New transfer pricing regulations put MNE's under the microscope in the Netherlands

Friday, 1 April 2016

Transfer pricing is a specific aspect in corporate income tax (“CIT”) legislation focussing on the application of the arm’s length principle. Transfer pricing determines the conditions, including the price, for transactions within a Multinational Enterprise (“MNE”) group resulting in a proper allocation of profits to MNE group companies in different countries.

The arm’s length principle is used by countries as the basis of transfer pricing rules. The principle requires that the conditions of transactions between related companies (intercompany) are as if the transaction took place between independent companies in comparable circumstances.

The Netherlands also adopted the arm’s length principle in its legislation (article 8b Dutch CIT) and requires MNE’s to demonstrate and properly document the arm’s length nature of the transactions between related companies. Until recently, there was no detailed guidance given on information that should be included in such documents.

On December 30, 2015 (*1), the Dutch government adopted a three tiered approach for transfer pricing documentation as developed by the OECD as part of the BEPS project (*2). By adopting this approach, detailed guidance is given on the information that should be included in transfer pricing documentation. The approach contains a master file, local file and country-by-country report for qualifying companies. The master file and local file are required for MNE’s with an annual consolidated turnover of at least EUR 50 million. MNE’s with an annual consolidated turnover of at least EUR 750 million are also obliged to include a country-by-country report in their administration. However, MNE’s that have an annual consolidated turnover of less than EUR 50 million, are still required to prepare transfer pricing documentation in line with the regulations that already was in place.

The additional regulations state that the transfer pricing documentation should be available in the MNE’s administration within the term of filing the annual CIT tax return. In case the obligations are not met, penalties may be applied.

As of January 1, 2016, the new regulations apply in the Netherlands, but it is intended that more OECD-member countries implement similar regulations in the near future.

Three tiered approach

The master file and local file require more in-depth information compared to the ‘old’ transfer pricing regulations. The master file should provide a general overview of the MNE group. This overview should include, amongst others, the intangibles owned, used and developed by the MNE and the financial and tax position of the MNE group (including an overview of tax rulings).

The local file should provide more detailed information relating to specific intercompany transactions of a MNE in a particular region. The information required in the local file supplements the master file.

The country-by-country report requires tax jurisdiction wide information in relation to the global allocation of income, the taxes paid, and certain indicators of the location of the economic activity among tax jurisdictions in which the MNE group operates.

By introducing the new transfer pricing regulations, MNE’s are faced with a substantial increase of their compliance burden and potential discussions with tax authorities in multiple countries. In order to be compliant and prevent discussions with tax authorities, or even worse, it is important that qualifying MNE’s adjust their internal reporting processes to the new transfer pricing regulations.

The first set of documents based on this new piece of transfer pricing legislation should be available early 2017 when filing the 2016 tax return. The clock is ticking!

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(*1) Decree of December 30, 2015 nr: DB2015/462M.

(*2) More specific, Action 13 of the OECD’s Base Erosion and Profit Shifting action plan, published per October 5, 2015.