For a multinational enterprise, transfer pricing can be both a burden and an opportunity. A burden because Dutch law requires several documents to be present and in order. It also presents an opportunity, because well-planned transfer pricing can actually prevent double or unnecessary taxation and fines.
Crowe Peak has the necessary expertise to help you develop an optimal transfer pricing strategy and be fully compliant with the requirements of the law.
What is Transfer Pricing?
Transfer pricing is basically nothing more than determining either the internal pricing of intra-group transactions (sale of goods or services). Internal pricing at multinational companies has large effects on how much income tax is due in a jurisdiction. This is why tax authorities are very concerned about transfer pricing and why the number of laws regarding transfer pricing have been increasing over the years.
Not playing by the rules of tax authorities may lead to fines, additional assessments or profit adjustments.
Your company consists of several entities that form a multinational group or has an office abroad.
Either goods are sold or services performed within the group or the functions that make up the enterprise (e.g. sales, accounting, management, treasury etc.) are divided over several entities or jurisdictions
Transfer pricing, BEPS and the European Union
In the Anti-Base Erosion and Profit Shifting project of the OECD (generally known as BEPS), transfer pricing plays an important role. It can be beneficial in determining where taxes should be paid, but it has also been used improperly by certain enterprises, creating unwanted effects.
The European Union has been implementing several measures that have been suggested in the BEPS Actions 8-10 amongst which a Directive concerning transfer pricing on mandatory transfer pricing documentation.
Dutch law regarding transfer pricing
In the Netherlands, the amount of transfer pricing rules that an enterprise must take into account depends on the size of the company. The size of a company is determined by the worldwide consolidated annual revenue:
- Rules for all enterprises
- Rules for enterprises with consolidated annual revenue exceeding € 50 million
- Rules for enterprises with consolidated annual revenue exceeding € 750 million
Transfer Pricing rules for all enterprises
In all commercial and financial relations, associated enterprises are required to deal with each other in the same fashion as independent enterprises would do. This is known as the ‘arms length principle’.
Documentation of how the transfer pricing is determined and why this leads to pricing that is similar to what independent enterprise would have agreed on needs to be present.
Note that when the documentation is not present, the burden of proof shifts to the taxpayer. This means that when the documentation is not present and a tax inspector states that the intra-group pricing is determined incorrectly, the taxpayer has to prove otherwise. Having the burden of proof shifted is an undesirable effect, as it is often quite hard to deliver the necessary proof.
Master file / Local file: enterprises with consolidated annual revenue exceeding € 50 million
For enterprises with consolidated annual revenue exceeding € 50 million, the rules are more formal. It is necessary to have both a master file and a local file at hand.
The master file must include:
- a description of the multinational enterprise;
- the types of business activities;
- a general description of the transfer pricing strategy;
- worldwide allocation of income and economic activities.
The local file must include
- all information that is relevant for the analysis of the transfer pricing with regards to the transactions between the Dutch enterprise and the associated enterprises in other jurisdictions;
- the information how the allocation of profit is determined in line with the arms length principle.
Note that this is required for every entity that is liable to corporate income tax in the Netherlands. This means that not only resident entities are required to do so, but also entities that are only taxed on sources in the Netherlands.
As far as language goes, the master file and local file can be written either in Dutch or in English.
Country-by-Country Report: enterprises with consolidated annual revenue exceeding € 750 million
Enterprises with consolidated annual revenue exceeding € 750 million are required to file a so called ‘country-by-country’ report when they are the ultimate parent entity of a multinational group.
The country-by-country report must contain:
- for every state in which the multinational group is active, information regarding the income, the profit before taxes, income taxes paid, income taxes payable in the annual accounts, share capital, accumulated profit, the number of employees and fixed assets other than cash or cash equivalents;
- a description of every group entity of the multinational group with mention of the state of which the group entity is tax resident and, when this deviates, the state according to whose laws that group entity is established, as well as the most important business activities of that group entity;
- a certain form, as established by the Dutch Minister of Finance
Note that when the ultimate parent entity is not resident of the Netherlands and does not file a country-by-country report , the requirement to file can be moved to the Dutch group entity under specific circumstances. This means that not being the ultimate parent entity does not necessarily mean that no obligations exist with regards to filing a country-by-country report.
As far as language goes, the country-by-country report can be written in either Dutch or English.
Transfer pricing services
At Crowe Peak we see that businesses are struggling with regulations in this area.
Not only in the sense that they struggle with the documents (master file, local file, country-by-country report) themselves, but we still encounter a lot of businesses that simply do not know that these obligations exist. Compared to other states, the Netherlands have been quick to adopt the obligations.
Within our regular tax consultancy service, we therefore offer specialized tax advice on transfer pricing. Our service covers:
- Providing insight into relevant regulations
- Setting up transfer pricing documentation
- Evaluating the business model in relation to transfer pricing
- Optimizing transfer pricing with regards tot he business model
- Assisting in contact with tax authorities
Transfer pricing: our concern
Our specialists can take this complex tax component off your hands. Together with you we determine the best transfer pricing strategy and help you set up the necessary documentation. In cooperation with our global network Crowe Global with local tax experts in close to 130 countries we ensure that the transfer pricing strategy is implemented correctly and consistently all over the world. Our experts keep a close eye on the international regulatory opportunities and highlight any opportunities or risks.
Would you like to learn more about a well-planned transfer pricing strategy? Contact our specialists today.