Transfer Pricing Documentation. What is it and do I need it?
Does your company have (national or cross-border) intercompany transactions? If so you must be able to demonstrate that you apply similar conditions as third parties would have done in a similar situation.
Read also: transfer pricing methods
What is transfer pricing documentation
Transfer pricing documentation describes (at the very least) how transfer prices have been determined and why those transfer prices and other relevant conditions are sufficiently comparable to the prices and conditions applied by independent parties in a similar situation.
Transfer pricing documentation demonstrates to the tax authorities that you comply with the legal obligation to apply arm’s length prices on your intra-group transactions.
Which companies must have transfer pricing documentation?
Dutch law sets a minimum requirement of participation and intra-group transactions. Participation can arise through participation in the capital, supervision or management or when a company or person participates in the capital, supervision or management of two other companies.
There are no ‘hard’ thresholds for determining whether there is any participation. The legislative history does state that there must be sufficient control to be able to exert influence on the determination of prices for the transactions.
As such, small businesses can also have a transfer pricing documentation obligation.
If all companies that have intra-group transactions with each other are part of the same fiscal unity for corporate income tax purposes, then (for the time being) there are no intra-group transactions for tax purposes and there is no documentation requirement. Because of rulings by the European court in recent years, experts doubt whether this is tenable under the EU freedoms.
Types of transfer pricing documentation
In 2016, the Netherlands has two forms of transfer pricing documentation;
- The Dutch transfer pricing documentation;
- The international master file and local file.
Dutch documentation
The Dutch transfer pricing documentation is mandatory for purely Dutch companies and multinationals with a consolidated group turnover in the previous year of less than € 50 million.
The Dutch transfer pricing documentation does not have fixed requirements. This was a deliberate choice. In this way, the scope of the documentation can be adapted to the size of the company and the intra-group transactions.
Master file and local file
The international master file and local file are required for multinational companies with a consolidated group turnover in the previous year of at least € 50 million.
The international transfer pricing documentation consists of two separate documents that must be prepared each year. A global master file and a (Dutch) local file. Both documents have fixed requirements. The Dutch requirements are identical to the requirements in the OESO transfer pricing guidelines. These guidelines are very authoritative and are followed by many countries worldwide.
Consequences of not having transfer pricing documentation
The consequences of not having the documentation depends on which type of documentation is legally required of you.
For Dutch transfer pricing documentation, companies must have the documentation available at the time of executing the transactions. In reality, if taxpayers do not have the documentation, they are given a period of at least four weeks to still prepare it. Unfortunately, trying to account for transfer pricing afterwards will not always be possible. Not preparing the documentation in advance usually makes a discussion with the tax authorities much more difficult.
For the international master file and local file, a hard deadline applies. They must be available in the administration within the deadline for submitting the corporate tax return for the year in question. Contrary to the Dutch transfer pricing documentation, you will not be given the opportunity to correct a lack of documentation without consequences. If your company does not have a timely prepared master file or local file, the inspector can impose a fine of approximately €9.000. In addition, the inspector may shift the burden of proof to you and increase it. You then have the burden of proof and will have to convincingly demonstrate that an adjustment imposed by the inspector is incorrect. Demonstrating something convincingly within transfer pricing is a (nearly) impossible task. It will therefore be very easy for the tax inspector to impose a transfer pricing adjustment if you do not have any (timely) transfer pricing documentation.
Want to know more?
If you’d like to know more or have our experts to assist you in preparing your transfer pricing documentation, please contact us today.