Directorate-General
for Taxation, Directorate for Consumption Taxes, Customs and International
Affairs
Decree
of 14 June 2022 no. 2022-0000139020, Staatscourant 2022, nr. 16685
The State
Secretary of Finance has decided as follows.
This decree
further defines the application of the so-called arm's-length principle. The
arm's-length principle was codified in the Netherlands in 2002 by the inclusion
of Section 8b of the Corporation Tax Act 1969 (Wet Vpb 1969). 1
There is agreement within the OECD2
Member countries on the arm's-length principle as set out in Article 9 of the
OECD Model Convention. This has been fleshed out in the OECD Commentary on
Article 9 of the OECD Model Convention and in the OECD Guidelines.
The OECD guidelines usually refer to a
Multinational Enterprise (MNE). A MNE is defined in the OECD guidelines as an entity
that is part of an MNE group. A MNE group is then defined as a group of
affiliated entities operating in two or more countries. Where reference is made
in this Decree to a group, it is intended to cover a group of associated
entities operating nationally and/or internationally.
References in this Decree
to paragraphs, chapters or sections are to the OECD 2022 Guidelines unless
otherwise stated.
|
AWR |
General Act on State Taxation |
|
BEPS |
Base Erosion and Profit Shifting |
|
CCA |
Cost Contribution Arrangement |
|
CUP |
Comparable Uncontrolled Price |
|
DEMPE |
Development, Enhancement, Maintenance, Protection and Exploitation |
|
DVL |
Service body |
|
NOW |
Temporary Emergency Measures for the Preservation of Employment |
|
MNE |
Multinational Enterprise |
|
OECD |
Organisation for Economic Co-operation and Development |
|
OECD guidelines |
Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations |
|
ORA |
Options Realistically Available |
|
R&D |
Research & Development |
|
TNMM |
Transactional Net Margin Method |
|
WACC |
Weighted Average Cost of Capital |
|
Vpb 1969 Act |
Corporate Tax Act 1969 |
|
WEV |
Economic Value |
This decree replaces the decree of the State
Secretary of Finance of 22 April 2018, no. 2018-6865, Stcrt. 2018, 26874. This decree addresses,
among other things, recent developments that have resulted in amendments to the
OECD Guidelines. To the extent that these amendments concern further
clarification of the application of the arm's-length principle, I believe that
these amendments also apply to years in which these amendments had not yet been
published.
Important changes compared
to the previous decree are:
·
-Adjustment
of the paragraph on financial transactions;
·
-Adjustment
of paragraph 6 of this Decree on provision of services in a
group context;
·
-Expansion
of the public policy section to include a section on
governmental support measures in response to, for example, the COVID-19
pandemic; and
·
-Textual changes
to better align the terminology used with that used in the OECD Guidelines and
Dutch laws and regulations.
The OECD guidelines have been amended in
recent years, partly as a result of the BEPS3 project. The OECD guidelines are
still under development and will continue to be extended and amended regularly.
If necessary, the present decree will be replaced by a new decree in response
to new developments.
As stated in the OECD guidelines, the
assessment of transfer pricing should take into account that determining
transfer prices is not an exact science. Therefore, tax administrations are
encouraged to be flexible in their approach and not to require the taxpayer to
determine its transfer prices with an accuracy which, given all the facts and
circumstances, is unrealistic. The Dutch tax authorities will take these
principles into account.
In the area of transfer pricing, constructive
cooperation between the Tax and Customs Administration and the taxpayer is
appropriate. It is important that both parties understand the position and the
interests of the other. 4
Taxpayer can obtain certainty by making advance pricing
arrangements. For whether or not it is possible to obtain certainty about the
application of the arm's-length principle in international relations, the
Decree of 19 June 2019, no. 2019/13003 (Stcrt. 28 juni 2019,
nr. 35519)5
on pre-consultation rulings of an international nature is relevant.
The OECD guidelines are intended to provide
insight into how the arm's-length principle should be applied in practice. In
addition, the OECD guidelines play an important role internationally in the
application of treaties and the prevention of no or double taxation. Because
the OECD guidelines provide an internationally accepted interpretation of the
arm's-length principle, I regard the OECD guidelines as an appropriate
explanation and clarification of Section 8b of the Dutch Corporate Income Tax Act
1969.
On a number of points, the OECD guidelines
leave room for individual interpretation. On a number of other points, practice
demands a clarification of the OECD guidelines. This decree provides insight
into the Dutch position on these points and clears up existing ambiguities
where possible.
If the interpretation and/or application of
the OECD guidelines lead to a situation whereby a transfer price difference
arises within an internationally operating group which may result in part of
the group's profits not being subject to profit-based taxation, the Tax
Authorities may deviate from the explanation in this decree to prevent such a
transfer price difference, provided that this leads to an outcome based on the
arm's-length principle.
An important task of the EU Joint Transfer
Pricing Forum is the elimination of double taxation and the removal of
administrative obstacles to the efficient application of the arm's-length
principle. The Netherlands follows the recommendations of the EU Joint Transfer
Pricing Forum as far as possible, except where the Netherlands has
reservations.
The coordination of the implementation of
transfer prices within the Tax and Customs Administration is in the hands of
the Transfer Pricing Coordination Group (Standing Order CGVP, no. 2018-4380).
In the fight against non-cash profit
shifting, the Transfer Pricing Coordination Group within the Tax and Customs
Administration will cooperate, if necessary, with the Taxhavens and Group
Financing Coordination Group and the Anti-Corruption Coordination Group.
The starting point of the arm's-length
principle is that for tax purposes related entities are expected to trade among
themselves under the same conditions as independent parties would do under
similar circumstances. This means that a result should be achieved in which the
profit for tax purposes that associated entities make on their mutual
transactions is comparable to the profit that unrelated entities would make on
similar transactions under comparable circumstances.
In view of the importance of the arm's-length
principle, this section will first consider the general view on the application
of the principle as expressed in this Decree and the OECD Guidelines.
Any transfer pricing analysis should be based
on a good understanding of the role of each group member, the commercial and
financial relationships between them, and the transactions (whether or not
identified by the group) that reflect those relationships (see paragraphs 1.34,
1.35 and 1.50).
Before the price of a particular transaction
between related parties can be determined, the transaction must be
characterised as such ('delineation of the actual transaction'). This requires
an analysis of the economically relevant features of the transaction. This
analysis is carried out with reference to all the features described in section
1.36.
The starting point for the characterisation
of the transaction, prior to the application of the arm's-length principle, is
the transaction as structured between the related parties with contractual
terms in the mutual agreement(s), if necessary supplemented by information from
other records about the mutual rights and obligations.
This information should then be complemented
by an analysis of the other economically relevant features of the transaction.
All this information together provides insight into the actual behaviour of the
parties involved. If the actual behaviour does not correspond to the
contractual design of the transaction, the actual behaviour will generally be
decisive for the characterisation of the transaction.
An analysis of the functions performed and
the economically relevant risks associated with the transaction must be carried
out. The analysis of the risks in an affiliated transaction consists of the
steps described in section 1.60.
In practice, situations are conceivable in
which several parties exercise control (see para. 1.65) over the risks and have
the financial capacity (see para. 1.64) to bear those risks, while only one of
those parties has contractually assumed the risks. In such cases, paragraph
1.94 stipulates that the contractual allocation of risks is respected. This
does not alter the fact that the other party/parties should be remunerated at
arm's length for exercising the control function performed by that party/parties.
Paragraph 1.105 stipulates that this remuneration, if commensurate with the
contribution made to the control function, may include a share in the positive
and negative consequences of the risks. In my opinion, this means that in such
cases the 'transactional profit split' method (see section 3 of this decree)
may be appropriate. After all, it does not seem at arm's-length that a party
who bears risks on the basis of the contract, but in fact only partially
contributes to the control, should be attributed all the negative and positive
consequences of the risks concerned on the basis of section 1.94, while the
other party (parties) receives a limited, routine remuneration. In the event
that the risk allocation used by the parties concerned actually occurs between
unrelated parties in similar transactions under similar circumstances, the
conclusion of this analysis might be different.
After all the steps in the risk analysis have
been taken, the transaction is characterised as such. The transaction so
characterised may therefore deviate from what has been contractually agreed
between the related parties or their interpretation of it. Based on the
characterised transaction, an appropriate price should be determined, taking
into account the arm's-length risk allocation. In principle, this should be
done on the basis of comparable transactions between unrelated parties
resulting from a comparability analysis. The economically relevant
characteristics mentioned in the OECD guidelines are also elements of this
comparability analysis.
On the basis of the OECD guidelines,
questioning a transaction as such is only possible if the characterised
transaction (including the possible adjustment of the risk allocation), viewed
as a whole, differs from what unrelated parties acting in a commercially
rational manner would have agreed in similar circumstances, making it
impossible to determine a price that is acceptable to all parties. The
perspective of both parties and the available realistically available
alternatives (also called "Options Realistically Available" or ORA)
for each of them at the time the transaction is entered into must be considered
(see paragraphs 1.142-1.144). In this situation, the consequences of such a
transaction for the taxable profit must be ignored.
Paragraph 1.142 allows the transaction itself
to be called into question in extreme cases. This prevents the contractual
design from making the application of the arm's-length principle impossible. If
possible and appropriate, according to this paragraph, the transaction can be
replaced by an alternative transaction for which arm's-length conditions can be
found. This alternative transaction should be based as much as possible on the
facts and circumstances of the case at hand (see paragraph 1.144). Ignoring the
transaction and possibly replacing it with an alternative transaction takes
place for the purpose of determining the taxable profit.
Paragraphs 1.11 and 1.142 recognise that
related parties enter into transactions that independent parties would not. In
such situations, a comparison of terms within the meaning of paragraph 1.6 with
terms agreed in comparable transactions between unrelated parties is not
possible. However, the mere fact that comparable transactions between unrelated
parties are not found does not mean that the related transaction would not be
arm's-length. In such a case, it will have to be investigated whether
conditions can be found under which it is conceivable that commercially
rational independent parties under comparable circumstances would nevertheless
enter into such a transaction. It must then be established whether these
conditions correspond to the conditions of the related transaction. If
arm's-length terms can be found for the transaction in question, they should be
applied and the transaction respected as such.
The functional analysis of the parties to the
transaction, which is important in characterising the transaction, is also an
essential part of the application of the arm's-length principle and the
comparability analysis required in that regard. After all, the functions
performed, the associated risks and the assets used determine the remuneration
of the parties involved.
In the context of section 1.6, price is only
one of the conditions (see section 1.7). A number of principles play an
important role in this comparison of conditions. For example, point 1.38
stipulates that the ORA must be taken into account. It is also important that
the comparison of the conditions should be made from the perspective of all
parties involved in the transaction.
If only the price of the related transaction
differs from the price that would have been agreed upon between unrelated
parties, a price adjustment may be made for tax purposes. When adjusting the
price and/or other terms of an individual transaction or specific group of
transactions, an analysis should be made, depending on the facts and
circumstances of the case, as to whether after that adjustment there is still an
arm's-length profit for the entity concerned, given the functions performed,
the assets used and the risks assumed. Where appropriate, the price and/or
other terms of other transactions with other group entities may also need to be
adjusted where they have not been determined in accordance with this Decree. 6
Based on the OECD
guidelines, the arm's-length fee should in principle be determined on an
accrual basis. Such a determination on an accrual basis may lead to problems in
practice. If an individual transaction assessment is not possible, for example
because there are a large number of comparable transactions, the transactions
can be assessed together to determine the arm's-length character.
The taxpayer is expected
in that situation to be able to substantiate that the transfer price taken into
account in respect of the aggregate transactions as a whole complies with the
arm's-length principle.
Also in the context of the avoidance of
double taxation and double non-taxation, the following should be taken into
account. If the transactions have been or will be entered into with various
entities and a transfer price method is used that does not directly correspond
to an individual transaction, it must always be possible to trace which entity
is responsible for which part of the total profit. Only in this way can it be
determined to which transactions with which entity which part of the profit
determined using that transfer price relates.
Sometimes it is possible to arrive at a
single transfer price that reliably reflects the terms of a transaction that
would have been agreed arm's-length. Because transfer pricing is not an exact
science, however, it will often be the case that the application of one or more
transfer pricing methods leads to a range of transfer prices based on a certain
degree of comparability. 7
The question then arises as to which observations are appropriate to establish
the arm's-length nature of the transaction (the arm's-length range) and to
which observations must be corrected if the transfer price applied is outside
that arm's-length range.
In establishing an arm's-length range, a
distinction must be made between situations in which the comparative material
consists of highly reliable quantities and the situation in which use is made
of material which, in the area of comparability, has shortcomings which cannot
be qualified and/or quantified. In the first situation, the range is composed
of all comparables. In the second situation, the use of statistical methods,
such as the 'interquartile range', can improve the reliability of the
comparative material. With the aid of such statistical methods, the range is
reduced, so that a relevant arm's-length range remains, which is expected to
consist of better comparative material.
Once the arm's-length range has been
established, it must be assessed whether the price of the transaction(s) to be
assessed falls within this range. If the remuneration falls within the range,
no adjustment is made (see paragraph 3.60). In the event that the remuneration
falls outside the range and the taxpayer cannot adequately explain the
deviation, an adjustment shall be made. In the first situation described in the
previous paragraph, a correction can be made to any point in the range. If it
is plausible that one specific point within the range best meets the conditions
of the transaction, an adjustment should be made to this point. In the second
situation described in the previous paragraph, to reduce the risk of errors due
to unknown or unquantifiable comparability defects, I consider that an
adjustment should be made to the median (see paragraph 3.62).
When assessing a transaction, it may be
useful to consider data over several years. The use of multiannual data can
prevent corrections being made in a particular year, while the group member in
question receives remuneration over a number of years in line with the
arm's-length principle. The application of multi-year data can, however, also
lead to insights developed in retrospect being used to assess a situation that
occurred earlier ('hindsight'). The OECD guidelines state that tax
administrations should not use hindsight. Therefore, when using multi-year
figures, only data for the year in question and previous years can be used. An
elaboration of this is working with a moving average. This leads to the
following system:
·
-First,
it is checked whether the remuneration for the transaction to be
assessed falls within the arm's-length range established for the year in
question. If the remuneration is within the annual range, no adjustment is
made.
·
-If the
fee falls outside the annual range, the above test is repeated on the basis of
(moving) averages over a number of years. The length of the period taken into
account will depend in part on the length of the life cycle of the product or
service. If the average remuneration for the transaction to be assessed falls
within the multi-year range, no adjustment will be made.
·
If the
fee to be assessed falls outside both the arm's-length annual range and the
arm's-length multi-year range, a correction will be made in accordance with
what is described in section 2.6 of this decree.
Some government interventions can be
considered as market factors in the country concerned and as such must be
factored into the transfer price. Paragraph 1.156 describes two possible
approaches for the situation where, for example, a country prevents or blocks
the payment of a sum of money.
Under Dutch tax law, the payment related to
the performance delivered must be recognised in the result, but it may be in
accordance with good business practice to (partially) write down a receivable
that arose as a result of the delivery of services. The costs related to the
transaction may be taken into account.
In situations where the arm's-length price is
determined using a cost-related remuneration, the question is regularly asked
whether subsidies and tax benefits received are deducted from the cost base.
For the Dutch situation, the starting point
can be that subsidies are deducted from the cost base if there is a direct link
between the subsidy and the supply of the product or service and the subsidy in
question is granted in the form of a discount or an allowance towards costs.
For example, a subsidy for the use of more expensive but environmentally friendly
raw materials, a premium for the purchase of an energy-efficient business tool
or a contribution under the Investment Premium Scheme. Deductions mentioned in
Article 3 of the Wet vermindering afdracht loonbelasting en premie voor de
volksverzekeringen reduce the wage costs and also have the effect that the cost
basis on which the profit surcharge is calculated is lower.
In the opposite situation, additional
charges, e.g. related to the use of environmentally harmful raw materials, will
lead to an increase in the applied cost base.
Subsidies and tax benefits granted to the
entity as such and not causally related to the activity to which a cost related
remuneration is attributed shall not be deducted from the cost basis used. To
the extent that they are part of the taxable profit, they are credited
separately to the profit and loss account.
If tax concessions are granted in the form of
a deduction from taxable profit, such as the investment deduction, they are not
deducted from the applied cost base. In this case, the profit is first
calculated on the basis of the costs to be allocated and then the allowance is
deducted from the taxable profit separately.
For certain cost categories it applies that
these are based on the tax law only limited deductible, for example the costs
mentioned in Article 3.14 Wet inkomstenbelasting 2001 in conjunction with art.
8 Wet Vpb 1969, the costs of depreciation of buildings ex Article 3.30a Wet
inkomstenbelasting 2001 in conjunction with art. 8 Wet Vpb 1969 and the costs
mentioned in Article 10 paragraph 1 j Wet Vpb 1969. These costs do form part of
the cost base on which the profit surcharge is calculated. The restriction in
the deduction of these costs is implemented by adding the non-deductible part
of the costs to the profit when determining the taxable profit.
Certain events can have a major impact on the
economy and the (financial) situation of companies. An example of such an event
is a credit crisis or a pandemic, such as the COVID-19 pandemic. The Dutch government
can take several aid measures in relation to such and similar events. A recent
example of such a support measure is the Temporary Emergency Measure to bridge
the gap in employment (NOW).
For entities, the question arises as to how a
support measure (such as the NOW) affects the terms (including the price) used
by the parties in their mutual legal relationships and what the consequences
are for taxation. This arises, for example, in situations where remuneration
has been agreed between related parties based on costs incurred.
In applying the arm's-length principle, it
should be assessed whether comparable unrelated parties receiving such aid take
account of the State contribution in the terms (including the price) of their
transactions. It is plausible that a large decrease in turnover and/or a
temporary halt in production due to a risk that cannot be influenced may cause
unrelated parties to renegotiate the terms and conditions (including the price)
of their transactions. The consequences of the aforementioned risk will fall on
the most obvious party or parties. In these renegotiations the parties may take
into account the possible granting of a support measure (such as the NOW) to
one or more of the parties.
If aid received or expected to be received
plays a role in the conditions of transactions in unrelated relationships, this
also applies to the conditions of transactions in related relationships on the
basis of Article 8b of the Netherlands Corporate Income Tax Act 1969. For
affiliated transactions, the support measure can therefore also be reason to
adjust the conditions (including the price), taking into account the support
measure (such as the NOW) which one or more parties may receive.
If the taxpayer wishes to adjust the
conditions (including the price) because of the aid received or expected to be
received, the taxpayer must make a plausible case that comparable unrelated
entities would, in similar circumstances, have agreed to an adjustment in a
similar manner. Such an adjustment must be made at arm's length and not with a
view to achieving a reduction in turnover potentially qualifying for the aid. 8
If, as a result of an audit, the Tax
Authorities propose an adjustment of a transfer price applied in respect of a
certain transaction, the taxpayer may request a reduction of the adjustment if
he is of the opinion that the adjustment proposed by the Tax Authorities does
not take into account a deliberate compensation in (a) different transaction(s).
According to the OECD guidelines, tax administrations have discretionary power
in this case to grant or refuse this request. The distinction, as made in the
OECD guidelines, between claiming a deliberate compensation when filing the tax
return and claiming (and claiming) a deliberate compensation when a tax
authority proposes adjustments as a result of an audit, is not relevant for
Dutch practice. In both cases, the taxpayer retains his statutory rights of
objection and appeal.
The OECD guidelines discuss five transfer
pricing methods. Depending on the circumstances, a choice of one of these
methods should be made. 9
The Dutch tax authorities will always start
their transfer pricing investigation from the perspective of the method used by
the taxpayer at the time of the transaction. Taxpayer is in principle free to
choose a transfer pricing method, provided that the chosen method leads to an
arm's-length outcome for the specific transaction.
However, for certain situations, one method
will be more appropriate than another. While a taxpayer, when choosing a
transfer pricing method, may be expected to consider the reliability of that
method for the particular situation, it is expressly not required that the taxpayer
evaluate all methods and then substantiate why the method it chooses provides
the best outcome in the given circumstances (the so-called 'best method rule').
In some situations a combination of methods may also be used. However, the
taxpayer is not obliged to use multiple methods. However, the taxpayer will
have to substantiate his choice for a certain method.
In general, it can be noted that the
comparable uncontrolled price (CUP) method is difficult to apply in practice
due to the fact that comparable unrelated transactions are almost impossible to
find. 10
In practice, it appears that, partly for this reason, in many cases the TNMM is
used as the transfer pricing method.
If a transfer pricing method is chosen,
whereby the results of the transactions of one of the affiliated parties are
compared with the results of similar transactions of unaffiliated parties, the
basic assumption is that this comparison is made with the affiliated party with
the less complex functions (the so-called 'tested party', see also section
3.18). This will generally not be the party that, in view of its functions,
assets and risks, is entitled to the revenues with a strong relationship to the
intangible fixed assets in use.
In the cost-plus method and the TNMM (with a
profit margin on costs as the 'profit level indicator'), the determination of
the cost base is an essential part of the application of the method.
In general, prices will be determined in
advance on the basis of the budgeted costs associated with the transactions. If
the actual costs are higher than these budgeted costs, it depends on the cause
of this difference whether this will lead to a price adjustment. In general, it
can be assumed that higher costs resulting from inefficiency will be borne by
the contracting party that performs the services. After all, it is the
contracting party that can influence these costs. An independent buyer in this
situation will not accept a price adjustment.
A prerequisite for the correct establishment
of transfer prices based on budgets is that these budgets are established in an
economically correct manner.
Paragraph 2.98 shows that a transfer pricing
method which bases the profit on the transaction(s) is appropriate only if
those costs are the relevant indicator of the value of functions performed,
assets used and risks incurred. That means that in such a situation, the costs
that are not a relevant indicator of that value should not be part of the cost
base for the calculation of profit.
Although paragraph 2.99 states that in
applying the TNM where profit is related to the costs incurred, the policy
often includes the full costs, it leaves open the possibility of excluding some
of the costs from the policy if an unrelated party to a similar transaction
would also be willing to make no profit in relation to such costs.
As an illustration of the above, see
paragraph 7.34 where it is concluded that an (affiliated) agent procuring
services from an unaffiliated party is only entitled to a mark-up on the costs
with regard to its own functions, assets and risks. The (tied) agent is not
entitled to a mark-up on the costs of services provided by unaffiliated
parties.
The costs with a so-called 'out-of-pocket'
character remain outside the cost basis on which a profit surcharge is
calculated. Well-known examples of so-called out-of-pocket expenses are costs
which are initially paid by the performing contracting party but which
generally tend to be charged to the client separately, such as fees, court
costs and costs of services provided by third parties.
Also, costs of raw materials which are
processed by a producer, without that party exercising any control over the
risks associated with those raw materials due to its functionality11 , can
generally be excluded from the cost base. In such a case, only the operational
costs of that producer are, in principle, the relevant indicator of the value
of the functions performed by it, the assets used and the risks incurred. 12
The foregoing applies irrespective of how the raw materials in question are
accounted for.
In practice, it happens that a party, being
part of a group, sells goods via an affiliated Dutch intermediary that does not
perform any relevant sales activities itself, but actually provides
administrative services for the sales transaction. In such cases, the turnover
realised from the sale is recognised in the financial statements (profit and
loss account) of the intermediary.
Paragraph 2.39 stipulates that such an
affiliated intermediary, who does not perform an economic function in the value
chain that increases the value of the goods or bears no risk in relation to the
sales activities on the basis of the characterisation of the transaction,
should not receive a share of the profit in relation to the sales transactions,
as this would not be granted to him in an unaffiliated relationship either.
Such an intermediary should, in principle, be remunerated by a profit mark-up
based on his own relevant operating costs, including the costs related to his
administrative services, and not by a remuneration related to turnover.
Valuation methods, in particular the
discounted cash flow method, may, depending on the facts and circumstances, be
used by taxpayers and the tax authorities as part of the five transfer pricing
methods or as a valuation method that can be used to determine an arm's-length
price when using or transferring an intangible asset. The OECD guidelines
describe points of attention regarding the use of valuation methods and the
interpretation of the various parameters.
Importantly, paragraph 6.157 prescribes that
the valuations should be done from the perspective of all parties involved in
the transaction to arrive at an arm's-length price. The arm's-length price will
lie between the value of the intangible asset from the perspective of the
seller and the value from the perspective of the buyer (unless the value from
the perspective of the seller is higher than the value from the perspective of
the buyer). Thus, the value resulting from the application of a valuation
method is not the same as the arm's-length price for the transaction.
When determining the arm's-length price, the
tax consequences of the transfer should be taken into account. In the case of a
transaction, the seller must take into account the possible taxability of the
fiscal book profit as a result of the transfer of the (intangible) asset. The
seller will want to be compensated for this. During a transaction, the buyer
should take into account the consequences of possible tax benefits from the
amortisation of the acquired (intangible) asset (see paragraph 6.178 and
example 29 in chapter VI).
A transaction, in which the value from the
perspective of the seller is higher than the value from the perspective of the
buyer, will not come about between commercially rational unrelated parties.
Both parties have a better alternative, namely not to enter into the
transaction. In such cases, section D.2 of Chapter I applies.
Paragraphs 6.170 to 6.173 deal with the
discount factor for determining the present value of the expected future cash
flow. The choice of the appropriate discount factor, for example based on the
weighted average cost of capital (WACC), should take into account the risk
profile of the parties involved, the asset to be valued and the activity to be
valued.
Paragraphs 4.68 to 4.78 deal with the
consequences of secondary transactions. In many countries, the making of a
transfer pricing adjustment is not limited to an adjustment to the profit, but
it is also required that by making a secondary transaction, the administration
shows how the adjustment is incorporated in the profit and loss account and the
balance sheet of the taxpayer. A secondary transaction may, for example, be a
current account settlement, a profit distribution or an informal capital
contribution. From a Dutch perspective, in principle, a secondary transaction
is required to account for the transfer pricing adjustment. 13
A secondary transaction may give rise to a secondary adjustment, for example
the taking into account of interest on the claim created or the levy of
dividend tax on a profit distribution.
Not all countries use the same system. This
can result in the other state involved not being willing to, for example,
credit the dividend tax levied as a secondary adjustment, because the
fictitious dividend distribution is not recognised. If the taxpayer makes it
plausible that the dividend tax (as a secondary adjustment) cannot be set off
in the other state involved and there is no question of abuse aimed at avoiding
dividend tax, the secondary adjustment will be omitted.
The levy of dividend tax as a secondary
adjustment shall not be omitted if the other State concerned is designated in
the Regulation on Low-Tax States and Non-Cooperative Jurisdictions for tax
purposes in the year in which the secondary adjustment is made. 14
The transfer of (in)tangible fixed assets to
a group company will not satisfy the arm's-length principle if that group
company does not add value to the assets in question because the required
functionality is lacking and it is therefore not in a position to control the
risks relating to the (in)tangible fixed assets.
Based on the arm's-length principle, related
parties are expected to strive for profit maximisation. In unrelated
relationships, a transaction with respect to a tangible or intangible fixed
asset will normally only be entered into if both parties can expect an increase
in their own profit from it. This expectation is only realistically possible
for the seller and buyer if there is an expected increase in the combined
earnings of the buyer and seller as a result of the transaction compared to the
combined earnings of both without the transaction. The expected increase in
profit can only take place if the buyer adds value in some way. This is only
possible if the buyer has the relevant functionality required for this and is
thus able to manage the relevant risks. If there is no expected increase in
joint profit, the bid price of a potential buyer will be lower than the asking
price of a potential seller. Transfer of the asset in that case is not
commercially rational and will not take place, partly because the transfer will
also involve (transaction) costs. Such a transaction between related parties
does not meet the arm's-length principle.
In addition, from the perspective of both
seller and buyer, the arm's-length assessment must consider whether the seller
and/or buyer have other realistically available options that are more
attractive to them. In the situation described above, it is a realistically
available and more attractive option for both the seller and the buyer not to
enter into the transaction. This is because the overall operating profit that
the parties would achieve together is not higher compared with the situation
where the transfer would not have taken place. Because the transfer would
entail additional (transaction) costs (e.g. preparation of contracts), the
joint operational profit is even expected to be lower than in the situation
where no transfer would have taken place.
It may happen that the buyer of an immovable
or tangible fixed asset is located in a low-tax jurisdiction. The mere fact
that the buyer is established in a low-tax jurisdiction does not lead to an
increase in the combined profit if the buyer does not have the relevant
functionality in relation to the (im)tangible fixed asset. If, after the
transfer, the functionality in relation to the tangible or intangible asset
remains with the seller, the buyer will be fully dependent on the seller for
the future development of the value and operation of the asset. In unrelated
relationships, the buyer will not be able to expect any operational profit. As
a result, under arm's-length conditions it cannot benefit from the low(er) tax
rate.
Based on the arm's-length principle, the
difference in profits resulting from the use of conditions different from those
which unrelated entities would have used must be eliminated from the taxable
profit of the Dutch seller. That is the difference in profit compared with the
situation where the transfer had not taken place.
For an illustrative example, see example 1 in
paragraph 1.145 and the example in paragraphs 9.122 to 9.124.
In some situations the legal ownership of
tangible and intangible fixed assets is in the hands of group entities without
a prior transfer by another group entity. If the legal owner does not have the
relevant functionality in these situations either, the Tax and Customs
Administration will treat them in accordance with the principles outlined in
this paragraph. This means that only a relatively limited remuneration can be
attributed to the legal owner of the tangible or intangible fixed asset, who
does not perform the relevant functions with regard to the asset.
In the OECD guidelines, the description of
relevant functions in respect of intangible assets often refers to the
so-called DEMPE functions. These are the functions of "Development,
Enhancement, Maintenance, Protection and Exploitation". Depending on the
facts and circumstances, the various DEMPE functions will have to be weighted
in relation to their relative importance. In general, the Development and
Enhancement functions will be given greater weight in assessing the relative contribution
to the value of the intangible asset concerned than the Maintenance, Protection
and Exploitation functions.
In the case of the transfer of intangible
assets, it may be difficult to determine their value at the time of transfer
due to a lack of understanding of the future benefits and risks. Paragraph
6.185 notes for such cases that if independent entities in similar circumstances
would have agreed on a price adjustment clause, a tax authority should be
allowed to determine the price on the basis of such a clause. 15
This refers to an arrangement whereby the consideration is in line with the
future benefits generated by the intangible asset. Agreeing on a
benefit-dependent consideration helps to ensure that taxation is more in line
with the benefits actually achieved.
The Dutch tax authorities will also take the
view that it is not legitimate to agree a fixed price if the valuation at the
time of the transaction is highly uncertain and economically rational
independent parties in a similar situation would not have agreed a fixed price.
In such cases, an adjustment clause should, for example, be included in the
agreement between the related parties whereby the price depends partly on the
benefits generated by the intangible fixed asset in the future.
An example is the situation where a new
intangible asset has been developed and is transferred to an affiliate at a
time when its success is not yet sufficiently apparent, for example, because
the intangible asset has not yet generated revenues and there are significant
uncertainties in estimating future revenues. In that situation, the valuation
at the time of the transaction is highly uncertain and the inclusion of a price
adjustment clause makes sense. 16
It should be noted that a price adjustment clause may lead to both an upward
and a downward adjustment of the originally agreed price.
In cases of transfer or licensing of
intangible assets as described in paragraph 6.189, it is difficult for the Tax
Authorities to assess the value in relation to the transactions in question due
to large uncertainties regarding the future value development. In these cases,
the Tax and Customs Administration can use the results actually achieved with
the relevant intangible assets in assessing the arm's length nature of the
price at the time the transaction took place.
The Tax Authorities may,
with reference to the actual results achieved, still question the price as
determined at the time of entering into the transaction if it appears that:
·
-there are
large deviations between the realised results and the expectations and
resulting forecasts which formed the basis for the pricing at the time of the
transaction; and
·
-these deviations
cannot be explained by facts and circumstances which did not occur until after
the date of the price determination.
A large deviation is a deviation of more than
20% from the projections that formed the basis for the originally established
price. The intangible assets shall not be considered difficult to value if such
deviation occurs only after a period of five years after the intangible asset
has earned its first revenues in transactions with unrelated parties.
In practice, an entity belonging to a group
often buys the shares in an unrelated entity, after which the intangible assets
contained therein are transferred to another entity within the group. This can
lead to discussions between taxpayers and the Tax Authorities about the
arm's-length price to be set for the transfer of the intangible assets. Prior
to this, it is important to determine whether, in addition to the legal
ownership of the intangible assets, the related functionality and risks are
also transferred. The other paragraphs of this Decree (including paragraphs 5.2
and 5.3) also apply to this in full.
Paragraph 6.147 and example 23 of the Annex
to Chapter VI state that the arm's-length price for the shares of the acquired
entity contains useful information for the valuation of the business of this
entity. I am therefore of the opinion that the purchase file (with the exception
of the parts which can be substantiated by the taxpayer that they are not
important for taxation purposes), which is usually held by the buyer of the
shares, is an essential part of the transfer price documentation to be provided
by the taxpayer to substantiate the price of the transferred intangible fixed
assets.
In addition, Chapters VI and IX play a role
in determining the arm's-length price for the transfer of the intangible
assets. Attention should also be paid, among other things, to the allocation of
the intended synergy benefits, the tax interpretation of the so-called control
premium, the valuation of the remaining routine function(s) (taking into
account the assets used and risks assumed) and the effects of taxation.
Although the price for the shares purchased
is at arm's length because the seller is an unrelated party, this does not
imply that the value of the shares to the buyer is equal to this price. On the
contrary, the buyer will generally only buy if he anticipates creating more
value with the acquired entity than the price he has to pay for it. However,
the value that the buyer of the shares has assigned to the intangible assets
present in the acquired entity when determining their value for him can be a
good indicator of the price he would like to receive at least on transfer of
these assets.
In addition, in the event of a transfer of
the intangible assets, the seller must take into account the fact that, unlike
in the case of a transfer of shares, corporate income tax will have to be paid
on any book profit made on the transfer of the assets. Generally speaking, the
seller will want to see a sale proceeds equal to the value he assigns to the
intangible assets plus the tax due on any book profit, taking into account the
corporation tax owed.
The Tax Authorities are sometimes confronted
with situations in which the entrepreneurial functions and related intangible
assets of an acquired entity are transferred to another entity within the group
and only a routine function remains in the acquired entity. In such cases,
taxpayers sometimes determine the transfer price by subtracting the expected
'perpetual' cash flow of the routine function (discounted using a discount
factor based on this routine function) from the discounted expected total cash
flow of the acquired entity if no transfer were to take place. In assessing a
transfer price determined in this way, the Tax Authorities will in general,
especially if only one (exclusive) related contract remains, take the position
that the expected cash flow of a routine function cannot be discounted as
perpetuity, because such functions are relatively easy to replace in the market
and contracts with such functions usually have a relatively short duration,
partly for that reason.
In practice, the remuneration for the use of
intangible assets by taxpayers is often determined using royalty rates from
various databases. The question is, however, whether this publicly available
information is sufficiently detailed to perform a comparability analysis
responsibly. In any case, the OECD Guidelines note that a comparability
analysis in the case of intangible assets will frequently show that no
comparable unrelated transactions can be found. The Tax Authorities will
therefore critically assess the use of such databases.
In analyses in which the resale price method,
the cost-plus method or the TNMM is the appropriate method, the entity with the
less complex functions that does not use its own intangible assets is chosen as
the tested party. In such cases, an arm's-length price or an arm's-length
profit for the tested party can be determined without having to determine the
value of an intangible asset used in the transaction itself. Paragraph 6.141
states that the above one-sided methods are not themselves reliable methods for
directly determining the value of an intangible asset. Under certain
circumstances, however, these methods may result in a residual gain
attributable to the intangible asset by first determining the tested party's
remuneration. This residual profit then constitutes the remuneration for the
intangible asset used and the functions performed in connection with it. The
condition is that it has been determined that the residual profit is
attributable to the intangible asset and that all other functions, risks and
assets have been adequately remunerated. Therefore, in appropriate cases, in
the absence of comparable transactions between unrelated parties, it is
acceptable to determine the amount of the consideration to be paid by the
tested party for the use of an intangible asset in this way, provided that the
conditions set out above are met.
According to the OECD guidelines, a group
service exists if an activity is performed for a group member that adds
economic or commercial value to it and for which that group member would
normally be prepared to pay. This does not include activities carried out in
the capacity of a shareholder.
The method to be used to
determine the transfer price for a service can be chosen from17:
·
1.Application
of the arm's-length principle using the methods set out in this Decree and the
OECD Guidelines (see section 6.1 of this Decree); or
·
The simplified method for low
value-added services (see section 6.2 of this Decree).
In practice, it appears that a cost-related
remuneration is often chosen on the basis of the TNMM. Based on a functional
analysis, it will have to be determined whether the remuneration for the group
services in question should be determined in this manner. This approach will
usually only be applicable to more routine services. With this approach
(remuneration related to costs), in principle an arm's-length remuneration will
only be possible if an appropriate profit margin is taken into account when
determining the remuneration.
There is a clear preference for a direct method
when it comes to charging for intra-group services. In practice, however, an
indirect method is often used because applying the direct method leads to
practical problems. The Tax Authorities will use the indirect method chosen by
the taxpayer if such practical problems exist. Of course, the method must also
lead to an outcome in accordance with the arm's-length principle. As an
allocation key, turnover, the number of employees or personnel costs could be
suitable (see also section 7.25). An allocation key whereby the fee to be
charged depends on the profit will not quickly lead to an outcome that is in
accordance with the arm's-length principle.
Shareholder activities shall not be
considered as intra-group services insofar as they do not add economic or
commercial value for the benefit of group members and insofar as a group member
would not normally be prepared to pay for them. No fees should be charged to
other group companies for shareholder activities.
In assessing the question of whether there
are shareholder activities, the Tax Authorities will assume, with due
observance of the provisions of Section 6.6.2 of this Decree, that at least the
activities referred to in the list below have been performed in the capacity of
shareholder. Under each category of activities a number of examples are given
of activities that fall under this category.
·
1.Activities
related to the legal structure of the body itself
o Implementation
of requirements of Book 2 of the Civil Code
§ -organising,
preparing and holding the shareholders' meeting
§ -the activities surrounding the
preparation and approval of the annual accounts and the filing with the Chamber
of Commerce
§ -the activities of the Supervisory
Board as far as the execution of its statutory supervisory tasks is concerned
§ -The activities of the Works Council
o 1.2.Implementation AWR, to the extent
that it concerns the tax obligations of the body itself
§ -the keeping of records
§ -complying
with the obligation to keep records
§ -drafting
of tax returns
§ -compliance
with the obligation to provide information
·
Activities related to the
placement/issue/splitting of shares in the body itself, or comparable
securities on the capital markets and activities related to applying
for/holding a (foreign) stock exchange listing of the body itself
o -complying
with the requirements for admission to a stock market
o -the activities related to the listing,
e.g. preparation of the forms to be submitted to the US SEC in connection with
the listing, making available (free of charge) annual accounts, annual report,
etc.
o -membership
of the associations and other bodies representing the stock exchanges
·
Activities related to the
introduction and enforcement of legal rules on supervision of share
transactions
o -the establishment and maintenance of
a registration system under the Financial Supervision Act
o -reporting
of share transactions by personnel of the body under this legislation
·
Activities related to the
introduction of and compliance with corporate governance rules at the entity or
group level
o -the introduction of corporate
governance supervision as required by legislation and regulations, including
the inclusion of a section on this subject in the annual report
·
Activities related to reporting
to various stakeholders concerning the body or the group as a whole
o -press conferences and other
communication costs with shareholders and other stakeholders, such as financial
analysts, to the extent that the communication relates to external reporting,
financial performance and future prospects of the entity or the group as a
whole.
The above list is not exhaustive. This means
that for activities that are not included in this list, it must always be
assessed separately whether these are intra-group services or activities
performed in the capacity of shareholder.
When classifying activities as intra-group
services or shareholder activities, there may be so-called mixed activities.
Mixed activities are activities, which for a part qualify as intra-group
services and for another part as shareholder activities. Examples of mixed
activities are consolidation activities, activities in the field of mergers and
acquisitions, activities related to the introduction of and compliance with
statutory regulations and codes of conduct in respect of corporate governance,
and activities of the Executive Board. The classification of the activities as
intra-group services or shareholder activities may be made on the basis of any
method that leads to an outcome that is in accordance with the arm's-length
principle.
The following examples describe situations
where there are mixed or no activities.
A.
Example of consolidation activities
A group uses a management information system
in which the results of all group companies are recorded. This information is
used for budget decisions, management and assessments of the group companies
concerned, as well as for drawing up quarterly, half-yearly and annual
consolidation statements that form the basis for the financial statements.
Conclusion: Group
services are concerned with setting up and maintaining the management information
system and processing the information for managing the group companies. As
regards the ultimate compilation of the periodic consolidated financial
statements of the (intermediate) holding company on the basis of the
information thus obtained, these are activities performed in the capacity of
shareholder.
B.
Example of merger and acquisition activities
A department at the Group's European
headquarters deals with mergers and acquisitions. The group needs an additional
production site in Europe and the department analyses which companies in the
various European countries qualify for a potential takeover to be carried out
by the European head office itself.
Conclusion: The
analysis of the mergers and acquisitions department is an activity performed in
the capacity of shareholder. Therefore, no remuneration should be demanded from
group companies in respect of this activity.
C.
Example of merger and acquisition activities
The mergers and acquisitions department in
the above example analyses which companies on continent X (not being Europe)
are candidates for a potential acquisition to increase market share on that
continent. The analysis leads to an acquisition of a company by the regional
headquarters of continent X.
Conclusion: A
group service is provided to the regional head office of continent X. In
respect of this activity, an amount should be charged that results in
arm's-length remuneration.
D.
Example of merger and acquisition activities
A department within the group that deals with
mergers and acquisitions assists an acquired company with the legal
implementation of the acquisition (e.g. de-listing of the shares), the
adjustments to the group's system and corporate identity and the setting up and
implementation of the personnel roadmap. Through this assistance, economic
and/or commercial value is added to the acquired group company for which an
unrelated party in similar circumstances would be prepared to pay.
Conclusion: A
group service is provided to the group company concerned. In respect of this
activity, an amount should be charged that results in an arm's-length
remuneration.
The OECD guidelines contain paragraphs that
focus on a specific group of low value-added intra-group services. 18
These paragraphs include a simplified determination of remuneration for these
specific services, optional for the taxpayer, which I endorse. Underpinned by
appropriate documentation, a limited fixed profit mark-up of 5% on the relevant
costs of these services allows the costs with the profit mark-up to be passed
on to the qualifying group members. This simplified method is also accompanied
by a simplified and more limited benefit test19 from the perspective of the
recipient of the services in question. The recipient must then demonstrate the
benefit of certain categories of services more generally (see paragraphs 7.54
and 7.55). The criteria for and some examples of low value-adding intra-group
services are described in sections 7.45 - 7.49.
In the case of services provided by an
associated party, the Tax and Customs Administration uses the benefit test to
assess whether a service has actually been provided for which a fee is
appropriate. However, to the extent that a fee charged relates to services that
fall under the simplified method chosen by the group, the Tax and Customs
Administration applies a pragmatic approach in determining whether a fee is
appropriate. The benefit to the recipient of the services in question need only
be substantiated in general terms and need not be traced back to individual
transactions. The fixed profit margin does not need to be substantiated by a
comparability study. However, the conditions set out in the OECD guidelines
must be met, including the appropriate documentation (see section 7.64) and the
appropriate method of calculating the amounts charged (see sections 7.56 to
7.58). For the details of the allocation key to be selected, see sections 7.59
and 7.60.
In view of the nature of the services
described here (low value-adding intra-group services), I assume that a
pass-through of the relevant costs with a limited fixed profit mark-up of 5%
via an appropriate allocation key will lead to an arm's-length outcome.
The cost base includes the direct costs and
indirect costs related to the relevant support services as well as overhead
costs. The relevant costs also include special charges (such as redundancy
costs, reorganisation costs and wages in kind). Which costs are relevant
follows from the functional analysis underlying the taxpayer's transfer pricing
system.
E.
Example
A group is active in the provision of legal
services to non-members. An employee of one of the group's entities provides
advice on local legal aspects to a foreign group company involved in advising a
client on an international transaction.
Conclusion: The
simplified method cannot be applied to this activity as it involves activities
that are part of the primary business processes of the group. Moreover, the
services in question are also provided more than incidentally to unrelated
parties.
F.
Example
A legal department of a bank is heavily
involved in the design of a bank product that another group entity wants to
offer. The activity of the legal department is an activity that adds more than
marginal value to the primary business processes of the group.
Conclusion: The
simplified method cannot be applied to this activity because it is an activity
that adds more than marginal value to the group.
G.
Example
A helpdesk department only deals with
questions from employees of various group entities about the operation of the
computer system, the software used and the resolution of minor user problems.
The taxpayer makes a plausible case, based on the nature of the activities, the
relative size of the activities within the group and the added value of the
activities, that there is no primary business process of the group and that the
activities do not add more than marginal value to the primary business
processes of the group.
Conclusion: In
this case it is sufficient to charge all relevant actual costs with a profit
surcharge of 5% (application of the simplified method).
H.
Example
A group operates an international chain of
hotels. A department deals with the creation and maintenance of a computer
application within the group, which automates the booking system, the invoicing
system and the inventory system.
Conclusion: The
activities of the department are probably not part of the primary business
processes of the group, but add at least more than marginal value to the
primary business processes of the group. The simplified method cannot be
applied to this activity.
I.
Example
One entity is engaged in the production of
semi-finished goods under the direction and at the risk of another group entity
(as a contract manufacturer). Such production activities are, by their nature,
generally part of the primary business processes of the group. In addition,
these activities, together with similar or adjacent activities (such as the
production activities of the client), generally constitute an absolute or
relative part of the total activities of the group.
Conclusion: The
fact that the added value of this activity may be marginal in itself is not
sufficient to classify the activity as ancillary. The simplified method cannot
be applied to this activity.
In a situation where group entities A and B
contractually stipulate that A develops intangible fixed assets ('contract
research') or produces products ('contract manufacturing') for the account and
risk of B, a remuneration for B related to the costs could be regarded as at
arm's length.
For the transfer pricing analysis, however,
the transaction should first be characterised according to the principles
described in paragraph 2 of this decree. A remuneration related to the costs is
at arm's length if the execution of the contract research or contract
manufacturing activities is done by A and if B directs the research or
manufacturing activities, bears the costs and risks and becomes the economic
owner of the assets developed or products produced. B must exercise control
over the risks run and have the financial capacity to bear the consequences of
the risks run (for these concepts see section 2.1 of this decree). The analysis
should in any case be based on the specific facts and circumstances.
The following elements play a role in
answering the question of who directs the research activities and controls the
risks involved: decision-making, planning, budgeting, measuring performance,
rewarding, adapting/redefining areas of work, identifying commercially valuable
areas and assessing the likelihood of (un)successful research.
J.
Example
A group has its headquarters in country X.
The group is engaged in the production and sale of consumer products. In order
to maintain and, where possible, improve its market position, research is
continuously carried out into the possible improvement of existing products and
the development of new products. To this end, the group has two R&D
centres, housed in a separate entity, located in country X (R&D X, as part
of the head office) and in the Netherlands (R&D NL) respectively.
The research programmes for the group as a
whole are drawn up by R&D X after strategic decision-making by the group
management. R&D NL is then deployed on the basis of separate contracts to
carry out part of this research programme. R&D NL has to submit the
detailed project plans drawn up for the implementation of the part of the
research programme allocated to it to R&D X. R&D X approves these
project plans and the budgets associated with them. Even if R&D NL has
suggestions regarding changes to the research programme and/or the project
plans already submitted, these suggestions must be explicitly submitted to
R&D X. R&D NL reports regularly to R&D X on the progress of the
research and the exhaustion of the budgets. If the budgets are exceeded,
R&D NL has to ask R&D X for additional financial resources.
Not all research activities lead to success.
The contractual terms and conditions between R&D X and R&D NL stipulate
that all risks connected with the development by R&D NL are for the account
and risk of R&D X. The risk of the development being carried out by R&D
NL is borne by R&D X. R&D X will be the owner of all legal and economic
rights arising from the research. R&D X has sufficient financial capacity
to bear the financial risks associated with the research.
R&D X pays R&D NL a fee related to
the costs calculated on the basis of the TNMM with the ratio operational
profit/costs as profit level indicator.
Conclusion: The
functions of R&D NL are limited to the performance of R&D activities.
These are carried out on the instructions and under the direction (including
control and decision-making) of R&D X. The risks connected with the R&D
activities are borne by R&D X. R&D X exercises the necessary control
over the risks and has the financial capacity to bear the consequences of the
risks for which it is responsible. The activities of R&D NL have rightly
been classified as contract research. The application of a remuneration related
to the costs is appropriate in this case.
K.
Example
A group has its headquarters in country X.
The group is engaged in the production and sale of consumer products. In order
to maintain and, where possible, improve its market position, research is
carried out on a continuous basis into the possible improvement of existing
products and the development of new products.
The R&D activities relating to product
line A are carried out in the Netherlands and have been assigned to a Dutch
body (R&D NL). This Dutch entity also houses the European head office and
sales activities. R&D NL operates completely independently, within the framework
of the strategic decision-making by the group management. Body Y, established
in country Y, is also part of the group. Y employs two people, both with an
administrative and financial background. R&D NL and Y have entered into an
agreement for an indefinite period with regard to the R&D activities of
R&D NL.
Not all of these research activities lead to
success. The contractual terms and conditions between Y and R&D NL
stipulate that all risks connected with the development by R&D NL are for
the account and risk of Y. Y becomes the owner of all legal and economic rights
arising from the research. Y has sufficient financial capacity to bear the
financial risks associated with the research.
Y pays R&D NL a fee calculated on the
basis of the costs incurred by R&D NL with a profit mark-up.
Conclusion: The
functions of R&D NL cover the entire R&D activity, from deciding which
research will be carried out to the implementation itself. R&D NL therefore
manages the R&D activities independently. The contractual conditions
stipulate that the risks associated with this R&D activity are to be borne
by Y. However, Y does not have the necessary expertise to exercise control over
the risk for which it is responsible. In fact, the control is exercised by
R&D NL, so the risk should also be attributed to R&D NL. Based on the
actual situation, there is therefore no contract research activity carried out
by R&D NL, with the result that the calculation of a remuneration based on
the costs incurred with a profit mark-up for R&D NL does not lead to an
arm's length remuneration in this situation.
Based on the arm's-length principle,
remuneration should be related to the functions performed taking into account
the risks and assets used. This means that the level of remuneration of the
participants in a CCA should not differ (substantially) from the remuneration
that the companies concerned would receive if they were cooperating outside a
CCA context.
The principles of the other chapters (in
particular chapters I and VI) apply in full to the question of whether CCAs
comply with the arm's-length principle. This means, for example, that a
participant in a CCA that assumes risks must also exercise control over these
risks and have the financial capacity to bear the negative impact of these
risks. For example, the participant in a CCA that only provides the financing
for the CCA and only exercises control over risks relating to that financing
and therefore not the risks relating to the other activities within the CCA, is
generally only entitled to an arm's-length fee for the financing, taking into
account the financing risk ('risk-adjusted return').
Chapter VIII provides that each Participant's
relative share of contributions to the CCA should correspond to that
Participant's relative share of the total expected benefits. Whether this is
the case should be assessed in practice on a case-by-case basis. The
arm's-length principle implies that both the relative share of each participant
in the contributions to the CCA and the relative share of that participant in
the total expected benefits should be determined on the basis of fair value. 20
Some countries do not accept the charging of
a profit mark-up, while they do accept the charging of a fee for the assets
involved in the business. This is acceptable if the outcome is at arm's length.
In assessing CCAs, the Tax Authorities should
take into account that transfer pricing is not an exact science. This does not
alter the fact that taxpayers can be expected to make a plausible case that
independent parties in similar circumstances would conclude a similar agreement
under similar conditions.
The following are some examples of CCAs
related to R&D activities to illustrate the above principles. 21
L. Example
Group body A and group body B respectively
house the head office of continent A and the head office of continent B
respectively. Both are engaged in production and sale of products. Both have an
R&D centre. The group decides to carry out research into the development of
a new product. The market prospects for the product are good, but significant
research needs to take place before the product is ready for production and
sale. The product has potential for the market in Continent A and B.
A and B conclude a CCA to perform the
necessary research. A makes the research capacity and the first development
results available and B makes knowledge, know-how and researchers available. A
and B agree on a number of moments when they jointly decide on the next phase
of the project. The ratio between the market value of A's contribution and that
of B is 1:1. The total expected value of the development result of the product
is the same in continent A as in continent B.
A and B agree that each of the participants
will bear the costs of their own contribution. In addition, it has been
determined that A will become both the legal and economic owner of the
development result insofar as it concerns continent A and that B will become
both the legal and economic owner of the development result insofar as it
concerns continent B. Strategic project planning and management (including
project control and decision-making) takes place in an equal manner.
Conclusion:
Both A and B can be regarded as participants in the CCA because, in return for
their contribution, both participants obtain a share of the right that is being
developed. Moreover, they can exploit/use this right independently. Finally,
the relative share of both participants in the contributions corresponds to the
relative share of the total expected benefits (i.e. the right that the
participants obtain). Thus, the terms of the CCA lead to an arm's-length
outcome.
M.
Example
Group entity A is engaged in the development,
production and sale of consumer products in continent A. A has carried out
initial research into the feasibility of developing a new product. The
conclusion is that the product can probably be developed successfully. The
market prospects for the product are good.
The product is also well suited for the market
in continents B and C. Group entities B and C are engaged in the development,
production and sale of similar products for the markets in continents B and C.
A, B and C conclude a CCA to conduct the research necessary to develop the new
product.
In order to achieve
successful development, the following agreements are made:
·
-Equal contribution
by all: drawing up a research programme and decision-making per project
progress stage identified in the research programme (strategic project planning
and steering, including monitoring and decision-making, of the project).
·
-Contribution
by A: Results of initial research. Development costs incurred:
EUR 1 million. WEV of research result: EUR 2 million.
·
-Contribution
by B: development capacity (personnel + fixed assets). The
expected costs associated with this development capacity are EUR 1.8 million.
If this development capacity were to be hired from third parties on a contract
research basis, EUR 2 million would have to be paid for it (= WEV).
·
-Contribution
by C: liquid assets of EUR 2 million for expected additional
costs (purchase of materials from third parties and hiring of third parties).
The participants agree that each of them will
bear the cost of its own contribution. The total expected value of the
development result in continents A, B respectively C is expected to be equal,
so that the value of the right to be developed is expected to be equal for all
continents. The group entities agree that A, B and C will become legal and economic
owners of the development result as far as continents A, B and C respectively
are concerned.
Conclusion:
Both A, B and C can be regarded as participants in the CCA because, in return
for their contribution, the participants obtain a share of the right that is
being developed. Moreover, they can exploit/use this right independently.
Finally, the relative share of the participants in the contributions
corresponds to the relative share of the total expected benefits (i.e. the
right that the participants obtain). Thus, the terms of the CCA lead to an
arm's-length result.
N.
Example
Group entity A, group entity B and group
entity C are engaged in the production and sale of similar consumer products in
continent A, continent B and continent C. A has an R&D centre. B and C
employ a number of product experts who also have knowledge of product
development, but do not have their own R&D centre.
A has carried out initial research for the
development of a new product. The market prospects for the product for Continent
B and C are good, but significant research needs to take place before the
product is ready for production and sale. The total expected value of the
development result in continents B and C is expected to be the same. For
continent A the product does not seem interesting.
A, B and C conclude a CCA
under the following conditions:
·
-B and
C will jointly draw up a research programme for the (further) development of
the product, making an equal contribution. In addition, they shall make equal
capacity available for the management of the project (strategic project
planning and management, including monitoring and decision-making, of the
project).
·
-Contribution
by A: Results of initial research. Development costs incurred:
EUR 1 million. WEV of research result: EUR 2 million.
·
-A's R&D department works out
the project plan and submits it to B and C. Next, A's R&D department takes
on the implementation of the research. The R&D department of A is regularly
accountable to B and C with regard to the progress of the project. The costs
that are expected to be related to this development capacity are EUR 1.8
million. WEV of the development capacity if work is commissioned: EUR 2
million.
·
-Contribution
by B and C: each make a payment to A in the amount of EUR 2
million as compensation for A's contribution. In addition, each bear half of
the additional costs paid to third parties (purchase of materials, hiring of
third parties) in the amount of EUR 2 million.
·
-Participants shall each bear the
cost of their own contribution.
·
-B and
C obtain the legal and economic ownership of the development result for
continent B and continent C respectively.
Conclusion:
Based on the OECD Guidelines, A is not a participant under arm's-length
conditions in the CCA, because A cannot derive any benefit from the development
result. A is actually selling the initial development result to B and C in
combination with performing contract research activities for B and C.
B and C can both be regarded as participants
in the CCA because, in return for their contributions (money and control), they
obtain a share of the right that is being developed, which right they can also
exploit/use independently. A provides development capacity and the initial
development result with a WEV of EUR 4 million in total and receives an amount
of money of EUR 4 million in return. Such remuneration is arm's-length.
The contribution of both participants in the
CCA (B and C) and the expected benefit (the right they receive) correspond to
each other. Therefore, although the contract does not qualify as a CCA for A,
the remuneration resulting from the terms of the contract is arm's-length for
all participants.
O.
Example
Group entity A is engaged in the development,
production and sale of consumer products. Group entity B employs a limited
number of persons with financial and administrative backgrounds. A has carried
out initial research into the development of a new product. The market
prospects for the product are good for continent A and continent B, but
additional research needs to take place before the product is ready for
production and sale. The total expected value of the development result for
continents A and B is expected to be the same.
A and B conclude a CCA
under the following conditions:
·
-Contribution
by A: Initial development results and development capacity.
Total costs involved: EUR 5 million. Total WEV: EUR 10 million.
·
-B pays
to A EUR 5 million and 50% of the costs to the extent that they exceed the
projected costs of EUR 5 million.
·
-A respectively
B become economic owner of the development result as far as it concerns
continent A respectively continent B.
·
-A becomes
the legal owner.
The contractual conditions stipulate that the
risks associated with this R&D activity are to be borne by B for 50% (B pays
EUR 5 million and 50% of the costs to the extent that they exceed the forecast
costs, and becomes the economic owner of the developed right).
An analysis of functions, assets used and
risks incurred shows that A's functions encompass the entire R&D activity,
from deciding which research will be carried out to the implementation itself.
A thereby manages the R&D activity entirely independently. In view of the
functions she performs, B is not able to exercise control over the relevant
risks in relation to the R&D activity. B's function is limited to financing
the R&D activity and exercising control over the risks associated with that
financing.
Conclusion:
In fact, the entire risk associated with the R&D activity is controlled by
A. In addition, A has the financial capacity to bear these risks. The entire
risk associated with the R&D activities should therefore be attributed to
A. The remuneration that A receives must be in line with the functions
performed by A and the associated risks. However, on the basis of the contract
between A and B, B shares the positive and negative consequences of the risk
controlled by A with A. The terms of the contract concluded between A and B are
therefore not arm's-length.
The remuneration of B, who does not exercise
control over any specific risk related to the R&D activity, should only
consist of an arm's-length payment for the financing of the R&D activities
of A, taking into account the financing risk (see section 6.61 which speaks of
a "risk-adjusted return"). If and insofar as B does not exercise
control over the risks related to this financing, B can at most be entitled to
a risk-free return (see section 1.103).
In many cases, joint procurement within a
group leads to benefits, including synergy advantages. Business arguments for
centralising purchasing activities include cost savings (bundling purchasing
power and/or purchasing expertise), reducing the required working capital and
improving product quality. Often there is also the desire to establish a
purchasing office close to the market where the products are purchased.
The activities related to purchasing can vary
from performing support activities to purchasing activities that can be
considered core functions of the group. The functional analysis focuses on the
relative importance of the purchasing function within the total value chain of
the group. Then it has to be assessed by which parts of the group the various
purchasing activities are carried out.
In case the procurement
activities are of a routine nature, little risk will be incurred. Such
activities include:
·
-the selection
of potential suppliers;
·
-the (local)
coordination with suppliers;
·
-the quality
control of purchases; and
·
-Arranging transport and other
logistical activities.
In practice, such activities do not or hardly
involve price or inventory risks.
Sometimes the activities have more complex
characteristics and also involve, for example, putting together the product
range (which should be considered a separate function).
The functional analysis is followed by the
question of an appropriate transfer pricing method for the activities performed
in order to determine an arm's-length reward. This remuneration can vary from a
routine remuneration (based on the incurred operational costs or a remuneration
related to the purchase value) for activities with a routine character to a
transactional profit split-like remuneration if the activities can be
considered as a core function of the group.
Local unaffiliated purchasing agents are
known to carry out mainly support activities. In general, they are remunerated
with a fee related to the purchase value. It is obvious that the percentage of
the remuneration will increase as the responsibilities of the agent increase
and decrease as the purchased volumes increase.
In practice, when looking for reliable
comparables, it is difficult to perform the comparison on the basis of a
percentage of the purchase value. Therefore, in such situations, the Tax
Authorities will usually use the TNMM (whereby the net operating profit is
related to the costs) as a test to assess the arm's-length nature of the
remuneration. In principle, given the routine nature of the purchasing
activities, the cost base is limited to the own operational costs of the
purchasing office. The cost price of the purchases is not part of it.
If the group, by centralising its purchasing
activities, is able to achieve higher discounts than before as a result of the
increased purchasing volume, this additional advantage is in principle not
attributable to the (centralised) purchasing office. Such a benefit is to be
attributed to those parts of the group which through their joint purchasing
volumes enable the purchasing office to realise such (additional) discounts.
Only if and insofar as (additional) discounts are realised due to the specific
knowledge and skills of the buying office, it is at arm's length to attribute
part of it to the buying office. 22
Based on the OECD Guidelines, the
arm's-length test for intra-group loans starts with the characterisation of
those transactions (see also section 2.1 of this Decree). The assessment of
whether a transaction presented by the parties as a loan should actually be
characterised as a loan is part of the characterisation process described in
Chapter I (see section B of Chapter X and specifically paragraphs 10.4 to
10.18).
Also in the case of intra-group loans, the
lack of control and/or financial capacity of a party in relation to certain
risks may result in the relevant risks, and the associated compensation, having
to be allocated to the party that does exercise control over these risks and
has sufficient financial capacity.
If a financial transaction is characterised
as a loan, the conditions applied must be tested against the arm's-length
principle. In the case of an intra-group loan, too, all the conditions,
including the price, must be tested. The end result of this test should in
principle be a price (interest charge/interest income) that meets the criteria
of Article 8b of the Dutch Corporate Income Tax Act 1969.
If the transaction cannot be made
arm's-length with an adjustment of the price and/or the other conditions, this
can in extreme cases lead to ignoring or reclassifying (part of) the loan (see
section 1.142 of the OECD Guidelines and section 2 of this Decree). Taking the
above into account, an arm's-length interest rate/interest charge can then be
determined for the remaining loan.
An analysis of the parties' perspectives and
their realistically available alternatives also plays an important role in
financial transactions (see section C.1.1 of Chapter X). For example, an
unaffiliated lender, taking into account the functions he performs and his
position in the market, will generally want to limit his risks as much as
possible. He will usually make the conclusion of the loan dependent on the
question whether the non-affiliated hirer will be able to (re)pay the loan and
the interest charged on it. He will therefore rather lend to an unrelated party
whose creditworthiness, taking into account the planned intra-group loan, does
not fall below a certain level.
Creditworthiness is usually expressed in a
so-called credit rating. Credit ratings from AAA to BBB- stand for high to
sufficient creditworthiness. 23
The likelihood that the borrower will ultimately be unable to pay interest and
repayments is considered small. The creditworthiness of the borrower is then
regarded as investment grade. Potential borrowers with a credit rating lower
than BBB- are not considered investment grade, as the likelihood that they will
ultimately be unable to pay the interest and repayments is considered too high.
The credit rating is determined by certain
objective indicators, including interest coverage24 and loan-to-equity ratio.
Only in special situations is a lender willing to accept a credit rating lower
than BBB- from the unrelated borrower. Moreover, a lender with a diversified
loan portfolio is more likely to issue a loan to an unrelated entity that is
not investment grade than a lender that has only one or a very limited number
of loans outstanding. On the basis of the above, when a loan is provided to an
affiliated entity that is not investment grade, it must be made plausible that
the loan was agreed on arm's-length terms.
An unaffiliated borrower will strive to
organise the financing of its business activities in such a way that it is as
efficient as possible and involves the lowest possible cost of capital. 25
The amount of equity compared to the amount of debt plays an important role in
the level of cost of capital. On the one hand, it is advantageous to finance a
certain part of the business activities with loan capital. Because, among other
things, the interest payments are in principle tax-deductible, the return on
the invested equity increases. On the other hand, the additional costs for
attracting loan capital from a certain size are so high that they will have a
negative effect on the cost of capital and reduce the return on the invested
equity. A better option in such a situation is to raise equity capital.
The level of borrowing costs depends to a
large extent on the creditworthiness of the borrower. An unaffiliated borrower will
generally not take out a loan if that would lower its credit rating below
investment grade/BBB- level. Such a creditworthiness means that either no loan
capital can be raised or only at very high costs. In addition, calamities
cannot be absorbed and the risk of bankruptcy becomes too high.
In view of the above, in the case of an
affiliated financing transaction that results in such a capital ratio and
interest charges that, after the intra-group loan is taken out, the borrowing
entity is no longer investment grade, it will have to be made plausible that
the loan was agreed under arm's-length conditions.
When determining the credit rating of an
entity, the degree of implicit support from affiliated entities within the
group can play a role. This may affect, for example, the level of interest or
the size of a loan when entering into a financing transaction. Implicit support
should be considered as a benefit that is solely attributable to being part of
the group. With reference to paragraph 1.158 and example 1 in paragraphs 1.164
to 1.166, the inclusion of remuneration for such implicit support as a
consequence of being part of a group is not arm's-length.
The implicit support results in a so-called
derivative credit rating for the borrowing entity. That is, a credit rating
that takes into account the fact that the entity is part of a group.
The role and position of the entity within
the group shall be taken into account in determining the degree of implicit
support from the group and its effect on the credit rating of that borrowing
entity. For entities whose continued existence is essential to the group, the
credit rating shall be the same as, or very close to, the group rating. In the
absence of sufficient relevant information, paragraphs 10.81 and 10.82 may be
relevant.
The OECD guidelines describe a number of
methods for determining the arm's-length interest rate. The preference of the
OECD guidelines seems to be for the CUP method (see section C.1.2.1 of chapter
X). This method involves determining the interest rate of loans on the basis of
available data regarding comparable transactions with borrowers with a similar
credit rating.
In addition to the CUP method, the OECD
guidelines also describe the 'cost of funds approach'. This is a method in
which the costs incurred by the lender to borrow the lent money itself are
increased by a coverage of costs, a risk premium and a fee for the required
equity.
In this context, the OECD guidelines pay
specific attention to cases in which borrowing takes place from unrelated
parties and the borrowed amount eventually reaches the ultimate affiliated
borrower via one or more entities within the group. If such entities only
perform an "agent" or "intermediary function", they are
only entitled to a remuneration consisting of a surcharge on the costs of their
own function (see also paragraph 7.34). Section 9.2 of this Decree on Service
Providers discusses this in more detail.
An interest rate charged in connection with a
loan is referred to in the OECD guidelines as a "risk-adjusted rate of
return". This consists of the risk-free rate of return and a premium as a
reward for the risk allocated at arm's length to the financier. Paragraphs
1.137 to 1.146 are relevant for determining the risk-adjusted rate of return.
Paragraph 1.103 stipulates that the party
that is not in control of the risks associated with investing in a financial
asset is only entitled to a risk-free rate of return. The risk-free rate of
return is defined as the return on an investment with a zero risk of failure.
The guidelines recognise that such an investment does not exist. Therefore, on
the basis of existing practice, the risk-free rate of return is generally
determined by reference to the interest rate on eligible government bonds (see
paragraphs 1.128 to 1.136).
Although the reward for the lender may be
limited to a risk-free rate of return, the lender does have the right to deduct
the arm's-length interest. The difference between the arm's-length interest and
the risk-free rate of return (the risk premium) accrues to the party that is in
control of the risks associated with the investment in the financial asset. The
basic assumption here is that the total interest income is included in a tax
levied on profits. The possibility for the Tax Authorities to deviate from the
explanation given in this Decree, as mentioned in Section 1.5 of this Decree,
is also relevant here.
The Supreme Court ruled on the question of
whether an affiliated loan could be written off in domestic relations. 26
The Supreme Court ruled that if the interest rate on a loan between related
parties was not determined in accordance with the arm's-length principle, an
interest rate that does comply with this principle must be used to calculate
the taxable profit.
I believe that the starting point for the
determination of that interest rate should be what has been described above
about the determination of the arm's-length interest rate.
If the interest adjustment described above by
the Supreme Court leads to the loan essentially becoming profit-linked, the
Supreme Court considers that the nature of what the parties have agreed is
affected. If no profit-linked interest rate can be determined below which an
independent third party would have been prepared to grant, on otherwise equal
terms and conditions, the same loan to a borrowing group entity, the Supreme
Court assumes that, in granting the loan, the borrowing group entity runs a
risk of default that the third party would not have taken. In that case, it
must be assumed, barring special circumstances, that the lending group entity
accepted this risk with the intention of serving the interest of the entity
affiliated to it in its capacity as shareholder or sister/subsidiary. The
Supreme Court calls this a "non-business loan. A possible write-off loss
on such a loan cannot be deducted from the (tax) profit of the lender.
Next, the interest to be
taken into account for tax purposes must be determined for the non-cash loan.
The Supreme Court applies two rules for this purpose:
·
(i)the
rule of thumb27
·
(ii)the
WEV rule28
The lowest applies as the interest rate to be
taken into account for tax purposes.
Re i
the rule of thumb
The interest on the non-cash loan shall be
equal to the interest that the user group member would have to pay if it
borrowed from a third party under the same conditions and circumstances as the
user group member. The interest thus determined shall be deductible in the case
of the borrowing group member and taxable in the case of the lending group
member. The difference between the interest actually charged and the interest
determined on the basis of the creditworthiness of the lender is in the capital
field.
Re ii
the WEV rule
The application of the WEV rule is
particularly relevant if the non-corporate loan is interest-free or the agreed
interest is owed. The interest to be taken into account for tax purposes is
then determined on the market value of each interest period at the time it
falls due.
The assessment of the business nature of the
money supply can take place both at the time of supply and during the term.
This test must be carried out on both sides, from the perspective of the
lending and borrowing company. Referring to what has been said above with
regard to the perspective of the entities involved, a situation of an
affiliated lender granting a loan to the borrowing group entity that
subsequently is insufficiently creditworthy may also constitute a 'non-business
loan' in the approach of the aforementioned judgment. In my opinion, the same
applies to the borrower who, as a result of the linked intra-group loan, sees
his creditworthiness drop to a level below BBB-.
The Supreme Court considered that the level
of interest on a 'non-bankrupt loan', a loan with a non-bankrupt default risk,
should be determined by reference to the creditworthiness of the lending
entity. The Supreme Court did not explain in its judgment how to deal with the
creditworthiness of the lending group entity compared to the creditworthiness
of the borrowing entity. In case of a higher creditworthiness of the lender
compared to the creditworthiness of the hiring entity, the interest rate that
would be charged by the lending group entity itself will be considered as the
appropriate interest rate to be taken into account for tax purposes. If the
lending group entity does not have a better credit rating than the borrowing
group entity, i.e. if it is not itself investment grade, the notional guarantee
does not, in principle, add anything. In that case, no more than the risk-free
interest rate on the loan can be taken into account.
A special form of financial service that
occurs within the group concerns transactions entered into by taxpayers where
the related activities consist primarily of the direct or indirect receipt and
payment, in law or in fact, of interest, royalties, rental or lease payments,
under whatever name and in whatever form. Entities in which these activities
primarily take place are called service entities (DVLs) in this Decree. 29
This section covers transactions of DVLs with affiliated entities, including
guarantees and transactions under guarantees.
DVLs are characterised by service activities
in which there is often a close relationship between the incoming and outgoing
cash flow. Such DVLs will typically engage in routine activities. In some
cases, however, DVLs may also engage in activities that justify taking credit
and market risks.
Based on the arm's-length principle, the
remuneration of the DVL must be assessed on the basis of the functions,
activities and risks of the DVL. To determine the arm's-length remuneration of
a DVL, we refer to Chapter X. This chapter discusses, among other things, the
consequences of risk allocation for the determination of the arm's-length price
of the transaction(s) to be assessed. The allocation of risks to a DVL requires
that the DVL exercises sufficient control over these risks and has sufficient
financial capacity to bear the possible negative consequences of the risks
taken.
The risks that may arise from financial
transactions consist mainly of credit risk (debtor and currency risks), market
risk and operational risk. In relation to DVLs, arm's-length bearing of credit
risks (debtor and currency risks) that have a strong relationship to cash flows
may justify remuneration related to the principal. Executing operational risks
only (arising from support activities performed by the DVL) will not result in
the allocation of credit risk to the DVL.
In cases where the DVL has insufficient
control and/or financial capacity, the risk should be allocated to the party
that exercises sufficient control over this risk and has sufficient financial
capacity (see paragraphs 1.98 and 10.25).
This decree distinguishes
between three different situations for assessing the transfer pricing system of
a DVL:
·
(i)The
DVL has full control over credit risks and has the necessary financial capacity
to do so;
·
(ii)The
DVL has no control over credit risks and/or insufficient financial capacity;
and
·
(iii)The
DVL has shared control over credit risk and has the necessary financial
capacity to do so.
Re i
The DVL has full control over the credit risks and has the necessary financial
capacity for this.
Once it has been established that the DVL
exercises full control over the credit risks, it must be assessed whether the
DVL has sufficient financial capacity to bear the consequences of the risks
incurred. In doing so, it must be taken into account whether and to what extent
the DVL would be able to raise debt capital from an unrelated party on its own
(without guarantees from affiliated entities) (Section 1.64). On the basis of
paragraph 10.161, financing that can be obtained by the DVL only under the
guarantee of a related entity must be regarded as a capital contribution to the
DVL. However, such a qualification as equity does not lead to an increase in
the DVL's financial capacity under paragraph 1.64. 30
The case law of the Supreme Court uses other
specific criteria for the qualification of a loan as equity. This may be an
area of tension between the OECD guidelines and Dutch case law. If a taxpayer
requests advance assurance on the application of the arm's-length principle,
the OECD guidelines will be taken as a starting point. The reason for this is the
fact that unilaterally given advance assurance must also be defensible
internationally.
If the DVL has full control and the necessary
financial capacity, an appropriate interest rate should be determined on the
basis of a comparability study. This should be done per individual inbound and
outbound related transaction and in conjunction with the overall funding
position of the DVL. The comparability study is concerned with the
comparability of the terms of the related transaction with the terms of comparable
unrelated transactions. For intercompany loans, the CUP method will be the most
logical starting point for finding an arm's-length reward per transaction.
Re ii
The DVL has no control over the credit risks and/or insufficient financial
capacity
If the control over the credit risks does not
lie with the DVL and/or the DVL has insufficient financial capacity to bear the
credit risks, these risks cannot be allocated to the DVL at arm's length.
Remuneration related to the size of the cash flows is therefore not at arm's
length. In the absence of control over the credit risk and/or sufficient
financial capacity to bear the credit risks, a reward related to the DPL's own
operating costs would be more appropriate. 31
The DVL may run an operational risk in relation to the performance of its own
activities. These risks are usually not material compared to the credit risks.
Re iii
The DVL has shared control over credit risk and has the financial capacity to
do so.
When both the DVL and the head office (or
other related entity) have credit risk control activities as described in
paragraph 1.65 (i.e. not only wider policy setting as described in paragraph
1.76), there is shared control. In this situation, there are control activities
in both a quantitative and qualitative sense. In both respects, the DVL must
exercise a certain level of activity before there is sufficient control to
allocate (part of) the risks in question to the DVL.
In the specific context of this particular
form of financial services, it is unlikely to be common in similar unrelated
transactions under similar circumstances for the risk borne by the DVL to be
contractually limited without regard to the relative degree to which the
parties exercise control over the relevant risks.
If a risk materialises, it seems appropriate
to share the consequences between the entities on a pro rata basis, depending
on the relative degree of control they have in relation to the relevant
transactions and associated risks. Given the nature and extent of the control
activities in relation to such financial service activities, I assume that
shared control within a group will rarely occur.
With regard to the financial capacity and the
arm's-length reward, the same remarks apply as made in the first paragraph
under Ad i (the DVL has full control over the risks and has the necessary
financial capacity for this).
In situations where there
is shared control of credit risks and the necessary financial capacity, an
appropriate remuneration should be determined based on the facts and
circumstances of the case.
The arm's-length
remuneration should take into account the other party within the group that
performs control activities and who should also be remunerated on an
arm's-length basis.
The examples below assume the situation where
BV X is part of an internationally operating group. BV X attracts financing
from unaffiliated parties and provides financing to affiliated entities abroad.
32
All financial flows run through the books of BV X. The treasury department of
the group consists of fifty employees.
P.
Example of full control
The entire treasury department of the group
is employed by BV X and operates in the Netherlands. This treasury department
exercises control over the credit risks and BV X has sufficient financial
capacity to bear the credit risk.
Conclusion: The
relevant functions to control credit risk are located in the Netherlands and BV
X has sufficient financial capacity to bear the consequences of the credit
risk. BV X therefore bears the credit risk. An appropriate remuneration must be
determined for each transaction. This can be done by means of a CUP, for
example.
Q.
Example no control
About 40 employees of the treasury department
are employed by BV X and work in the Netherlands. These employees are mainly
occupied with supporting and executive activities. The remaining ten employees
(CFO or head of treasury33 and the layer directly below) are employed by an
affiliated body abroad and work there.
Conclusion: The
relevant functions to control credit risk are not located in the Netherlands.
The functionality present in the Netherlands is limited to support and
implementation activities. A remuneration based on the costs of the supporting
and performing activities is appropriate (regardless of the answer to the
question whether BV X has sufficient financial capacity to bear the risks).
A remuneration method in which the costs and
revenues (interest) related to the loans form part of the basis of the profit
taxable in the Netherlands is not appropriate.
R.
Example of shared control
Of the 50 treasury employees, 45 are employed
by BV X and work in the Netherlands. Within this group, forty employees are
mainly occupied with supporting and executing activities. The remaining five
employees are partly in control of the risks involved in financing affiliated
entities. The remaining five employees of the treasury department work in
another affiliated entity abroad and, together with the aforementioned five
employees in the Netherlands, are in control of the risks associated with the
financing of affiliated entities. Both entities exercise control over the
credit risks as described in section 1.65 (so there is not only wider policy
setting) and have the financial capacity to bear the credit risks.
Conclusion: The
relevant functions to exercise control over the credit risks are located partly
in the Netherlands and partly abroad. Here an allocation of the risks as a
result of the presence of the control functions at BV X and the affiliated
foreign entity is appropriate. If in such an allocation a risk actually
materialises, the consequences thereof should be allocated proportionally
between BV X and the associated foreign entity on the basis of that risk
allocation.
In the above situation, the appropriate
remuneration should be determined on the basis of the facts and circumstances.
When determining the arm's-length remuneration, account should be taken of the
other party within the group that performs control activities and who should
also be paid arm's-length.
The remuneration for the supporting and
executive activities of BV X should be determined in a similar way as in
example Q above.
Within a group, entities usually have
short-term receivables and payables with unrelated financial institutions.
There can be an advantage for the group as a whole if they 'pool' these
receivables and debts within the group in the form of a 'cash pool' in which
various affiliated parties as cash pool participants can deposit short-term
receivables or incur short-term debts. The affiliated coordinator of the cash
pool is called the 'cash pool leader'. Two common manifestations are 'zero
balancing cash pooling' and 'notional cash pooling'.
In the characterisation process of a cash
pool transaction, attention should be paid to, among other things, the
individual participant's varying debit and credit positions in the cash pool.
In the situation where one or more cash pool participants hold debit or credit
positions in the pool for an extended period of time, it is necessary to
determine whether this is a different type of transaction, such as a deposit
with a longer term or a loan. This will result in a different remuneration
based on the arm's-length principle compared to the remuneration for a
short-term position of the participant in the cash pool.
Group entities are only expected to
participate in a cash pool if it does not lead to a worse outcome than any
other option. The options realistically available to cash pool participants
must therefore be taken into account here as well. The benefit of participating
in a cash pool need not consist solely of a favourable interest rate. It may
also include a reduced need to attract external loans, less administration and
more efficient management of the liquidity position.
Savings and other benefits resulting from
participation in the cash pool may be the result of group synergies resulting
from a structuring within the group aimed at realising those benefits (a so-called
deliberate concerted group action). In such a case, the synergy benefits will
have to be shared among the participants in the cash pool in accordance with
what is described in section D.8 of chapter I.
The distribution of these benefits should take
place through the determination of the arm's-length interest rate on the debit
and credit positions of the participants in the cash pool, taking into account
an appropriate remuneration for the cash pool leader. 34
Given the limited functionality, the cash pool leader in notional cash pooling
will add less value than the cash pool leader in zero balancing. This will be
reflected in the remuneration.
In addition to the guarantee of the parent
company, the OECD guidelines also address the possible 'cross-guarantees'
within the cash pool agreement, whereby the participants stand surety for each
other. Section C.2.3.3 of Chapter X notes that individual participants
generally have no influence on who participates in the cash pool and the
amounts they may guarantee. In addition, the cash pool participants will not
have relevant information about the other participants for whom they are
guarantors. In general, no guarantee fee is payable between the parties to
cross-guarantees. The support of a participant in the event of the default of
one or more participants should be regarded as an act in the sphere of capital
that has no effect on the taxable profits of the participants concerned.
Issuing a guarantee for the debts of an
unrelated party, especially without stipulating a high level of security, will
not happen quickly. When providing a guarantee to an affiliated entity, it
should therefore be investigated whether commercial conditions can be found
under which commercially rational unrelated parties would be willing to enter
into such a transaction.
The arm's length nature of a guarantee
provided by an affiliated entity will have to be assessed not only from the
perspective of the entity providing the guarantee but also from the perspective
of the entity for whose benefit the guarantee is provided. This includes the
determination of whether the hirer receives an advantage as a result of the
guarantee, taking into account the effect of any implicit aid already present.
An advantage for the borrower of a guarantee
may be that it can borrow under better conditions than without the guarantee.
In fact, the borrower will then lend on the basis of the credit rating of the
guarantor. If this leads to lower costs for the borrower, it will be willing to
pay a fee for the guarantee (the guarantee fee). The costs of borrowing with a
guarantee should be compared to the costs without an explicit guarantee, but
taking into account the implicit support.
Another advantage may be that the borrower is
able to borrow more money with a guarantee than without one. The guarantee then
not only supports the credit rating, so that a lower interest rate is charged,
but also increases the borrowing capacity.
The OECD guidelines (and in particular
paragraph 10.161) require that the additional part of the loan to the guarantor
(made possible by the guarantee) has to be classified as a loan to the
guarantor. This is followed by a capital injection by the guarantor into the
guarantor. No guarantee fee can be charged for this additional part. Only the
part of the loan that qualifies as a loan to the guarantor may possibly benefit
from an arm's-length guarantee fee. 35
The current OECD guidelines stipulate that a
guarantee for a group company that is unable to raise a loan or part of it on
the capital market independently without this guarantee takes place in
principle in the shareholder sphere for the part that could not be raised
independently. For that part, there is then no intra-group service for which a
fee should be charged to the guarantor. If the guarantee is called in by the
lender from the guarantor, it will first be attributed to the part of the loan
that could not be raised independently, and in view of the above, the
consequences will not give rise to a tax charge.
If a service is provided in the context of
the guarantee, the guarantee fee for tax purposes cannot in principle exceed
the benefit that the party receiving the service receives as a result of the
guarantee.
The OECD guidelines describe five methods for
determining the guarantee fee. If the corresponding CUP method cannot be
applied, it is preferable to determine the guarantee fee on the basis of the
approach described below (also referred to as the yield approach).
By way of example, the capital market may, in
a given situation, apply the following interest rates:
|
- Based on the standalone rating: |
6% |
|
- Based on the derived rating: |
between 4% and 6% |
|
- Based on the group rating: |
4% |
In this situation, the guarantee fee based on
the yield approach could not exceed the difference between the interest rate
corresponding to the derivative rating (see section 9.1 of this Decree) and the
interest rate corresponding to the group rating. That is the maximum benefit
the guarantor could derive from the explicit guarantee.
The role and position of the entity within
the group shall be taken into account in determining the degree of implicit
support and its effect on the entity's derived credit rating. The derivative
rating shall be between the standalone rating of the group entity and the group
rating.
If in an individual case it is not possible
to determine a specific arm's-length guarantee fee, I approve that the
guarantee fee is set at half of the benefit received by the guarantor.
As with cash pooling, section D.1.2 of
chapter X discusses the effects of cross-guarantees, whereby group entities
guarantee each other's liabilities. The OECD guidelines note that it is
difficult, if not impossible, to determine the value and effects of each
individual guarantee between two group entities, while at the same time other
group entities are also guaranteeing the same risk.
An analysis of the facts and circumstances
will normally lead to the conclusion that the benefit of such a cross-guarantee
does not exceed the benefit resulting from passive association and being part
of a group (implicit support). In such a case, no guarantee fee is payable and
the support resulting from the guarantee given in the event of default by one
or more participants takes place in the capital sphere and has no effect on the
taxable profit.
In addition to the above, a judgment of the
Dutch Supreme Court is also relevant in this context. 36
It has been ruled that in the case of a guarantee under a so-called umbrella
credit facility, the acceptance by an entity of joint and several liability for
all debts of other entities participating in the credit arrangement has its
origin in the corporate law relationship between that entity and those other
entities. The actions of the entities are governed by the group interest. The
entities thereby assume a liability that exceeds the liability that exists in
respect of the independent acquisition of debt.
A similar joint and several liability will
not easily be found between unrelated parties. It will rarely be possible to
establish an arm's-length remuneration for the mutual guarantee of the various
affiliated parties. The consequences of joint and several liability in those
cases are in the capital sphere.
Within groups there are bodies that act
contractually as internal (re)insurers. These are called captives hereafter.
In order to assess, within
the framework of the characterisation process of these transactions, whether
the captive insurance companies are in fact insurance companies, the following
questions are relevant:
·
-Is there
diversification and pooling in the captives?
·
-Is the
economic capital position of the group entities improved as a result of
diversification?
·
-Is the
captive, as a regulated entity, subject to rules relating to the actual
assumption of risk and the capital required in this respect?
·
-Would the
insured risk be insurable outside the group?
·
-Does the
captive have the required expertise and experience in
relation to the insurance activity and the investment of the premiums received?
·
-Is there
a real possibility that the captive will suffer losses?
In order to reach the conclusion that there
are actual insurance transactions, all the above questions must, in principle,
be answered in the affirmative.
As regards diversification, it should be
borne in mind that a captive insurance company generally has a lower degree of
diversification than an external insurer insuring similar risks because it
usually has a more limited circle of insured persons. A lower degree of
diversification means in principle that the captive would have to charge a
higher premium for assuming the insured risk. Without such a higher premium,
the captive would not generate sufficient return to bear the risks incurred and
to realise the remuneration for its risk capital.
A reduction of the risk capital, which could
possibly lead to a lower premium, would also not make the insurance transaction
possible from a rational economic perspective. This reduced capital would not
be sufficient to cover the entire expected loss in the event of the negative
consequences of the insured risks occurring, so that the insured persons would
have to bear part of the risk themselves. As a result of the higher premium
that would have to be charged from the captive's perspective, the insured
entity would be better off placing the risks with an unrelated more diversified
insurer. The insurance transaction with the captive would therefore not
materialise in such a situation.
When analysing an
insurance transaction, it is important to distinguish between:
·
(i)the
insurance risk associated with insurance; and
·
(ii) the
insured risk.
In general, the insured is in control of the
insured risk. The decree to take on the risk and to insure against the negative
consequences of that risk is part of the control of the insured over that risk
(see (i) and (ii) of section 1.61). If insurance is actually involved, the
captive exercises a so-called 'risk mitigation function'. This is a function
that does not belong to the control function with regard to the insured risk
(see (iii) of par. 1.61 and par. 1.65).
It must then be established whether the
captive is in control of the insurance risk. It is important to note that the
OECD guidelines37 consider
the 'underwriting function' described in the OECD PE report38
as the control function in respect of the insurance risk. If the captive does
not perform the described control functions, the risks must be allocated to the
party that does. Also the (net) income from the invested premiums must in that
case be allocated to that party (see section 10.212).
In a so-called passive pooler, only group
risks are pooled, or bundled and placed through it with unaffiliated
(re)insurers. In the former situation, this is often the excess that the group
itself wishes to retain and/or to which it is obliged by external insurers.
Usually, the passive pooler is an extension of the head office risk management
department.
Such a body is usually forced to accept all
insured within the group and is often prohibited from insuring risks of parties
outside the group. It does not perform the underwriting function mentioned
above, does not itself diversify and does not have the required expertise and
experience in relation to the insurance activity and investment of the premiums
received. Therefore, the requirements set out above to qualify the transactions
as insurance transactions are not met. The body performs mainly an
administrative and/or intermediary function that justifies only limited
remuneration.
The other benefits accruing through this
body, such as the bundling benefit due to the fact that less capital has to be
held together (see Section 10.207), the benefits resulting from the centralised
negotiation with possible (re)insurers and the investment income achieved by it
with the premium income accrue to the group entities that join forces in this
way (see Section 10.212).
There are situations where the insurance is
offered as a by-product to unrelated buyers of products or services by a group
with activities outside the insurance industry, such as cancellation insurance
or insurance for an extra guarantee period. The relevant policy for the
customer is generally in the name of an unaffiliated insurer supervised by a
local regulator. The premium, after deduction of a fee for the unrelated
insurer, is passed on as reinsurance premium to the internal affiliated
reinsurer.
In practice, it is not the internal
reinsurer, but the group entity that carries out the main business of the
group, that offers the insurance as a by-product to the unrelated customer.
That group entity achieves diversification through its customer base and
thereby obtains the insurance benefits for the group. The internal reinsurer
generally does not perform the underwriting function described above, does not
diversify itself and does not have the required expertise and experience in
relation to the insurance activity and investment of the premiums received.
Therefore, the requirements set out above for transactions between the internal
reinsurer and the group entity pursuing the main business of the group to
qualify as insurance transactions are not met. Such a body performs only a
limited administrative function that justifies limited remuneration. 39
Section E.3.4 of Chapter X describes the sale
of insurance through an affiliated intermediary where the profit made by the
insurer is higher than in comparable transactions with similar third parties.
This only concerns a group entity that, on the basis of the criteria mentioned
in section 9.5.1 of this decree, also actually provides insurance. In the
example, the sale of high-quality technical products by a retailer is
accompanied by insurance against damage and theft from an affiliated insurer.
In such a situation, in order to determine the arm's-length remuneration of the
intermediary, particular attention should be paid to the circumstances leading
to that high profit. If the high profit is attributable to the possibility of
also offering insurance at the time and place of sale of a product or service
through the intermediary's direct contact with the customer, the (additional)
benefit realised as a result should not be allocated to the affiliated insurer.
In such a situation, the affiliated insurer should receive a remuneration equal
to that of comparable non-affiliated insurers.
In the Corporate Tax Act 1969, the
documentation requirement regarding transfer prices is regulated in two
different places, in Article 8b(3) Corporate Tax Act 1969 and in Article
29b-29h, 34f and 34g Corporate Tax Act 1969 (country report, group file and
local file). Firstly, the country report, the group file and the local file are
discussed below, followed by the 8b documentation.
Section 29b-h of the Corporation Tax Act 1969
applies to taxpayers who meet certain standards. The Regulation on additional
documentation requirements for transfer pricing of 30 December 2015
(DB2015/462M) contains further rules on the form and content of the country
report, the group file and the local file.
The obligations of sections 29b-29h of the
Dutch Corporate Income Tax Act 1969 only relate to cross-border transactions
between affiliated group entities and the substantiation of an arm's length
profit allocation to permanent establishments.
The documentation obligation as described in
Article 8b, third paragraph, of the Corporate Income Tax Act 1969 consists of a
description of the five comparables of the affiliated transactions as described
in chapter I, a substantiation of the choice of the transfer pricing method
applied, and a substantiation of the conditions, including the price, that have
been established in the transactions. This requirement covers both domestic and
cross-border transactions with related entities.
In codifying the documentation requirement
under Section 8b(3) of the Dutch Corporate Income Tax Act 1969, it was a
conscious decision not to draw up an exhaustive list of documentation
requirements which are necessary to substantiate the arm's-length nature of the
transactions. In this sense, it is an open standard. The proportionality
principle plays an important role in assessing the adequacy of this
documentation. The basic principle is that the additional administrative burden
resulting from Article 8b, third paragraph of the Corporate Income Tax Act 1969
should be limited as much as possible. 40
In view of the open standard applied, I
realise that taxpayers may be uncertain as to whether the documentation present
will be assessed as sufficient by the Tax Authorities. It is therefore possible
to obtain assurance from the competent inspector as to whether the
documentation requirement of Section 8b(3) of the 1969 Taxpayer Relief Act has
been met.41
I approve that entities which, with their
documentation, meet the requirements set in Section 29g of the Corporate Income
Tax Act 1969 also meet the obligation as formulated in Section 8b(3) of the
Corporate Income Tax Act 1969 insofar as cross-border transactions are
concerned. If the requirements of Section 29g of the 1969 Corporate Income Tax
Act are also applied by entities to domestic transactions with affiliated
entities, I approve the fulfilment of the documentation requirement as
formulated in Section 8b(3) of the 1969 Corporate Income Tax Act.
Double taxation due to transfer pricing
adjustments is undesirable. Taxpayers who are faced with taxation that is not
in accordance with the provisions of a treaty can request a mutual agreement
procedure. The competent authority for the Netherlands is the Minister of
Finance. The General Manager of the Tax and Customs Administration/Great
Corporations has been granted a mandate to carry out the duties of the
competent authority.
The basic principle of a mutual agreement
procedure is that double taxation is eliminated as quickly and efficiently as
possible. This assistance is provided on the basis of concluded tax treaties, the
EU Arbitration Convention42 and the EU Arbitration Directive43 as implemented
in the Netherlands in the Fiscal Arbitration Act. 44
The Netherlands aims to initiate mutual consultation procedures with treaty
partners at an early stage. This is further elaborated in the Decree of 15 November
2021, no. 2021-0000226675, Staatscourant
2021, 47634.
Experience has shown that in a number of
cases during the consultation procedure the double taxation can be eliminated
in a relatively simple manner by exchanging facts and circumstances relevant to
the case in question. The Tax Authorities are therefore prepared, if a taxpayer
expects to be confronted with double taxation in the field of transfer pricing
as a result of actions of the Tax Authorities or of a tax administration of a
country with which the Netherlands has the possibility to exchange information,
to look for possibilities to prevent the possible double taxation at the
earliest possible stage through the exchange of information or by jointly
performing control activities. A request to this end can be submitted by the
taxpayer to the Dutch inspector.
There must be a chance that the actions of a
foreign tax authority will result in an adjustment of the transfer prices. The
taxpayer must demonstrate this in the written request. The possibilities of
avoiding possible double taxation by exchanging information or jointly carrying
out audit activities will depend on the legal possibilities and the willingness
of other countries to cooperate in such a method.
This Decree shall enter into force on the day
following the date of publication of the Government Gazette in which it is
published.
The following decrees are repealed with
effect from the entry into force of this Decree:
·
-Decree of
the State Secretary for Finance of 22 April 2018, no. 2018-6865, Stcrt. 2018,
26874 and
·
-Part V
of the Question and Answer Decree on Service Bodies, no. DGB 2014/3102.
This decree shall be cited as: Transfer
pricing decree 2022.
This decree will be
published in the Staatscourant.
The Hague, 14 June 2022
The
State Secretary for Finance,M.L.A.
van Rij
The arm's-length principle is also codified
in Article 3.2 of the 2021 Act on Withholding Taxes. Wherever the arm's-length
principle is explained in this decree, this also applies to Article 3.2 of the
Dutch Withholding Tax Act 2021.
Organisation for Economic Co-operation and
Development.
Base Erosion and Profit Shifting.
The foregoing does not alter the fact that
there may be situations in which an improper profit transfer has taken place
and that it is appropriate to take action. In such cases, the Tax and Customs
Administration will assess the extent to which the imposition of a penalty is
appropriate in view of the facts and circumstances of the case in question.
Deviations from the policy formulated in this decree shall not automatically
result in the imposition of a penalty.
Including the subsequent amendments to this Decree,
such as the one dated 9 August 2021, no. 2021 - 16465.
Downward adjustment is not always possible.
Ranges can also relate to margins, for
example when using the transactional net margin method (TNMM) as an appropriate
transfer pricing method.
See also article 6a paragraph 4 sub a First
temporary emergency measure bridging the gap to preserve employment (similar
provisions are included in article 7 paragraph 3 sub a of the second and
article 6 paragraph 3 sub a of and third temporary emergency measure bridging
the gap to preserve employment) in which the condition is set that the decrease
in turnover may not be the result of adjustments to the transfer pricing rules
and principles of valuation and determination of results. However, a price
adjustment is allowed if it falls within the group's already applied transfer
pricing methodology ('transfer pricing rules') if it appears that unaffiliated
parties in similar situations also make a price adjustment.
See section 2.9 when this can be deviated
from.
An exception to this is financial
transactions, as there are often comparable unrelated transactions.
For example, if in such cases the producer
does not perform any relevant functions with regard to the purchase of the raw
materials.
Such a producer is usually referred to as a
toll-manufacturer.
This may work out differently if sections 8ba
et seq. of the Dutch Corporate Income Tax Act 1969 apply.
Regulation of the State Secretary for Finance
of 31 December 2018 on the designation of low-tax states and states on the EU
list of non-cooperative jurisdictions for tax purposes (Regulation on low-tax
states and non-cooperative jurisdictions for tax purposes)
Paragraph 6.185 also leaves open the
possibility of renegotiation if, in the case of deviating values, unaffiliated
parties would also have resorted to renegotiation.
See also Supreme Court 17 August 1998, no.
32.997, ECLI:NL:HR:1998:AA2288.
If these methods are not used, but paragraph
7.37 is invoked, all the conditions of that paragraph must be met. In addition,
all financing costs must be included. The Tax Authorities have a discretionary
power in deciding whether or not to apply section 7.37.
See in this context also the 'Guidelines on
low value-adding intra-group services' of the EU Joint Transfer Pricing Forum
(Brussels, February 2010, JTPF/020/REV3/2009/EN), also in relation to section
1.6 of this Decree.
See section 7.6.
For situations in which contributions can be
calculated against costs, see sections 8.27 and 8.28.
The examples -for simplicity's sake- do not
take into account a difference in timing of the contribution by each of the
parties. In arm's-length relationships, such differences would be taken into
account in the valuation of the contribution, as far as relevant for the value
of the contribution, so that in practice attention should be paid to this when
determining the arm's-length remuneration in case a CCA is agreed upon between
related parties.
Supreme Court 23 April 2004, no. 39 542,
ECLI:NL:HR:2004:AO9474.
Standard & Poor's designation. Based on
its methodology, Moody's applies the ratings Aaa to Baa3 as investment grade.
The extent to which the interest can be
borne.
This is also called Weighted Average Cost of
Capital (WACC) in the literature.
Supreme Court of 25 November 2011, no.
08/05323, ECLI:NL:PHR:2011:BN3442.
HR 25 November 2011, no. 08/05323.
HR 15 March 2013, no. 11/02248,
ECLI:NL:HR:2013:BW6552.
This section focuses mainly on financial
DVLs, but the approach applies to other DVLs as well.
Paragraph 10.161 states that if and insofar
as entities cannot borrow from an affiliated entity without a guarantee, these
loans must be regarded as loans to the guarantor, which then pays the money
into the DVL as equity (whether or not through the parent).
The cost basis is determined in accordance
with Section 10.100.
The financing does not originate from a
low-tax country and no financing is provided to a low-tax country. Any
application of the 30% EBITDA rule is not taken into account here.
The nature of the activities is more decisive
than the job title.
See para. 10.143.
It is still uncertain whether the
characterisation of the additional part of the loan to the guarantor described
here will be followed by the court, in view of prevailing case law in the
context of the Vpb 1969 Act.
Supreme Court 1 March 2013, no. 11/01985,
ECLI:NL:HR:2013:BW6520.
See para. 10.211.
OECD (2010). Report on the Attribution of Profits to Permanent
Establishments. OECD Publishing: Paris.
See also: District Court of The Hague, 11
July 2011. AWB08/9105, LJN BR4966.
For taxpayers who are required to have
transfer pricing documentation on the basis of Section 8b(3) of the Dutch
Corporate Income Tax Act 1969, the absence of any research or study into the
prices (available in databases) that have been arrived at in comparable
situations between unrelated parties will not necessarily lead to the
conclusion that the documentation is incomplete.
Institutional Decree CGVP No. 2018-4380.
Convention on the elimination of double
taxation in connection with the adjustment of profits of associated enterprises
(90/436/EEC).
Council Directive 2017/1852 of 10 October
2017 on tax dispute resolution mechanisms in the European Union.
Act of 10 July 2019, Introducing a Legal
Mechanism for the Settlement of Tax Disputes between Member States of the
European Union, Stbl. 2019, 261.