Dutch legislation lacks TP certainty
Despite more clarity regarding inter-company loans and financial intermediaries, the TP decree from the Dutch State Secretary for Tax Affairs and the Tax Administration may still leave taxpayers in the dark.
The arm's-length principle and intermediate financial services are made clearer by the Dutch transfer pricing decree, but tax directors feel that it relies too heavily on previous regulations.
According to a global tax director of a streaming media company, "the goal was to provide new guidance, specifically on financial intermediaries as they tried to incorporate the key concepts of TP guideline - but there is no additional guidance from past practice."
The director continues, "Whether the goal has been achieved is a different story."
The decree that went into effect on July 1 comes after the last one that was published in 2018 and in which the 2017 OECD guidelines had significantly altered the TP landscape.
This decree takes into account the COVID-19 pandemic's effects on TP and seeks to harmonize Dutch guidance with OECD recommendations.
The application of the ALP following the pandemic, adjustments to inter-company services, and intermediary financial services companies are the three main areas of focus of the decree.
The decree, which deals with "contract manufacturing activities" for inter-company services, has deleted the section referring to the taxpayers' acquisition of advance certainty.
According to some TP experts, the decree's guidance on intermediate financial services companies is one of the most important updates because it affects how much multinational corporations are paid (MNEs).
It is a significant change for businesses doing business in the Netherlands, according to Gijs van Koeveringe, tax attorney and TP specialist at firm Houthoff in The Randstad.
“Before the remuneration of these companies was based on a spread, whereas the guidance now recommends a cost-plus type of remuneration in case of no or limited substance and based on the risk analysis of these companies,” he stated.
Van Koeveringe continues, "this change could have further spill-over effects concerning the beneficial ownership of the relevant incoming and outgoing payments."
Corporations must reevaluate whether the intermediate financing companies still meet the requirements for beneficial ownership, according to Rezan Okten, TP counsel at the same law firm.
By citing Chapter X of the OECD guidelines, the decree clarifies inter-company transactions involving financial intermediaries.
In summary, an appropriate interest rate would be applied, most likely using the comparable uncontrolled price method, if the financial intermediary has complete control over risks.
A cost-plus method would be used if the intermediary did not fully control the risks. It would be up to a third party to take control if the intermediate financial services companies shared risk management.
Tax directors have also taken notice of the decree's emphasis on cash pools in Chapter X.
MNEs can use cash pools to reduce interest rates and administrative costs, but if participants' debit or credit positions are held for a longer period of time, it may be necessary to compensate them at arm's length depending on the type of transaction.
According to a senior director at an American multinational operating in the Netherlands, the Dutch tax authority follows the rules for cash pooling in Germany and Switzerland.
"The old way was that you were lending the money and lending out the money. Apparently, this is outdated ," the director remarks. "If you have a cash pool, then you need to arrange your multinational cash pools. To make yourself reliant or resilient to —- in the world. It would be wise to review their current cash pool arrangements."
According to Krishna Gupta, a TP expert in the Netherlands, now might be a good time for businesses to perform functional analysis (FAR) of their treasury functions to see if the pricing policy is in line with FAR.
"For example, look at the new policy with respect to cash pooling and decide on the FAR of the pool header and see if the remuneration is according to the FAR. Ensure that the substance and form are the same," he says.
The decree's detailed information can only help the nation's taxpayers understand things more clearly. The alignment of the guidance with OECD standards, according to some tax directors, may enable businesses to more accurately assess their risks.
The emphasis on risks by the tax administration is seen as a benefit for the jurisdiction's TP by David Záeck, TP adviser at the software firm TP Tuned in Amsterdam.
"The entire BEPS initiative has been about focusing less on contractual arrangements and on who is performing functions and controlling risks. The guidance contained some principles as to how you should allocate risks. It’s positive and quite detailed," he said.
Van Koeveringe claims that even though the decree seeks to clarify certain aspects of Dutch TP regulations, there are still some gray areas.
"There is room for discussion as the decree does not seem to provide for the grandfathering of existing structures. For the part which leaves room for interpretation, one should aim to find more comfort provided by OECD guidelines ," he says.
The decree, according to the global tax director of a streaming media company, may cause some level of uncertainty for Dutch taxpayers, underscoring the value of financial analysis.
The Dutch tax administration's decree may or may not result in more audits, but the tax authorities are undoubtedly paying attention to inter-company transactions.
With more direction, corporations would be better able to evaluate the risks associated with particular transactions and avert potential controversy.
Inter-company agreements must be updated frequently, and it is the tax directors' responsibility to show that outdated tactics no longer apply.
While the ALP used to be simple by comparing a transaction with a comparable third party one, the process is no longer as simple, according to Dr. Arthur Pleijsier, partner of TP at consultancy firm Eurofiscus in Amsterdam.
"The ALP is under severe pressure. In many instances, the arm’s-length principle doesn’t provide a solution. The OECD developed many different interpretations to different transactions," he said.
Pleijsier continues, "the challenge for tax directors and other TP practitioners is to constantly keep up-to-date with the changes on the OECD level but also to the country-specific deviations and modifications to the ALP, like the recently published Dutch decree for example."
Overall, the Dutch decree serves as a reminder to tax directors that they must continue to be proactive with regard to TP updates.
The guidance ultimately makes the rules more clear by providing more information about the ALP, inter-company transactions, and financial intermediaries; however, any room for interpretation could cause uncertainty for taxpayers and result in potential mismatches.
By fLEXI tEAM