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Netherlands Company Formation Agents - How they (should) Work!
Are you thinking of starting a business in the Netherlands? One important step is finding a reliable company agent to help with legal and...
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Transfer Pricing in the Netherlands; Intra-Group transactions
Transfer pricing is an important tax aspect, when expanding your company overseas, and performing transactions within your Group.
When independent parties do business, a fair price will be established by the free market. This could be different when affiliated businesses (within the same Group) do business, abd set prices and conditions that no third party would accept. This is when business is conducted between related entities must be performed according to the arm's length principle.
Transfer Pricing has been in the spotlight in recent years due to the media fuss about tax avoidance and the tax morale of multinationals. As a result, new laws have been introduced and SMEs are now also dealing with transfer pricing. This article explains and handles how SMEs can deal with transfer pricing in a practical way.
If you are active in several countries with your own branch, you will in any case have to deal with Transfer Pricing. Due to the media fuss around tax avoidance and the tax morality used, the control of this is also on edge again. Countries are afraid of losing tax revenues when companies can shift profits they have earned in the various countries. However, this has not become any easier since the legislative amendments as of 2016, and there has even been a significant increase in the administrative burden for taxpayers. Transfer Pricing documentation must be updated annually and failure to comply with that obligation is subject to various sanctions (administrative and criminal).
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Why is Transfer Pricing relevant?
In fiscal matters, Transfer Pricing is ultimately about the question of which government can levy on which part of the profit of a company. In an economy where sixty to seventy percent of world trade takes place between multinationals, governments are increasingly using extensive Transfer Pricing legislation and documentation obligations as a tool to raise their share of taxes. Internal transfer prices largely determine the allocation (allocation) of revenues and costs to the group companies in the countries concerned. The taxable profit and the tax owed logically follow from this.
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Transfer pricing methods
Taxpayers may choose from all of the, in the guidelines, mentioned methods. The OECD mentions the following transfer pricing methods to comply with the arm’s length principle:
The comparable uncontrolled price method;
The resale price method;
The cost-plus method;
The transactional profit split method;
The transactional net margin method.
As mentioned above, taxpayers can choose the method best suitable for their business.
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How to deal with Transfer Pricing
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There are a number of important steps to make a Transfer Pricing project successful. These steps can (partly) be carried out yourself if there is sufficient knowledge of the matter. But even with insufficient knowledge of Transfer Pricing, every company can still do this itself. One of the most important things about Transfer Pricing is simply to present the facts. The most important facts are the internal transactions with the associated functions, risks and assets. To start a transfer pricing project, companies can take the following steps:
Create a functional analysis matrix. In the first column, note all functions, risks and assets. In the top row you put the entities and / or countries. Then you go through the functions, risks and assets for each entity and tick them if they apply;
Then make a characterization per entity. At Transfer Pricing we often distinguish the 'simple' versus the 'entrepreneur' function. The latter has the most functions, risks and assets. Usually a clear picture already follows from the matrix. The matrix often also reveals a business model, for example central or decentralized;
Make an overview of all internal transactions and bundle them into groups, for example sales, services, financing, etc .;
Select the appropriate Transfer Pricing method to be applied to the transactions. This is a step that follows from the characterization and it is also a very crucial step. The Transfer Pricing methods are described in the new legislation and the OECD Transfer Pricing guidelines;
Finally, look for comparable transactions to demonstrate the business nature of the transactions and / or profit. When there are transactions that are done both internally and externally, that is a possible comparison. If there are no comparable transactions with third parties, databases should be used.
The above-mentioned steps together form the final Transfer Pricing story and serve as an explanation to, for example, an inspector, but also, for example, to an accountant. However, facts are open to interpretation. So having Transfer Pricing documentation alone is no guarantee of success. Documentation must be kept and the story must be correct. Even when changes occur.
Advanced rulings
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It is also possible to get an advanced ruling on transfer pricing. Meaning that taxpayers can have a consult with the Dutch tax authorities in order to make an agreement about the cross border activities of their related companies. In general, an advance tax ruling is treated as a binding opinion from the Dutch tax Authorities based on the facts and circumstances applying to all intra-group transactions. The ruling is binding only with respect to the activities specified in the ruling; if the actual facts and circumstances deviate, the ruling will be cancelled. These kinds of rulings are generally valid for a specified period and can be terminated in a number of cases.
The Dutch tax Authorities only consult with businesses having enough substance in The Netherlands. (please also check our article about substance)
Transfer pricing documentation
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Related companies must include in their administration a description of how prices are calculated between them. This calculation has to prove that the prices comply with the arm’s length principle.
Next to this, there are extra requirements for multinational group companies with a consolidated group turnover of € 750.000.000. These companies need to file an annual country-by-country report. In addition, Dutch taxpayers that are part of a multinational group with a consolidated turnover of at least € 50.000.000 must draw up a so-called ‘’ master file’’ and a ‘’local file’’.
Please note that: With effect from 1 January 2017, EU Member States are obligated to automatically exchange information on advance cross-border tax rulings and advance pricing arrangements.
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