Transfer pricing: a key tax issue
An increasing number of companies are seeking to do business internationally. While this opens up many opportunities, there are also challenges. Enterprises that operate internationally have to comply with complex tax rules that keep changing. The provisions that regulate transfer pricing should be a key consideration in your tax planning. Here we explain what is involved.
The arm’s length principle
The arm’s length principle was established to prevent companies from shifting profits to lower their tax bills. It means that the prices companies charge other companies in the same group must be comparable to those paid by non-group companies. The rules that control prices in intra-group transactions are referred to internationally as transfer pricing regulations.
Without the arm’s length principle, a company in the Netherlands could, theoretically, sell products at a loss to an affiliated company in Dubai (making a loss in the Netherlands and therefore paying no tax) and then, from Dubai, sell the products to the consumer at a considerable profit, which in Dubai is taxed at 0%.
Streamline your global tax burden
The prices charged and paid in international intra-group transactions directly affect profits, and therefore the amount of tax paid in the countries in which the affiliated companies are established. By proactively planning and implementing consistent transfer pricing policies, you can use the tax laws in the countries in which you operate to your advantage and effectively reduce your global tax bill.
Not just international business
Entrepreneurs often assume that transfer pricing rules only apply to international transactions. But this is not the case. Transfer pricing regulations also provide for intra-group transactions within national borders. Astute application of these rules can help you achieve your financial goals. In other words, even if you only operate in the Netherlands, it is still necessary to implement consistent transfer pricing policies in documenting transactions such as intra-group financing arrangements for example. Appropriate application of transfer pricing methods can also help national group enterprises reduce their effective tax burden.
Transfer pricing documentation requirements
To enable tax authorities to monitor the way group companies arrange their profits, many countries, including the Netherlands, have introduced legislation compelling companies to document their transfer pricing transactions. Among other things this means that companies are required to describe their activities, functions and risks.
More comprehensive regulations introduced in the Netherlands on 1 January 2016 impose stricter transfer pricing documentation requirements. And national transfer pricing rules are also being made more stringent, in line with the Base Erosion and Profit Shifting (BEPS) project launched by the Organisation for Economic Co-operation and Development (OECD) to curb tax evasion.
- Revenues of € 50 million or more
Multinational enterprises with annual revenues of € 50 million or more are required to prepare master file and local file documentation.
- Revenues of more than € 750 million
Multinational enterprises with consolidated annual revenues in excess of € 750 million are also required to comply with country-by-country (CbC) reporting requirements.
In the Netherlands there are severe penalties for failure to comply with transfer pricing disclosure and documentation requirements. If you do not prepare and submit master and local files and a CbC report if applicable, you may incur both an administrative penalty of up to € 870,000 and criminal penalties. And the tax authorities may reverse the burden of proof.
Advance pricing agreements with the Dutch tax authorities
To avoid unexpected tax liabilities and penalties, international enterprises can make advance pricing agreements (APA). By agreeing an appropriate transfer pricing methodology with the Dutch tax authorities (and possibly the foreign tax authority) in advance, you can ensure that your transfer pricing policies are not challenged at a later date.
Find out more
The need to address transfer pricing issues affects tax planning and imposes new tax reporting requirements. Since the burden of proof is on the taxpayer, you must be able to prove that your transfer pricing complies with the arm’s length principle. However, this also offers opportunities. An effective transfer pricing system may mean that certain companies do not have to report losses in certain countries. If you would like to know more about transfer pricing or need help with complex cross-border tax issues, our specialists can advise you on how to craft and set up an effective transfer pricing policy and documentation system. Call our Tax Consultant Jeroen Geers on +31 (0)134 647 288 or send Jeroen an e-mail.