On 1 July 2022, the tax authorities in the Netherlands published Decree No. 2022-0000139020 of 14 June 2022 containing local guidance on application of the arm’s length principle. The Decree is based on article 9 of the OECD Model Tax Convention and the OECD Transfer Pricing Guidelines and also contains references to local case laws. In the Decree, particular focus is on areas that have been updated in the most recent releases of the OECD Transfer Pricing Guidelines – Legal ownership, DEMPE functions, Services, HTVI and Valuation Methods, Government policies (COVID-19), Remuneration of Procurement activities, Financial transactions etc. Click here for Unofficial English translation Click here for other translation NL TP decree stcrt-2022-16685 ... Read more

Because independent enterprises might not engage in a transaction subject to government interventions, it is unclear how the arm’s length principle should apply. One possibility is to treat the payment as having been made between the associated enterprises, on the assumption that an independent enterprise in a similar circumstance would have insisted on payment by some other means. This approach would treat the party to whom the blocked payment is owed as performing a service for the MNE group. An alternative approach that may be available in some countries would be to defer both the income and the relevant expenses of the taxpayer. In other words, the party to whom this blocked payment was due would not be allowed to deduct expenses, such as additional financing costs, until the blocked payment was made. The concern of tax administrations in these situations is mainly their respective tax bases. If an associated enterprise claims a deduction in its tax computations for a ... Read more

A difficulty with this analysis is that often independent enterprises simply would not enter into a transaction in which payments were blocked. An independent enterprise might find itself in such an arrangement from time to time, most likely because the government interventions were imposed subsequent to the time that the arrangement began. But it seems unlikely that an independent enterprise would willingly subject itself to a substantial risk of non-payment for products or services rendered by entering into an arrangement when severe government interventions already existed unless the profit projections or anticipated return from the independent enterprise’s proposed business strategy are sufficient to yield it an acceptable rate of return notwithstanding the existence of the government intervention that may affect payment ... Read more

A special problem arises when a country prevents or “blocks” the payment of an amount which is owed by one associated enterprise to another or which in an arm’s length arrangement would be charged by one associated enterprise to another. For example, exchange controls may effectively prevent an associated enterprise from transferring interest payments abroad on a loan made by another associated enterprise located in a different country. This circumstance may be treated differently by the two countries involved: the country of the borrower may or may not regard the untransferred interest as having been paid, and the country of the lender may or may not treat the lender as having received the interest. As a general rule, where the government intervention applies equally to transactions between associated enterprises and transactions between independent enterprises (both in law and in fact), the approach to this problem where it occurs between associated enterprises should be the same for tax purposes as that ... Read more

There are some circumstances in which a taxpayer will consider that an arm’s length price must be adjusted to account for government interventions such as price controls (even price cuts), interest rate controls, controls over payments for services or management fees, controls over the payment of royalties, subsidies to particular sectors, exchange control, anti- dumping duties, or exchange rate policy. As a general rule, these government interventions should be treated as conditions of the market in the particular country, and in the ordinary course they should be taken into account in evaluating the taxpayer’s transfer price in that market. The question then presented is whether in light of these conditions the transactions undertaken by the controlled parties are consistent with transactions between independent enterprises ... Read more

In 2019, the Danish parent company of the group, EAC Invest A/S, had been granted a ruling by the tax tribunal that, in the period 2008-2011, due to, inter alia, quite exceptional circumstances involving currency restrictions in Venezuela, the parent company should not be taxed on interest on a claim for unpaid royalties relating to trademarks covered by licensing agreements between the parent company and its then Venezuelan subsidiary, Plumrose Latinoamericana C.A. The Tax tribunal had also found that neither a payment of extraordinary dividends by the Venezuelan subsidiary to the Danish parent company in 2012 nor a restructuring of the group in 2013 could trigger a deferred taxation of royalties. The tax authorities appealed against the decisions to the High Court. Judgement of the High Court The High Court upheld the decisions of the tax tribunal with amended grounds and dismissed the claims of the tax authorities. Excerpts: Interest on unpaid royalty claim “The High Court agrees that, as ... Read more

Finally, when applying a one-sided method such as the resale price method, the cost plus method, or the TNMM, the accounting treatment of the government assistance in both the tested party and any comparable may need to be specifically identified, especially when the tested party and the comparables apply different accounting standards. For example, the government assistance may be deducted from the costs under the relevant accounting standard, or it may be presented separately. In addition, the accounting treatment of government subsidies under different accounting standards may impact different levels of profitability (e.g. gross profit, operating profit, net profit, etc.) or might even be accounted for in the “other comprehensive income” statement, only being recycled into the “profit or loss statement” of the entity over time. Where accounting treatments of the same type of assistance differ between the tested party and the comparable, a comparability adjustment may be required. In addition, divergences in the accounting treatment of government assistance could ... Read more

The materiality of the change in economically relevant circumstances created by the impact of government assistance available in a market may impose additional challenges to the comparability analysis. It may for example render it more difficult to apply the comparability analysis through the utilisation and/or the application of a particular transfer pricing method and search for comparable transactions, on the basis that comparability differences may be exacerbated due to variations in government assistance between comparables or between jurisdictions.40 For example, an uncontrolled transaction that might otherwise have been considered comparable to a particular controlled transaction might be considered not comparable by virtue of the fact that one of the transactions is subject to government assistance while the other is not. A revised strategy, and potentially the use of a corroborating transfer pricing methodology,41 may need to be applied in such cases to take account of the differences in comparability. See Chapter II of this guidance. 40 As the guidance in ... Read more

The most reliable approach in identifying reliable comparables will be to refer, where possible, to data regarding comparable uncontrolled transactions in the same or comparable geographic market between independent enterprises performing similar functions, assuming similar risks, and using similar assets ... Read more

For example, as government assistance and the specific circumstances of the COVID-19 pandemic may vary across different markets, it may affect the comparables and the arm’s length prices of uncontrolled transactions in different ways.39 For instance, assume Company D, a member of an MNE group, provides manufacturing services and receives a domestic wage subsidy under a job retention programme offered by the government of Country D. Assume further that third party manufacturer Company E in Country E receives a domestic short-time work programme where the hours not worked by employees are directly subsidised. The services provided by Company D and Company E may be similar but the general availability and receipt of government assistance to Company D and Company E may result in a material difference in the arm’s length conditions of the transactions for the period over which the short-time work programme is in place and may not be sufficient to ensure a reliable comparison. In that case, the ... Read more

The comparability of open market transactions or enterprises may be influenced by the receipt of government assistance, affecting both how the parties establish their commercial or financial relations and how they price their transactions. Therefore, when performing a comparability analysis, it may be necessary to take into account the receipt of government assistance when reviewing potential comparables ... Read more

Under the guidance of Chapter I of the OECD TPG, the provision of government assistance to an associated party will not change the allocation of risk in a controlled transaction for transfer pricing purposes. For instance, assume Company W is a distributor that purchases goods from a related party manufacturer and sells those goods to third party customers in the jurisdiction where it is resident (Country W). Under the accurate delineation of the transaction, the marketplace risk is assumed by Company W. This implies that, under normal economic circumstances, including economic cycles, Company W bears the consequences of the playing out of the marketplace risk (e.g. a decrease in demand due to new competitors entering the market). Assume further that demand for Company W’s products declines significantly due to the measures adopted by the government in Country W in response to the COVID-19 pandemic. Company W receives government assistance in the form of a cash grant to help the entity ... Read more

The receipt of government assistance may reduce the quantitative negative impact of a risk. For instance, a party assuming credit risk could expect to incur losses from a transaction due to financial difficulties of its counterparty. However, the counterparty may in fact be able to meet its obligations by benefitting from government assistance. This aspect (i.e. the reduction in the negative impact of risk) must be distinguished from the allocation of risk under the guidance in section D.1.2.1 of Chapter I of the OECD TPG ... Read more

In the absence of reliable comparables or other reliable information (such as a robust analysis of the economically relevant characteristics described in paragraph 74) regarding how independent parties would allocate government assistance, caution should be exercised in assessing whether a purported sharing of government assistance represents an arm’s length outcome ... Read more

Under the guidance in Chapter II of the OECD TPG, when establishing arm’s length prices using one-sided methods, particular care must be taken to avoid adopting without further analysis a particular mechanical approach (such as offsetting cost savings achieved through government assistance against the relevant cost base for the transaction; recognising government assistance as revenue; or recognising government assistance as extraordinary income) since this could lead to non-arm’s length prices in transactions among associated parties ... Read more

The analysis of the effect of government assistance on the price of a controlled transaction will take into account the allocation of the economically significant risks under the accurate delineation of the controlled transaction, the impact of the pandemic on the outcome of the economically significant risks, and the linkage between the type of government assistance and those risks. Based on the facts and circumstances, the impact of government assistance on the price of a controlled transaction, if any, would depend, among other things, on which party assumes the economically significant risks affected by the pandemic in the context of an analysis of the accurately delineated controlled transaction. In order to reach a conclusion, consideration also should be given to all the other comparability factors described in paragraph 74 ... Read more

The economic circumstances of the market in which the party receiving government assistance operates could also influence the pricing of the accurately delineated controlled transaction. Subject to the specific facts and circumstances, aspects such as the level of competition, the elasticity of the demand or the availability of the benefits to competitors in the market, which may not be known or disclosed, could be relevant factors in determining whether the receipt of government assistance would be translated into an entity’s pricing strategy. In addition, the economic circumstances of the market in which the MNE group sells its products to third party customers would also be relevant to determine, for instance, whether the receipt of government assistance has led the MNE group to change its pricing strategies towards unrelated customers, either to retain the assistance within the MNE group or to pass it on to third parties ... Read more

Government assistance programmes may be subject to a number of legal conditions that could limit or even prevent the capacity of the party receiving the assistance from modifying the pricing of its transactions with other parties across the value chain and that should be taken into account in performing a comparability analysis, along with the other comparability factors described in paragraph 74. Similarly, government assistance programmes could be, for example, contingent upon eligibility criteria that could require the recipients to demonstrate a significant downturn in revenue or could be intended to preserve the viability of businesses during the pandemic. In addition, some government assistance programmes may be subject to uncertainty around the amounts involved. These aspects could limit the effect of government assistance on the price of the goods or services offered by the entity receiving the assistance and should be considered as part of the comparability analysis ... Read more

The economically relevant characteristics of the accurately delineated controlled transaction will help in determining the potential effect of the receipt of government assistance on the pricing of the controlled transaction, if any. For instance, some of the aspects to consider in analysing the impact, if any, of the receipt of government assistance on the price of a controlled transaction include the availability, purpose, duration and other conditions imposed by the government in granting the assistance; the allocation of the economically significant risks; and the level of competition and demand within the relevant markets. In addition, as indicated in paragraph 1.34 of the OECD TPG, the identification of these economically relevant characteristics would require a broad evaluation of how the MNE group responds to the receipt of government assistance ... Read more

The potential effect of the receipt of government assistance on the pricing of a controlled transaction will depend on the economically relevant characteristics of the transaction, following an accurate delineation of the controlled transaction and the performance of a comparability analysis. Therefore, it would be contrary to the arm’s length principle to assume that the mere receipt of government assistance would affect the price of the accurately delineated controlled transaction, without performing a careful comparability analysis (including an analysis of how the receipt of government assistance would affect the price of uncontrolled transactions, if at all, and the perspectives of both parties to the transaction) ... Read more

The analysis of the receipt of government assistance as a local market feature may help to inform an analysis of whether its receipt affects the price of a controlled transaction. It may also be relevant when conducting a comparability analysis. However, the particular nature of the government assistance should always be reviewed in the transfer pricing analysis, as under certain circumstances it may not be a general feature of the market, and/or it may not generate benefits for either party ... Read more

In particular, by analogy to section D.6.2 of Chapter I of the OECD TPG, the analysis of the implications of the receipt of government assistance would need to consider the following factors (not only to identify reliable market comparables when they exist, but also in cases where such comparables cannot be identified): whether the receipt of government assistance provides a market advantage to the recipient; the amount of any increase in revenues, decrease in costs, vis-à-vis those of reliable comparables, that are attributable to the government assistance received, and the duration of the assistance; the degree to which benefits of government assistance, at arm’s length, are passed on to independent customers or suppliers (see paragraph 76); and, where benefits attributable to government assistance exist and are not fully passed on to independent customers or suppliers, the manner in which independent enterprises operating under similar circumstances would allocate such benefits between them ... Read more

Section D.4 of Chapter I of the OECD TPG elaborates on the effect of government policies noting that, as a general rule, government interventions should be treated as conditions of the market in the particular country. Therefore, the receipt of government assistance may be part of the economic circumstances of the parties and a feature of the market in which the parties operate. In this regard, the provisions in section D.6.2 of Chapter I of the OECD TPG on other local market features may provide guidance relevant to the transfer pricing implications of government assistance either directly or by analogy ... Read more

The determination of the economic relevance of government support will inform its effect, if any, on accurately delineating the controlled transaction and performing the comparability analysis. If the government assistance is an economically relevant characteristic, this information should be included as a part of the documentation to support the transfer pricing analysis ... Read more

The extent to which the receipt of government assistance is an economically relevant characteristic may vary. An example of where government assistance may be more economically relevant is the provision of a wage subsidy, a government debt guarantee or short-term liquidity support. In such circumstances, the receipt of government assistance may have a direct impact on the controlled transaction and comparable transactions between independent parties, including their prices. In other situations the receipt of government assistance may be less economically relevant. For example, the provision of local infrastructure by a government might be only indirectly linked to the controlled transaction and the compensation thereof. Additionally, there may be other situations where the parties to a controlled transaction do not receive government assistance, but another party does, and this may influence the economically relevant characteristics of the transaction ... Read more

Economically relevant characteristics that pertain to a controlled transaction should be evaluated: (i) when accurately delineating the controlled transaction; and (ii) to facilitate the comparison between the accurately delineated controlled transaction and comparable uncontrolled transactions, in order to price the controlled transaction.38 38 Paragraph 1.33 of Chapter I of the OECD TPG ... Read more

In addition, there may be challenges in establishing the nature of government assistance received by potential comparables, given the different types of COVID-19 government assistance programmes, the practical difficulties to obtain detailed and reliable information and the delay in data availability. In this context, the analysis required on the specific characteristics of the government assistance should take into account the economic impact of the assistance on the accurately delineated transaction. Therefore, an exhaustive analysis of the specific characteristics of government assistance would not be required in circumstances where the receipt of government assistance is unlikely to have a material impact on the accurately delineated controlled transaction. (See section C of Chapter III of the OECD TPG) ... Read more

The terms and conditions of government assistance programmes related to COVID-19 need to be considered when determining the potential impact of these programmes on controlled transactions and when comparing their effects with those of other pre-existing assistance programmes. For instance, a number of COVID-19 assistance programmes are designed as temporary support to preserve businesses as a going concern and their impact in the transfer pricing analysis may differ from the impact of ongoing assistance programmes (linked or not to COVID-19 assistance), the duration of which may cover several years ... Read more

The availability, substance, duration and take-up of these programmes potentially have transfer pricing implications, whether the government assistance is provided to a member of an MNE group directly or made available to independent parties within the market where an MNE group operates (thus affecting the behaviour of enterprises engaged in potentially comparable transactions).37 37 This chapter deals with government assistance programmes. This chapter does not discuss the effects of other government interventions, including interventions that prevent or limit a party’s ability to fulfil an existing intercompany agreement ... Read more

Governments have also provided broader financial and liquidity supports to ensure enterprises can continue to operate through the period of reduction in business activity. Those include: (i) loan guarantees; (ii) direct financing to business on preferential terms; (iii) loan deferrals; (iv) specific grants and (v) tax relief ... Read more

Job retention programmes have been used in many jurisdictions to preserve jobs in enterprises experiencing a temporary reduction in business activity.34 Examples of these programmes include short- term work programmes that directly subsidise hours not worked35 and wage subsidy programmes that subsidise hours worked or top up the earnings of workers on reduced hours.36 34 A crucial aspect of all job retention schemes is that employees keep their contracts with the employer even if their work is suspended. 35 For example, the German Kurzarbeit or the French Activité partielle. 36 For example, the Dutch Emergency Bridging Measure (Noodmatregel Overbrugging Werkgelegenheid, or “NOW”) or the Job Keeper Payment in Australia ... Read more

During the COVID-19 pandemic, governments’ overriding concern has been public health and controlling the spread of the virus while at the same time trying to help enterprises manage the impact of the decline of business activity and workers facing a decline in employment opportunities and income ... Read more

Government assistance is a monetary or non-monetary programme where a government or other public authority provides a direct or indirect economic benefit to eligible taxpayers such as grants, subsidies, forgivable loans, tax deductions, or investment allowances. For example, a government may directly subsidise the labour costs incurred in undertaking certain activities or may indirectly support businesses through the provision of local infrastructure, such as a business park ... Read more

This aspect is also relevant in performing the comparability analysis. For instance, assume government intervention forces a taxpayer to close its distribution facilities for three months. In undertaking a benchmark analysis, care should be taken in verifying that comparable enterprises have faced similar restrictions or conditions. Otherwise, it might be necessary to adjust the period over which the comparison is performed (e.g. excluding the economic data corresponding to the three months where the taxpayer was unable to operate). Taxpayers and tax administrations should determine on a case-by-case basis the extent to which these adjustments are necessary in circumstances where the potential differences may not have a material impact on the comparability. In this respect, the guidance in paragraphs 3.50 to 3.52 of the OECD TPG is relevant ... Read more

As a pragmatic means of addressing divergent economic conditions in the pre- or post-pandemic period, and when the pandemic was in effect and its effects on economic conditions were material, it may be appropriate to have separate testing periods (and periods considered for price setting) for the duration of the pandemic or for the period when certain material effects of the pandemic were most evident. This may be appropriate, so long as the data from independent comparables can be measured over a similar period in a consistent manner. Care should be taken to ensure the financial data of years affected by the pandemic do not unduly distort results from pre- or post-pandemic periods. In addition, government intervention in a market may materially affect the performance of activities. For example, in certain situations, the activities that otherwise normally would have occurred absent the pandemic may not occur in the same manner (or at all) during the period that the government intervention ... Read more

However, the unique and almost unprecedented economic conditions arising from and government responses to COVID-19 have led to practical challenges for the application of the arm’s length principle. For example, the pandemic may raise novel issues or exacerbate in complexity or magnitude the occurrence of certain transfer pricing issues (e.g. effect of government assistance or the availability of reliable comparable data). For taxpayers applying transfer pricing rules for the financial years impacted by the COVID-19 pandemic and for tax administrations that will be evaluating this application, there is a need to address these practical questions. Based on the responses to the questionnaires submitted to members of the Inclusive Framework and businesses, and conscious of the need to provide practical and timely guidance, this note addresses four priority issues: (i) comparability analysis; (ii) allocation of losses and the allocation of COVID-19 specific costs; (iii) government assistance programmes; and (iv) Advance Pricing Arrangements (“APAs”). For ease of presentation, these issues have been ... Read more

Because independent enterprises might not engage in a transaction subject to government interventions, it is unclear how the arm’s length principle should apply. One possibility is to treat the payment as having been made between the associated enterprises, on the assumption that an independent enterprise in a similar circumstance would have insisted on payment by some other means. This approach would treat the party to whom the blocked payment is owed as performing a service for the MNE group. An alternative approach that may be available in some countries would be to defer both the income and the relevant expenses of the taxpayer. In other words, the party to whom this blocked payment was due would not be allowed to deduct expenses, such as additional financing costs, until the blocked payment was made. The concern of tax administrations in these situations is mainly their respective tax bases. If an associated enterprise claims a deduction in its tax computations for a ... Read more

A difficulty with this analysis is that often independent enterprises simply would not enter into a transaction in which payments were blocked. An independent enterprise might find itself in such an arrangement from time to time, most likely because the government interventions were imposed subsequent to the time that the arrangement began. But it seems unlikely that an independent enterprise would willingly subject itself to a substantial risk of non-payment for products or services rendered by entering into an arrangement when severe government interventions already existed unless the profit projections or anticipated return from the independent enterprise’s proposed business strategy are sufficient to yield it an acceptable rate of return notwithstanding the existence of the government intervention that may affect payment ... Read more

A special problem arises when a country prevents or “blocks” the payment of an amount which is owed by one associated enterprise to another or which in an arm’s length arrangement would be charged by one associated enterprise to another. For example, exchange controls may effectively prevent an associated enterprise from transferring interest payments abroad on a loan made by another associated enterprise located in a different country. This circumstance may be treated differently by the two countries involved: the country of the borrower may or may not regard the untransferred interest as having been paid, and the country of the lender may or may not treat the lender as having received the interest. As a general rule, where the government intervention applies equally to transactions between associated enterprises and transactions between independent enterprises (both in law and in fact), the approach to this problem where it occurs between associated enterprises should be the same for tax purposes as that ... Read more

There are some circumstances in which a taxpayer will consider that an arm’s length price must be adjusted to account for government interventions such as price controls (even price cuts), interest rate controls, controls over payments for services or management fees, controls over the payment of royalties, subsidies to particular sectors, exchange control, anti- dumping duties, or exchange rate policy. As a general rule, these government interventions should be treated as conditions of the market in the particular country, and in the ordinary course they should be taken into account in evaluating the taxpayer’s transfer price in that market. The question then presented is whether in light of these conditions the transactions undertaken by the controlled parties are consistent with transactions between independent enterprises ... Read more