Taxing authority and tax law
Tax authority: Dutch Tax Administration (Belastingdienst)
Tax law:
- Tax authority Articles 3.8 and 3.25 of the Dutch Income Tax Act 2001
- Articles 8 and 8b of the Dutch Corporate Income Tax Act 1969
- Effective 1 January 2002, Article 8b codifies the arm’s length principle and introduces transfer pricing documentation requirements in the Netherlands that came into force
Relevant regulations and rulings
Besides the articles in Dutch tax law as mentioned above, the Dutch Under-Minister of Finance issued several decrees in August 2004, which bring up to date existing decrees published in 2001, with adjustments and improvements in the rules for obtaining advance certainty. These 2004 decrees provide more clarity regarding how the fiscal rules within the APA/Advance Tax Ruling (ATR) practice should function. Furthermore, one decree clarifies how the tax authorities will treat certain issues regarding the application of the arm’s length principle. The decrees provide the formal position of the tax authority, but do not legally bind the taxpayer.
The eight decrees published are:
- APA decree, IFZ2004/124M
- ATR decree, IFZ2004/125M
- Decree regarding financial service activities, IFZ2004/126M
- Questions and answers on the decree regarding service entities and grandfather regime ruling policy, IFZ2004/127M
- Decree on advance certainty and good faith versus treaty partners, DGB2004/1337M
- Decree on APAs, advance tax rulings (atrs), financial services entities, interposed holdings, contact point potential foreign investors, organization and competency rules, DGB2004/1338M
- Implementation decree regarding the Coordination Group Transfer Pricing, DGB2004/1339M
- Adjustments to the transfer pricing decree of 30 March 2001, application of the arm’s length principle and the OECD guidelines, IFZ2004/680M
OECD guidelines treatment
The tax authority in general follows the OECD guidelines. Further guidance regarding the interpretation and application of the arm’s length principle is provided by the Dutch transfer pricing decrees (as published by the Under-Minister of Finance in the decree of 30 March 2001, updated with the decree of 21 August 2004). According to these decrees, the OECD guidelines leave room for interpretation or require clarification on several issues. The goal of these decrees is to provide insight into the position of the tax authority regarding these issues. The transfer pricing decree of August 2004 is an excellent source for transfer pricing guidance. It provides specific guidance on intra-group services and shareholder activities, support services, contract research, cost contribution arrangements, arm’s length price determination when the value at the time of the transaction is uncertain and other topics. With respect to business restructuring no specific guidance has been issued to date but as already noted the tax authority in general follows the OECD guidance in this respect.
Priorities/pricing methods
There is no “best method” rule. Taxpayers are in principle free to choose any OECD transfer pricing method as long as the method chosen results in arm’s length pricing for the transaction. Taxpayers are not obligated to test all the methods, though they must substantiate the method chosen. The tax authority prefers traditional transaction methods over transactional profit methods.
Transfer pricing penalties
The lack of transfer pricing documentation will shift the burden of proof regarding the arm’s length nature of the transfer prices used to the taxpayer.
During the parliamentary discussions regarding the introduction of the arm’s length principle and transfer pricing documentation requirements (i.e., Article 8b) into the Dutch Corporate Income Tax Act, a question was raised regarding the Dutch policy in connection with the levying of administrative penalties in case of a transfer price adjustment. The Dutch Under-Minister of Finance declared that in case of transfer price adjustments the levy of an administrative penalty under the circumstance of an incorrect income tax return should be limited to cases in which it is plausible that the agreed transfer price is not regarded as arm’s length as a result of a pure intentional act. Therefore, an administrative penalty will not be imposed even in the case of gross negligence or conditional intentional act according to this policy announcement.
In case of a pure intentional act as set forth above, the tax may be increased with a maximum penalty of 100% of the (additional) tax due, plus interest.
Penalty relief
It is unlikely that there will be transfer pricing-related tax penalties if there is proper transfer pricing documentation available by the taxpayer and the documentation at hand adequately substantiates the arm’s length nature of the intercompany transactions undertaken by the taxpayer.
Documentation requirements
Taxpayers are obliged to prepare documentation that describes how the transfer prices have been established and which must be included in the accounting records. Furthermore, the documentation needs to include sufficient information that would enable the tax authority to evaluate the arm’s length nature of the transfer prices applied between associated enterprises. The parliamentary explanations to Article 8b do not describe an exhaustive list of information that should be documented.
- The transfer pricing documentation could consist of the following elements:
- Information about the associated enterprises involved
- Information on the intercompany transactions between these associated enterprises
- A comparability analysis, describing the five comparability factors as set forth in Chapter I of the OECD guidelines
- A substantiation of the choice of the transfer pricing method applied
- A substantiation of the transfer price charged
- Other documents, such as management accounts, budgets and minutes of shareholder and board meetings
Documentation deadlines
Documentation is generally expected to be available at the time when the taxpayer enters into a transaction. This has been communicated by the Dutch Ministry of Finance. However, if the transfer pricing documentation is not available upon the request of the tax authority, taxpayers are granted a minimum time frame of four weeks to prepare the documentation. This period may be extended to a maximum of three months depending on the complexity of the intercompany transactions in which the taxpayer is engaged.
Statute of limitations on transfer pricing assessments
The statute of limitations on transfer pricing assessments is the same as the statute of limitations on tax assessments (as covered by the General Tax Act). The statute of limitations for making an assessment is three years from the end of the fiscal year. If the tax inspector has granted an extension for filing the tax return, the assessment period is extended with the period of extension. An additional assessment must be made within a period of five years, starting from the end of the fiscal year (this period will also be extended with the possible period of the filing extension). With respect to foreign-source income, the period for making an additional assessment is 12 years. For the tax authority to be able to impose such an additional assessment, there needs to be a new fact which the tax authority did not know or could reasonably not have known upon the moment of imposing the initial tax assessment (unless the taxpayer did not act in good faith).
Return disclosures/related-party disclosures
Dutch corporate income taxpayers are required to confirm in the corporate income tax return (by checking a separate box) whether they have been involved in related-party transactions during the fiscal year. The related-party transactions need to be specified in a separate appendix to the Dutch corporate income tax return.
Audit risk/transfer pricing scrutiny
The risk of transfer pricing issues being scrutinized during a tax authority audit is high and consequently the controversy risk is high as well. Transfer pricing is a key issue in any tax audit, and many companies are subject to separate transfer pricing audits. A functional analysis is incorporated into many of these audits and forms the basis of transfer pricing risk analyses of taxpayers. The tax authority has, among others, shown interest in performing head office audits (which include intra-group services and other activities performed by the head office) and characterizations in terms of alignment of functions and risks. Next to head office activities intangibles transactions are being evaluated, as well as business reorganizations. The tax authority has also focused, as a natural result of the risk analyses, on transactions with entities located in low effective tax rate countries.
APA opportunity
Unilateral, bilateral and multilateral APAs with rollback features are available. The APA process currently operates well in the Netherlands, despite earlier criticism regarding the uncertainty of obtaining APAs for financial service entities (see below). Pre-filing meetings with taxpayers to discuss the case before a formal APA request is made, support for small taxpayer APAs and case management plans have been introduced and processing time has been reduced.
Financial services entities consist of both financing (mere receipt and payment of intercompany interest) and licensing (mere receipt and payment of intercompany royalties) companies. For license companies, the first APA under the new regime was granted by the tax authority in 2005. For finance companies, the APA process had been functioning successfully for a number of years already by 2005.
A number of substantial improvements for Dutch financial services entities were introduced in 2005, which mainly relate to a reduction in the applicable transfer pricing documentation requirements.
Mutual agreement procedure
On 29 September 2008 a decree (IFZ2008/ 248M) describing the Mutual Agreement Procedure (MAP) process under bilateral treaties and the EU arbitration convention has been published. The decree aligns the MAP process in the Netherlands with the OECD Memorandum on Effective Mutual Agreement Procedures (MEMAP) making the route to obtaining avoidance of double taxation more accessible and transparent for taxpayers. Key features of the new Decree are: formal introduction of an Accelerated Competent Authority Procedure (ACAP); endorsement of arbitration to resolve MAP cases; targeting a reduction of MAP related expenses; introducing transparency into the process by providing regular feedback and updates to the taxpayer; encouraging use of Article 9(2) of the OECD Model Tax Convention; commitment to tackle resolution of double taxation in cases “not provided for in the Convention’’ (Article 25(3) of the OECD Model Tax Convention) in addition to the more traditional double taxation cases.
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