The Netherlands published a new Transfer Pricing decree, in place of the decision of November 14, 2013, no. IFZ 2013 / 184M, providing further details on the application of the arm’s length principle. On the same day, another decision was also published on establishing a Coordination Group for Transfer Pricing, De Coördinatiegroep Verrekenprijzen (hereinafter CGVP).
The decree makes it clear that taxpayers are free to choose a transfer pricing method, or a combination of methods provided the result is arm’s length. They have to make their choice reliable and plausible, but it is explicitly not the intention to make the taxpayer assess all methods to prove the chosen method leads to the best outcome under the given circumstances.
Also, it raised attention to the determination of the cost basis when applying cost-related transfer pricing methods in three aspects: budgets used to predetermine the prices should be set in the correct economic way, some disbursements may not constitute a part of cost base, cost-related remuneration for intermediary selling goods should be based on relevant operational costs.
The Dutch tax authority takes the position that it is not necessary to agree on a fixed price if the valuation at the time of the transaction is highly uncertain and independent parties in a similar situation would not agree on a fixed price. In such a case, a price adjustment clause should be included in the agreement between the related parties in a way that the price is partly dependent on the subsequent income. However, if a large deviation (exceeding more than 20% of projection that formed the basis of originally fixed price) only occurs after five years when the revenue is realised for the first time, the intangible assets will not be considered as hard-to-value intangibles.
For the use of intangible assets, it is suggested to choose a party with less complex functions and no intangibles as a tested party and apply the cost-plus method or TNMM to determine the arm’s length price.
The decree mentioned a non-exhaustive list of shareholder activities which should be disregarded as group services. For low value-added services, the Netherlands implemented the simplified method with a fixed profit margin of 5% on the passing-on costs. Several examples are given to illustrate situations such as activities of a mixed nature, low value-added services and group service contract research.
Apart from those important changes compared to the previous decision, the decree also draws attention to other technical issues:
The CGVP is responsible for the coordination of implementation in the area of the transfer pricing within the Tax Authorities and must ensure the consistency of the implementation of tax policy. The chairman of the CGVP is chosen from the Tax and Customs Administration / Board of Professional Trades. The other members of the CGVP are from the Board of the Large Companies and the Management of Small and Medium Enterprises. Besides, the CGVP has five regional coordinators, a Country-by-Country Reporting coordinator, a coordinator for the APA / ATR team and a network of members at the offices in order to carry out its task. Tax inspectors should report transfer pricing problems to the CGVP as those problems arise. The CGVP will support the inspector solving the problems and, if necessary, issue a binding advice on relevant decisions.
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