The Dutch approach to the arm's length principle has always kept pace with the evolving international interpretation, and arguably in certain aspects has even been ahead of its time. The OECD guidance around alignment between the actual controlling of risks with the contractual division of risks, as included in the 2010 update of the OECD Guidelines, was already partially included in the Dutch transfer pricing decree from 2004.
More than 12 years ago, the arm's-length principle was codified in the Dutch Corporate Income Tax Act, and at that time, specific transfer pricing documentation requirements were introduced. This was also the first time that extensive guidance was issued around the Dutch interpretation of the OECD Guidelines. More than 12 years later, new guidance will be released providing insight into the current Dutch interpretation of the OECD Guidelines. This guidance will provide further insights about the importance of establishing arm's length conditions, and will offer guidance on particular transactions around management of risks and centralising functions, and will also address financial transactions and the pricing thereof. The Dutch government is continuing the trend to stay ahead of the curve and opts for providing specific guidance in a time when transfer pricing and its role in international taxation is widely debated. As such, it will even provide a framework for alignment with the Base Erosion and Profit Shifting (BEPS) action plan.
The Dutch approach to transfer pricing has always focused on the principle question of whether a third party would be willing to enter into similar transactions under similar terms and conditions instead of the mere pricing question. Consequently, the Dutch tax authorities have a strong focus on "economic reality aspects" and the underlying assessment of what is considered arm's length behaviour.
Focus on economic aspects of transfer pricing
Taxation in the Netherlands and the underlying regulatory and interpretation aspects thereof has been very strongly influenced by a more economic as compared to a purely legal focus. Furthermore, transfer pricing has always been on the forefront of applying more economic concepts rather than legal concepts. However, in today's environment, transfer pricing continues to move further away from the historic approach of primarily recognizing and respecting contractual and legal realities. With the continued and expanding focus on people functions and management of risks, as an attempt to mimic arm's length behaviour, there is the inherent risk that the application of the arm's-length principle will no longer achieve its key objective: establishing similar prices and conditions as third parties under similar circumstances. Many examples can be found amongst third parties whereby risks have been transferred while the transferee is not necessarily controlling the risks but will ultimately be liable for these risks. Nonetheless, despite the evolved interpretation about what constitutes arm's length behaviour, the transfer pricing practice in the Netherlands is (still) not characterized by much transfer pricing controversy in comparison to some other EU countries.
Despite the strong principle viewpoints on a number of particular transfer pricing topics, the Dutch tax authorities maintain a pragmatic, and above all, a transparent approach to resolve potential issues. In particular, the Dutch tax authorities have developed strong principle viewpoints with regard to the arm's-length nature of intra-group risk reallocations as well as specific financing and intellectual property transactions. Value chain approaches are increasingly applied either in a primary or corroborating context. It is important to note, though, that the Dutch tax authorities are in the process of expanding the team of transfer pricing specialists in the various tax offices and more transfer pricing examinations are expected for the years to come.
The fact that the overall transfer pricing landscape in the Netherlands is (still) not dominated by transfer pricing controversies is not only due to the pragmatic approach of the authorities but also because of the transparent relationships that the Dutch tax authorities typically have with taxpayers in addition to their structured approach to unilateral, bilateral, and multilateral advance pricing agreements.
The benefits of advance certainty: the success of the Dutch APA practice
The Dutch APA practice has been very successful since the reorganisation in 2001. Many companies with activities in the Netherlands have been through the Advance Pricing Agreement process. The Dutch government has been involved with many bilateral APAs with many different countries around the world in the last decade. There is an increasing appetite for bilateral APAs with governments in emerging countries. The Dutch treaty network, as well as the relationships with the respective treaty partners, has contributed to the success of the international APA program.
Furthermore, the APA program continues to be a powerful instrument in resolving
domestic and international transfer pricing disputes. In particular, the flexibility of the rollback program enables the APA program to be a very good instrument for controversy avoidance and for resolving more complex issues.
Transfer pricing trends
As aforementioned, there is a specific focus on risk reallocations within multinational enterprises as part of a broader focus on business restructuring. Specifically, the approaches towards establishing taxable conversions increasingly entail approaches that are not too dissimilar from the German approach to business restructuring. These approaches reflect new concepts for determining arm's length values for deemed transfers and/or indemnifications. The underlying valuation techniques and discussions around economic life (including the notion of terminal value for many sources of intangible property) necessitate that taxpayers in the Netherlands should be prepared to have very solid documentation available when engaging in risk transfer or business restructuring scenarios.
There is also heightened scrutiny around the arm's-length nature of financing arrangements, which includes the subtle interplay with non-transfer pricing aspects of the Dutch Corporate Income Tax Act. A Supreme Court decision from 2011 defined a new standard through the definition on a non-arm's length loan and the prescribed consequences thereof. This Supreme Court decision (followed by further Court decisions) contributed to challenges based on deemed non-arm's length loans which intensifies scrutiny around the level of the interest rate and the amounts that can be deducted in the Netherlands. The new transfer pricing guidance around arm's length aspects of intra-group financing arrangements will necessitate that taxpayers in the Netherlands devote more efforts to both transfer pricing policy and documentation aspects of intra-group financing arrangements.