The Dutch Secretary of Finance on 1 July 2022 published a new Transfer Pricing Decree that replaces the decree of 22 April 2018 and withdraws Part V of the “Q&A decree on intermediary financial service entities” published in 2014.
The main purpose of the new decree is to clarify the application of the arm's-length principle by the Dutch tax authorities and to address recent developments regarding the latest edition of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published earlier this year.
The most relevant differences between the new decree and the 2018 decree are:
The following is a high-level overview of the most relevant changes.
Intercompany loans
The 2022 edition of the OECD transfer pricing guidelines includes a new chapter on the transfer pricing aspects of financial transactions. On this topic, the new transfer pricing decree states that, in line with the OECD transfer pricing guidelines, the first step is to determine whether the purported intercompany loan should be regarded as a loan for transfer pricing purposes. If the transaction is characterised as a loan, the next step is to determine whether the lender exercises control over the risks associated with the transaction and has the financial capacity to assume these risks. A lack of control and/or financial capacity implies that the relevant risks and related compensation should be allocated to the party that exercises control and has sufficient financial capacity.
The OECD guidelines describe several methods for determining an arm's-length interest rate. The OECD's preferred method is the CUP method. When there is an insufficient number of comparables, the OECD guidelines and the TP Decree describe as an alternative the “cost of funds approach.” Under this method, the costs incurred by the lender to borrow the funds are increased by a coverage for its own costs, a risk premium, and a fee for its “equity at risk.” The TP decree further indicates that if a taxpayer performs only an “agent” or “intermediary” function, it is entitled only to a remuneration consisting of a mark-up on the costs incurred by its function performed.
If a group entity is not in control of the risks associated with investing in a financial asset, under the TP decree this entity is entitled only to a risk-free rate of return. This rate can generally be determined by reference to the interest rate on qualifying government bonds. The TP Decree explains that the borrower does have the right to deduct an arm's-length interest, provided the interest income is included in a profit-based tax.
Intermediary financial service entities
Perhaps the most notable change to the TP Decree is the new section on intermediary financial services entities or FSEs. The withdrawn Part V of the Q&A Decree on FSEs provide guidance for establishing an arm’s length remuneration. Under the TP Decree, the remuneration of FSEs is now to be determined based on the entity’s functions, activities and risks.
To illustrate this new approach, the TP Decree describes the following three situations:
Government policies and subsidies
The TP Decree's most significant addition to this section relates to subsidies and their impact on transfer prices, particularly if the transfer price is based on costs. If there is a direct link between the subsidy and the supply of the product or service, the subsidies are to be deducted from the cost base. With respect to an important Dutch COVID-19 subsidy, such as the Temporary Emergency Bridging for Employment Retention (NOW from its Dutch acronym), the question is how it affects transfer prices. According to the TP Decree, parties should take the NOW into account as third parties would. An adjustment to the remuneration should be made on an arm's length basis and not on the realisation of a decrease in sales that may entitle the taxpayer to the NOW. According to the TP Decree, the taxpayer must make a plausible case that similar unrelated parties would have agreed to a transfer pricing adjustment under similar circumstances.
Intra-group services
For low value-adding intra-group services, the so-called “simplified method” may be applied. Under this method, a profit mark-up of 5% may be applied without the need to substantiate this percentage. The 2018 TP Decree explicitly allowed taxpayers in certain cases to charge only the relevant actual costs for such services with a profit mark-up. This TP Decree no longer includes this discretionary policy, which has been replaced by a reference to the OECD Transfer Pricing Guidelines regarding which costs can be charged without a mark-up is described. However, the OECD Transfer Pricing Guidelines are more limited scope because they recognise a cost allocation for practical reasons only. A footnote in the TP Decree adds that the Dutch tax authorities have discretionary authority in the application of this rule. This implies a limitation with respect to the 2018 TP Decree.
The contents of the TP Decree are presented as providing only clarifications of existing transfer pricing rules, with the implication that the new rules were already applicable to tax years before the new decree was published. Since the TP Decree introduces significant changes, it is unclear how the Dutch tax authorities will deal with past years.
The amendments to the TP Decree will bring it more in line with the OECD transfer pricing guidelines. In light of these amendments, taxpayers should review their transfer pricing policies and update their transfer pricing documentation, especially if one or more Dutch entities are involved in financial transactions.
Frederik Vinks
frederik.vinks@bdo.nl