What Is Transfer Pricing and How Does It Work?
Transfer pricing is all about the prices that are charged for goods or services between companies that are associated with each other in some way. Companies can be associated through (joint) ownership, (joint) control or (joint) management.
How transfer pricing works
When unrelated companies deal with each other, they have conflicting interests. Both want to make the biggest profit possible. Therefore, the seller wants to sell for the highest price possible, while the buyer wants to buy for the lowest price possible. Associated enterprises do not (necessarily) have the same conflicting interests. They may even have corresponding goals: maximizing group profit. Taxes are costs, so if you want to maximize profits, you want to minimize your tax burden. By setting your prices in intercompany transactions/ controlled transactions accordingly, you can easily shift profits from one country to the other.
Tax administrations are also aware of this and they want to avoid related parties manipulating their taxable income this way. That is why many of the world’s countries have agreed on implementing the ‘at arm’s length principle’. This principle is the leading principle in transfer pricing. It states that related companies should deal with each other under similar conditions (including prices) as unrelated parties would have done in a similar situation. In theory, manipulating your taxable income via transactions with companies related to your own is not possible.
In practice however, there were and still are some possibilities. Some of these possibilities were unintentional. Other methods were (and are) created more or less intentionally by countries taking part in tax competition. Especially in the last decade or so, countries have been actively cooperating in an attempt to stop this.
In order to do that, many countries in the world agreed on a wide range of measures, including transfer pricing measures. Transfer pricing has increased in complexity and gets an ever increasing amount of attention from tax administrations and governments. This shows from the increasing number of companies that has adopted transfer pricing regulations, including transfer pricing documentation requirements.
Transfer pricing in the Netherlands
The Netherlands has overhauled its transfer pricing documentation requirements as per 2016. Documentation requirements for larger multinational groups have increased substantially and the law provides the tax authorities with increased possibilities to penalize companies that are not complying with these rules. The Dutch Tax Authorities have also increased the size of their transfer pricing specialist team in recent years to conduct more transfer pricing related audits.
If you would like to know more about transfer pricing or how we can assist you, please contact one of our specialists.