Netherlands vs “Holding B.V.”, March 2007, District Court, Case No AWB 06/288, V-N 2007/35.6

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“Holding B.V.” is a holding company. The actual activity of the [X] group in the Netherlands – a wholesale trade in garden-related (gift) items – takes place in [X] B.V. The latter is included in a fiscal consolidation for corporate tax purposes with “Holding B.V.”. Customers of [X] B.V. are located in both the Netherlands and abroad (particularly in Western Europe, the United States and Canada).

The products are purchased in China in particular and supplied direct by the producer to [X] B.V. or to its other customers.

The procurement company – X Limited has an office and a showroom in Hong Kong, and employs a staff of five. The core activities of X Limited consist of quality control, logistics, product development, purchasing and sales.

As remuneration for its activities, [X] B.V. pays a mark-up of 10% on the purchase price paid by X Limited to its Chinese suppliers.

The tax authorities issued an assessment where the remuneration of the procurement company in Hong Kong was instead based on a cost plus method.

Judgement of the Court

The court rules that the transfer prices are not arm’s length. The ‘comparable uncontrolled price’ method advocated by the plaintiff is not accepted. The court followed the tax authorities in the cost-plus method, in which a cost surcharge of 10% was applied.

The Court considers the following.

The cup method as advocated by the plaintiff involves a comparison of the price charged for goods or services transferred in a group transaction with the price charged for goods and services transferred in a comparable free market transaction in comparable circumstances. The Court is of the opinion – as stated by the Respondent – that in view of the various functions which [X Limited] performs vis-à-vis the Claimant or third parties, there is no question in this case of a cup. A cup can therefore not serve as a basis for the transfer price so that another method should apply as a basis for determining the transfer prices.

According to the defendant, the cost-plus method should be taken as a starting point. According to the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (1995-1999), the cost-plus method is based on costs incurred by the supplier of the goods or services in a group transaction for goods or services supplied to an associated purchaser. An appropriate cost-plus mark-up is then added to these costs in order to achieve an appropriate profit in view of the functions performed and the market conditions.

The court is of the opinion that in view of the OECD Guidelines, the cost-plus method is a correct method for determining transfer prices in the present case. A cost-plus surcharge of 10% as defended by the defendant and further calculated in the statement of defence, has not been contested by the plaintiff and also does not appear unreasonable to the court.

In view of all relevant facts and circumstances – considered together and in relation to each other – the Court is therefore of the opinion that the Defendant has made it plausible that the transfer price applied between the Claimant and [X Limited] is not based on business economics. In view of the fact that the cost supplement applied by the plaintiff is considerably higher than a transfer price that should be considered as arm’s length, the defendant has herewith also made it plausible that there is an intention to favour and awareness of this on the part of both parties. The arguments put forward by the claimant against this is of insufficient weight to conclude otherwise.

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