/462M is largely reflective of Annex III to Chapter V of the OECD Guidelines. As per the Annex, the following items need to be present and addressed in the CbCR for it to be considered complete: 

Overview of allocation of income, taxes, and business activities by tax jurisdiction (Table 1) 

Tax Jurisdiction 

In the first column of the template, the Reporting MNE should list all the tax jurisdictions in which Constituent Entities of the MNE group are resident for tax purposes. A tax jurisdiction is defined as a State and a non-State jurisdiction with fiscal autonomy. A separate line should be included for all Constituent Entities in the MNE group deemed by the Reporting MNE not to be resident in any tax jurisdiction for tax purposes.  

Where a Constituent Entity is resident in more than one tax jurisdiction, the applicable tax treaty tie breaker should be applied to determine the tax jurisdiction of residence. Where no applicable tax treaty exists, the Constituent Entity should be reported in the tax jurisdiction of the Constituent Entity’s place of effective management.  

Effective management is where key management and commercial decisions necessary for the conduct of the entity’s business are in substance made. All relevant facts and circumstances must be examined to determine the place of effective management. An entity may have more than one place of management, but it can have only one place of effective management at any one time. 

Revenues 

In the three columns of the template under the heading Revenues, the Reporting MNE should report the following information: (i) the sum of revenues of all the Constituent Entities of the MNE group in the relevant tax jurisdiction generated from transactions with associated enterprises; (ii) the sum of revenues of all the Constituent Entities of the MNE group in the relevant tax jurisdiction generated from transactions with independent parties; and (iii) the total of (i) and (ii). Revenues should include revenues from sales of inventory and properties, services, royalties, interest, premiums, and any other amounts. Revenues should exclude payments received from other Constituent Entities that are treated as dividends in the payor’s tax jurisdiction. 

Profit (Loss) before Income Tax 

In the fifth column of the template, the Reporting MNE should report the sum of the profit (loss) before income tax for all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. The profit (loss) before income tax should include all extraordinary income and expense items. 

Income Tax Paid (on Cash Basis) 

In the sixth column of the template, the Reporting MNE should report the total amount of income tax paid during the relevant fiscal year by all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. Taxes paid should include cash taxes paid by the Constituent Entity to the residence tax jurisdiction and to all other tax jurisdictions. Taxes paid should include withholding taxes paid by other entities (associated enterprises and independent enterprises) with respect to payments to the Constituent Entity. Thus, if company A is resident in tax jurisdiction A earns interest in tax jurisdiction B, the tax withheld in tax jurisdiction B should be reported by company A. 

Income Tax Accrued (Current Year) 

In the seventh column of the template, the Reporting MNE should report the sum of the accrued current tax expense recorded on taxable profits or losses of the year of reporting of all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. The current tax expense should reflect only operations in the current year and should not include deferred taxes or provisions for uncertain tax liabilities. 

Stated Capital 

In the eighth column of the template, the Reporting MNE should report the sum of the stated capital of all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. About permanent establishments, the stated capital should be reported by the legal entity of which it is a permanent establishment unless there is a defined capital requirement in the permanent establishment tax jurisdiction for regulatory purposes. 

Accumulated Earnings 

In the ninth column of the template, the Reporting MNE should report the sum of the total accumulated earnings of all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction as of the end of the year. Regarding permanent establishments, accumulated earnings should be reported by the legal entity of which it is a permanent establishment. 

Number of Employees 

In the tenth column of the template, the Reporting MNE should report the total number of employees on a full-time equivalent (FTE) basis of all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. The number of employees may be reported as of the year-end, based on average employment levels for the year, or on any other basis consistently applied across tax jurisdictions and from year to year. For this purpose, independent contractors participating in the ordinary operating activities of the Constituent Entity may be reported as employees. Reasonable rounding or approximation of the number of employees is permissible, providing that such rounding or approximation does not materially distort the relative distribution of employees across the various tax jurisdictions. Consistent approaches should be applied from year to year and across entities. 

Tangible Assets other than Cash and Cash Equivalents 

In the eleventh column of the template, the Reporting MNE should report the sum of the net book values of tangible assets of all the Constituent Entities resident for tax purposes in the relevant tax jurisdiction. Regarding permanent establishments, assets should be reported by reference to the tax jurisdiction where the permanent establishment is situated. Tangible assets for this purpose do not include cash or cash equivalents, intangibles, or financial assets. 

List of all the Constituent Entities of the MNE group included in each aggregation per tax jurisdiction (Table 2) 

Constituent Entities Resident in the Tax Jurisdiction 

The Reporting MNE should list, on a tax jurisdiction-by-tax jurisdiction basis and by legal entity name, all the Constituent Entities of the MNE group which are resident for tax purposes in the relevant tax jurisdiction. As stated above regarding permanent establishments, however, the permanent establishment should be listed by reference to the tax jurisdiction in which it is situated. The legal entity of which it is a permanent establishment should be noted (e.g., XyZ Corp – Tax Jurisdiction A permanent establishment). 

Tax Jurisdiction of Organization or Incorporation if Different from Tax Jurisdiction of Residence 

The Reporting MNE should report the name of the tax jurisdiction under whose laws the Constituent Entity of the MNE is organized or incorporated if it is different from the tax jurisdiction of residence. 

Main Business Activity(ies) 

The Reporting MNE should determine the nature of the core business activity(ies) carried out by the Constituent Entity in the relevant tax jurisdiction, by ticking one or more of the appropriate boxes. 

• Business Activities 
• Research and Development 
• Holding or Managing Intellectual Property 
• Purchasing or Procurement 
• Manufacturing or Production 
• Sales, Marketing or Distribution 
• Administrative, Management or Support Services 
• Provision of Services to Unrelated Parties 
• Internal Group Finance 
• Regulated Financial Services 
• Insurance 
• Holding Shares or Other Equity Instruments 
• Dormant 
• Other (please specify the nature of the activity of the Constituent Entity in the “Additional  
• Information” section.) 

As the CbCR relates to very specific information in that particular financial year, it is also a requirement that the CbCR prepared needs to be contemporaneous (i.e., reflect updated/current information). This generally means that a CbCR is prepared or updated annually. 

What are the consequences of not being compliant with Dutch legislation? 

If the relevant CbCR is not prepared correctly or submitted in a timely manner, you may be liable for an administrative penalty of between 515 EUR and 25,750 EUR. If you are uncertain whether your company meets the criteria for transfer pricing documentation or if your CbCR is compliant from a Dutch standpoint, reach out to us. Crowe Peak’s team includes highly experienced tax professionals with expertise in transfer pricing, who can assist you in evaluating your transfer pricing requirements effectively.