All questions
Overview
On the basis of general principles of Dutch tax law (i.e., the ‘total profit concept’), profits derived from a business are determined based on the arm’s-length principle. Article 3.8 of the Dutch Income Tax Act 2001 (ITA), which equally applies to the Dutch Corporate Income Tax Act 1969 (CITA), and Article 10 of the CITA allow the Dutch Revenue and Dutch tax courts to adjust taxable income reported by Dutch taxpayers to the extent that such income (or the lack thereof) is influenced by the relationship between a company and its shareholder.
As per 1 January 2002, the arm’s-length principle, as laid down in Article 9 of the OECD Model Tax Convention (OMC), was codified in Article 8b of the CITA. Under Article 8b of the CITA, transfer pricing corrections can be made provided that an entity, directly or indirectly, participates in the management, supervision or capital of another corporate entity, or where the same person participates, directly or indirectly, in the management, supervision or capital of two corporate entities dealing with each other (i.e., related entities). Article 8b of the CITA applies to transactions between companies, partnerships and trusts, among others. Furthermore, under Article 18 of the CITA, the guidance of Article 8b of the CITA applies by analogy to Dutch permanent establishments (PE). However, Article 8b of the CITA does not cover individuals.2
According to the Parliamentary Papers,3 Article 8b of the CITA applies where the shareholder, supervisor or manager has sufficient authority to influence the transfer prices applied between the parties involved.4 In accordance with Article 9 of the OMC, the concept of ‘related entities’ has not been further defined or quantified for purposes of Article 8b of the CITA, to prevent the applicability of Article 8b of the CITA from being manipulated. Where the taxpayer has not presented or confirmed the existence of ‘related entities’, the tax inspector has to demonstrate that parties are in fact related. The burden of proof rests with the Dutch Revenue.
The Dutch Revenue generally follows the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (Paris: OECD 2022) (the OECD Guidelines) as regards the application of the arm’s-length principle. The transfer pricing decree (the TP Decree)5 provides further guidance on the position of the Dutch Revenue regarding the practical application of the arm’s-length principle. In the TP Decree, the Dutch State Secretary of Finance (the State Secretary) states that the OECD Guidelines have direct effect in Dutch tax law, and advocates a dynamic interpretation of Article 8b of the CITA. A dynamic interpretation entails that the arm’s-length principle is applied in Dutch tax law in accordance with the latest version of the OECD Guidelines (i.e., the 2022 version of the OECD Guidelines).6
The view expressed by the State Secretary on the dynamic interpretation of Article 8b of the CITA, however, is not in line with the status of the OECD Guidelines as expressed in the Parliamentary Papers:
(F)or the purpose of the application of Article 8b of the CITA, courts are expected to also take into account what has been agreed on in the OECD Guidelines in this area. In this respect, the OECD Guidelines are comparable to the opinions of reputable authors and the conclusions of the Attorney General at the Supreme Court.
On the basis of the above, Visser and Van Kalmthout7 argued that, contrary to the view expressed by the State Secretary in the TP Decree and the 2013 version of the TP Decree,8 the OECD Guidelines cannot be considered to have direct effect in Dutch tax law. Therefore, Article 8b of the CITA has to be interpreted statically.
Effective as of 1 January 2022, legislation was implemented in the CITA (Articles 8ba to 8bd) to end the practice of allowing unilateral downward transfer pricing adjustments. On the basis of the long-standing ‘informal capital’ doctrine, benefits arising from shareholder motives are excluded from the tax base and are requalified as informal capital or deemed dividend. These unilateral adjustments could result in double non-taxation if there is no corresponding upward adjustment included in the taxable base of the related party in another jurisdiction.
As regards 2022, a downward adjustment of the Dutch tax base is denied to the extent that no corresponding upward adjustment is included in the taxable base of the related party in another jurisdiction. The Dutch taxpayer claiming the downward adjustment has to plausibly argue (aannemelijk maken) with respect to which specific transaction a corresponding upward adjustment is included in the taxable base of the related party. If the remuneration is determined based on the transactional net margin method (TNMM), it is practically impossible to demonstrate in relation to which specific transaction a corresponding upward adjustment is included in the tax base of the related party. Typically, there are many interrelated inter-company transactions that cannot be priced separately. As such, this is exactly a reason upon which the TNMM is considered the most appropriate to determine the remuneration.
Broader taxation issues
i Diverted profits tax, digital sales taxes and other supplementary measures
The Netherlands does not provide for a diverted profit tax, digital sales tax or other tax measures supplementing transfer pricing rules. Changes in this regard may be expected in the coming years because the European Commission seems willing to introduce a digital levy tax in the European Union.
Regarding EU State Aid case law, on 24 September 2019, the General Court of the EU annulled the European Commission’s decision in the Starbucks case.22 The European Commission was of the opinion that the agreed remuneration by the Netherlands and Starbucks was not in accordance with the arm’s-length principle. The Commission found that the Netherlands had therefore granted State Aid to Starbucks in the form of a selective tax advantage. However, the Commission did not manage to demonstrate the existence of a selective economic advantage within the meaning of Article 107 of the Treaty on the Functioning of the European Union.
ii Tax challenges arising from digitalisation
In 2021, the Inclusive Framework agreed on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy.23 The State Secretary has expressed his support for a swift implementation of both pillars.24
iii Transfer pricing implications of covid-19
In response to the consequence of the covid-19 pandemic on the transfer pricing policies applied by related entities, on 18 December 2020, the OECD released guidance (the Guidance) on the transfer pricing implications of the pandemic. The Guidance can be relied on by Dutch taxpayers. In addition, the Dutch government introduced a temporary emergency employment measure (the NOW). The NOW provided Dutch employers with a grant to allow them to continue to finance the wages of Dutch employees. However, on 1 April 2022, the NOW was discontinued.25
iv Double taxation
A Dutch taxpayer has multiple options to resolve double taxation. All bilateral tax treaties (Tax Treaties) concluded by the Netherlands contain a MAP provision similar to Article 25, Paragraph 1 of the OECD Model Convention. In addition, as part of its Tax Treaty policy, the Netherlands also intends to include mandatory binding arbitration (MBA) clauses, in line with Article 25, Paragraph 5 of the OMC, in its Tax Treaties. Unfortunately, not all Tax Treaty partners have agreed to include an MBA provision. Furthermore, domestic statutory provisions regarding MAP and MBA are included in the Law on Fiscal Arbitrage (WFA), which constitutes the implementation of EU Dispute Resolution Directive in Dutch law. Finally, Dutch taxpayers can rely on the EU Arbitrage Convention (the Convention) to eliminate double taxation. The practical application of MAPs and (mandatory binding) arbitration under the Tax Treaties, the WFA and the Convention is further outlined in the MAP Decree.26
Once the Dutch and foreign competent authorities have reached consensus and the taxpayer accepts the outcome, the outcome has to be implemented regardless of any domestic time limits or court decisions. However, it the Dutch taxpayer does not obtain a satisfactory outcome, it may still invoke the domestic legal proceedings against an assessment, given that the time limit has not lapsed.
v Consequential impact for other taxes
Transfer pricing adjustments are primarily of importance in the context of the Dutch (corporate) income tax. However, a transfer pricing adjustment can also have consequences for VAT and customs purposes. A transfer pricing adjustment may affect the pricing of the products and impact the customs value of the imported goods. Consequently, an adjustment required by the Dutch Revenue may have an impact on the tax levied. When a transfer price adjustment does not relate to an individual transaction, it is unlikely to have consequences for other taxes. These implications should be carefully analysed on an individual basis.
When demonstrating the arm’s-length value for customs purposes, it is customary to share transfer pricing reports in which it is established that the transaction value has not been influenced by a related entity.
Outlook and conclusions
As discussed in Section I, from 1 January 2022, the Netherlands implemented ground-breaking legislation to end its long-standing practice of allowing unilateral downward transfer pricing adjustments based on the arm’s-length principle. The legislation denies a downward adjustment to the extent that no corresponding upward adjustment is included in the taxable base of the related party in another jurisdiction.
In addition to the above, it should be noted that the Netherlands implemented the mandatory disclosure rules for intermediaries and taxpayers, as recommended by BEPS Action 12 and imposed by Council Directive 2018/822/EU, of 25 May 2018 (Mandatory Disclosure Directive). The Mandatory Disclosure Directive entails the obligation for intermediaries and taxpayers (if applicable) to disclose to the relevant tax authorities within the European Union information on certain arrangements that have tax relevance and indicate a potential risk of tax evasion. Arrangements that meet certain characteristics, or hallmarks, should be reported to the Dutch Revenue. The Dutch Revenue will exchange the reported arrangements with the other involved EU Member States. According to the hallmark regarding arrangements involving transfer pricing methods (Category E), the following arrangements should be disclosed:
- an arrangement that involves the use of unilateral safe-harbour rules;
- an arrangement involving the transfer of hard-to-value-intangibles; and
- an arrangement involving an intra-group cross-border transfer of functions or risks (or both) and assets, if the projected annual earnings before interest and taxes (EBIT), during the three-year period after the transfer, of the transferor or transferors, are less than 50 per cent of the projected annual EBIT of such transferor or transferors if the transfer had not been made.
Finally, the State Secretary has expressed his support for both Pillar One and Two as agreed on by the Inclusive Framework to address the tax challenges arising from the digitalisation of the economy. It is expected that, once ready for implementation, both pillars will be brought into Dutch law.