At a time when transfer pricing is at the forefront of the international tax debate, the Dutch Ministry of Finance published a new transfer pricing decree (IFZ 2013/184M). The decree of November 14, 2013, replaced two previous decrees on the application of the arm's length principle. Furthermore, in 2014, the Ministry of Finance updated and replaced previous guidance on advance pricing agreements (APAs) and advance tax rulings (ATRs) (especially regarding financial service companies) by publishing five new decrees.
The new decrees reemphasize the Netherlands' existing policy regarding transfer pricing and APAs/ATRs. Further, the new decrees demonstrate the Dutch government's increased attention to the realignment of taxation and substance and the contribution to actions addressing base erosion and profit shifting, as well as treaty abuse by multinational companies.
Same message, different jacket
The new transfer pricing decree of November 2013 confirms that the OECD transfer pricing guidelines are a suitable interpretation and clarification of the arm's length principle as codified in section 8b of the Dutch Corporation Tax Act 1969. Moreover, in line with the Dutch tax authorities' policy, the new decree encourages tax administrations to adopt a flexible and pragmatic approach regarding the determination of the correct transfer prices. Constructive cooperation between the tax administrations and taxpayers, especially in the area of transfer pricing, is important.
Enhanced attention to profit shifting
The promotion of a flexible and pragmatic approach, as well as cooperation between taxpayers and tax authorities, does not alter the fact that situations can arise where an unbusinesslike shift of profits takes place on non-arm's-length terms and conditions, for which counteraction is appropriate. The new decree pays special attention to the following situations: (i) transfers of intangible fixed assets; (ii) intragroup procurement; and (iii) internal reinsurance activities.
The decree provides additional guidance on the transfer of intangible fixed assets. The decree states that, in independent relationships, a transaction with regard to intangible fixed assets will normally take place only if an expected increase in the joint profit for both the seller and buyer is apparent, and that this is possible only if the buyer has the required functionality and is able to use it to control the relevant risks. In other words, the buyer should not be fully dependent on the seller for further development of the intangible fixed assets. If that is the case, such a transaction between associated enterprises will not be regarded as being at arm's length.
With respect to intragroup procurement, the decree states that if the activities of a purchasing entity are support services, and the purchasing entity is not exposed to price or stock risks (or if the exposure is minimal), remuneration based on a mark-up over its own operational costs is considered appropriate. If by centralizing the purchase activities the group realizes higher discounts than before, as a result of the increased purchase volume, this additional benefit cannot be allocated to the central purchasing entity. Rather, that benefit must be allocated to other group companies, enabling the purchasing entity to realize such (additional) discounts with their joint purchase volumes.
With respect to internal reinsurance activities, the new decree stipulates that for a group's internal insurance company, which does not perform the activities that would typically characterize a professional reinsurer (such as product development, marketing and sales, acceptance of insured parties, asset/liability management, development of an independent reinsurance policy and 'active' diversification outside the group) only a minor remuneration for the administrative/mediating function is considered appropriate.
All three situations described above demonstrate the importance and increased attention the Dutch government is paying to the realignment of taxation and the required substance, which anticipated some of the issues raised by the BEPS initiative in 2014 and 2015.
The Netherlands favors providing taxpayers advance certainty in the form of APAs and ATRs. The Dutch APA and ATR program is described in the APA Decree (DGB 2014/3098) and ATR Decree (DGB 2014/3099), both published on June 13, 2014. These new decrees replace the decrees of August 11, 2014. One key objective of these decrees is to provide taxpayers with a uniform and predictable APA/ATR practice with easy access, clear conditions, streamlined procedures, and minimal processing time. Although the new decrees are primarily updates of the former decrees, the new APA/ATR decrees, pay attention to the realignment of taxation and the substance, as does the new transfer pricing decree.
The APA and ATR decrees state that the Netherlands gives advance certainty only if either: (i) the company or its affiliates conduct operational activities in the Netherlands (including specific plans to do so); or (ii) the company meets specified minimum substance requirements for (intermediary) holding companies and intragroup financing, licensing, and leasing companies.
The decrees also indicate that if financial service companies have obtained advance certainty by means of an APA, the information in the APA will be exchanged automatically with the relevant foreign tax authorities if the financial service company does not meet the minimum substance requirements or does not have the intention to meet these requirements in the near term.