What is Transfer Pricing?
Business profits are generally subject to taxation on an ‘arm’s length basis’. This means that profits (and prices) should be determined based on market conditions. For unrelated companies, pricing almost by definition meets this requirement. However, when goods and services are provided within groups, it may be difficult to determine the proper pricing. In that case, from a tax perspective, you will need to correctly allocate profits to the relevant group entities. Transfer Pricing offers the methodology to determine what an ‘at arm’s length’ price is, and to ensure that entities are correctly remunerated.
Dutch tax law determines that Transfer Pricing applies to all dealings between associated enterprises (intragroup transactions). Incorrect or absent transfer pricing policies may lead to unforeseen tax corrections and double taxation. Furthermore, certain documentation obligations may apply.
What is Transfer Pricing?
Shortly put, Transfer Pricing aims to determine what pricing and terms & conditions would have been agreed upon, had parties not been associated with one another. This is known as the ‘arm’s length principle’. Transfer Pricing covers a wide range of intragroup transactions and services, and is not just limited to the ‘sales price’ of goods. It is also relevant to for example loans, cash pooling activities, central group services, and management services.
Transfer Pricing provides a variety of methods to determine arm’s length conditions, and in this regard international guidance is offered by the OECD.
When is Transfer Pricing relevant?
Transfer Pricing is relevant in any situation where pricing is not inherently at arm’s length. Although it is best known in the context of large multinationals, transfer pricing regulations in the Netherlands apply to all group transactions. Recent developments in the field of corporate income taxation (amongst others interest deduction restrictions and profit determination in fiscal unities) have increased the importance of accurately determining each entity’s profit for tax purposes, even in purely domestic situations.
What kind of obligations apply to my company?
Domestic groups are often ‘only’ subject to the requirements of Article 8b the Dutch Corporate Income Tax Act. This means that their dealings must be at arm’s length and the Tax Inspector may request them to show how they have determined this to be the case. If pricing is not at arm’s length, the Tax Inspector may apply corrections (upward and downward) to the taxable profits. For example, if a group company lends a large sum of money to an associated company, but does not take into account an arm’s length interest rate, the Tax Inspector may correct this by increasing the taxable profits.
For internationally operating groups, further documentation and reporting obligations may apply, depending amongst other things on the consolidated group turnover. Please note that these obligations may apply regardless of the size or relative importance of your Dutch entity, and fines for non-compliance are significant. In recent years, steps have been taken towards a form of international coordination of these obligations, and it is likely that an international group may have similar reporting obligations abroad.
Our Transfer Pricing Desk
We can help you meet your legal obligations by analysing, determining and documenting your transfer pricing policies. Where needed, we can liaise with our international partners of the Baker Tilly International network. In addition to meeting your compliance obligations, we can help identify new ways to optimise your business model and pricing.
We specialise in international transfer pricing compliance, policy documentation, the conclusion of Advance Pricing Agreements, and negotiations with the Dutch Tax Authorities.
Our Transfer Pricing experts would be happy to discuss any questions you may have. Please feel free to contact us to discuss how we may be of service.