New Dutch transfer pricing decree implements OECD guidelines

Transcription

1 from Transfer Pricing New Dutch transfer pricing decree implements OECD guidelines May 18, 2018 In brief On May 11, the Dutch Ministry of Finance published its new Transfer Pricing Decree (IFZ2018/6865). The Decree provides further guidance on application of the arm s-length principle and aims to incorporate recent changes following the OECD Base Erosion and Profit Shifting (BEPS) project and related changes in the 2017 OECD Transfer Pricing Guidelines (OECD Guidelines). This Decree replaces the Decree of November 14, 2013 (IFZ 2013/184M). The new Decree reflects a trend toward providing more detailed guidance on complex transfer pricing issues. The Decree emphasizes the importance of conduct over contract and functions to control risks, as well as explicitly calling attention to penalties. In detail Overview In the 2013 Decree, the Ministry of Finance established its transfer pricing anti-abuse agenda, and set forth the commonly applied economic approaches. The new Decree reinforces some general transfer pricing principles as reflected in the OECD Guidelines and the Ministry of Finance s interpretation on these points: The new Decree stipulates that the actual conduct of the parties to transactions can overrule the contractual terms. The 2013 Decree only set aside the contractual terms in cases of an extreme mismatch between conduct and contract. Risk control functions become more significant in the transfer pricing risk analysis. Incurring risks should be aligned with the functions controlling these risks. This follows from the BEPS project and renewed 2017 OECD Guidelines. Two remarkable additions are the retroactivity of the Decree to transfer pricing positions of previous years and the explicit comments regarding penalties in case of non-arm s-length profit shifting. Other key observations from the new Decree: Explanation of various BEPS provisions as included in the 2017 OECD Guidelines into the Dutch practice, e.g., application of transfer pricing methods, hard-tovalue intangibles, and valuation methods. Characterization of transactions focusing on the actual conduct of parties, six-step risk analysis, and control functions over risks. A new paragraph confirming application of the OECD s simplified remuneration for low value-adding services.

2 The State Secretary s reluctance to accept royalty comparables studies as the primary method for pricing the use of intangibles (due to incomparable data). The position of the State Secretary that, in the intangible DEMPE analysis, more weight should be given to Development and Enhancement as opposed to Maintenance, Protection, and Exploitation. The following outlines the main changes to the 2013 Decree as included in the new Decree, in order of the Decree s content. Alignment with the BEPS provisions in the 2017 OECD Guidelines The new Decree sets forth the State Secretary interpretation and additional clarification on specific changes as implemented in the 2017 OECD Guidelines following the BEPS project. In line with any future developments in OECD guidance, the Decree will be updated or amended accordingly. According to the State Secretary, the OECD Guidelines have in principle a direct effect on the Dutch legal practice. The new Decree contains new sections on the six-step risk analysis approach (OECD par onwards); valuation methods (OECD chapter VI); hard-tovalue intangibles (OECD par to 6.195); and low value-adding services (OECD chapter VII D). Transfer pricing penalties The State Secretary acknowledges that transfer pricing is not an exact science. However, explicit reference is made to the general Dutch penalty regime under which penalties can be imposed in cases of non-arm s-length profit shifting. The decision to apply penalties depends on the facts and circumstances of the specific case, whereby intention plays an important role. It appears that the State Secretary has included this message as a preventive measure in order to discourage taxpayers from entering into non-arm s-length transactions. Characterization of transaction A characterization for transfer pricing purposes of a transaction starts with the contractually agreed terms and conditions, followed by an analysis of other economically relevant characteristics. If the characteristics of the transaction that are economically relevant are inconsistent with the written contract, the conduct of the parties should determine the actual characterization. Besides the functions performed, the economic relevant risks need to be analysed according to the OECD s sixstep risk analysis. Following the risk analysis, parties need to be compensated (could be upside benefits and to incur the downside costs) for their risk control functions performed and their financial capability to incur the risk. Disregarding a transaction According to the OECD Guidelines, a transaction may be disregarded where the arrangements of the transaction, viewed in their totality, differ from those that would have been adopted by independent parties, behaving in a commercially rational manner, in comparable circumstances. This takes into account the parties perspectives and the options realistically available to each of them at the time of entering into the transaction. Disregarding a transaction and, if appropriate, replacing by an alternative transaction are only done for fiscal purposes. Reference is made to the fact that related parties may enter into a much greater variety of arrangements than independent parties. Also, related parties may conclude transactions of a specific nature that are not (or very rarely) encountered between independent parties, and may do so for sound business reasons. A comparison on terms and conditions is needed to see whether commercially rational arguments exist for such a transaction. Cost-based transfer pricing method Additional guidance is provided for the cost basis and treatment of disbursements under a Cost Plus or Transactional Net Margin Method (with a cost-based Net Profit Indicator). Only the costs that directly or indirectly relate to the transaction and the costs that are a relevant indicator of the value of the functions performed, assets used, and risks assumed are to be part of the cost basis to determine the arm s-length profit. Examples are provided of disbursement type of cost and the situation of raw material cost excluded from a toll manufacturer s cost basis. Also discussed is the situation of multinationals selling goods in the Netherlands through a Dutch related company that does not perform sales activities, but merely provides administrative services supporting the sales transaction. In this case, it does, however, usually register the revenue in its Profit and Loss account. If the Dutch related company does not have an economic function in the value chain, the State Secretary is of the opinion that such activity should be remunerated based on its costs instead of its revenue. Valuation techniques The State Secretary emphasizes that valuations of intangibles in line with OECD par should be evaluated from the perspectives of both parties in arriving at an arm s-length price. The arm s-length price will fall somewhere within the range of present values evaluated from the 2 pwc

3 perspectives of the transferor and the transferee. Furthermore, the tax effects of the transfer for both the transferor (i.e., income taxable for corporate income tax) and the transferee (i.e., possible tax deductible amortisation cost) should be taken into account when determining the arm s-length price. Intangibles Additional clarification on intangibles is included in the Decree, addressing topics as required functionality to add value and control risk of an intangible asset, an arm s-length transfer and price should benefit both parties to the transaction, and only legal ownership without relevant functions to add value and control risk entitles the party to a limited remuneration. The OECD Guidelines mention that five functions are of specific importance to determine the creation of value by the various parties involved in an intangible transaction. The OECD Guidelines do not explicitly rank these in relative importance. The Decree does make a distinction: it states that in general more weight should be given to the Development and Enhancement functions. With regard to hard-to-value intangibles, the view of the State Secretary is that when the actual results realised with the use of the intangible deviate more than 20% from the projects used at the time of the transfer, the arm s-length price can be scrutinized by the tax inspector. In the situation where the variance of 20% is realized only five years after the intangible is used in transactions with third parties, the intangible will not qualify as hard-to - value intangibles. Acquisition of shares followed by business restructuring Multinationals frequently acquire shares in unrelated companies followed by a transfer of intangibles to another related entity. The State Secretary provides guidance on pricing the transfer of the intangibles in such situations. First, it needs to be determined if the accompanying functionality and risks also are transferred if there is only a transfer of legal ownership. In determining the arm s-length price of the transferred intangibles, the State Secretary expects the acquisition file, if available, to be an essential part of the transfer pricing documentation. It is implied that the value of the intangibles does not equal the price paid for the shares minus the tangible assets, as other elements such as synergy effects, control premium, the value of the routine functions, and tax effects need to be taken into account. Further, although the acquisition price can be considered an at-arm slength price, this does not imply that this price equals the value of the shares for the buyer, as the buyer generally only acquires the shares as the buyer expects to create additional value. Accordingly, a separate transfer pricing analysis needs to be prepared in which the value as determined for the intangibles according to the acquisition file is a good indicator for the minimum price the buyer would expect. In the situation where a discounted cash flow method is applied to value a routine function, the State Secretary is of the opinion that the net present value of future cash flow should not be based on an eternal period. Such routine functions are considered easily replaceable in the market and have typically short-term service contracts. Use of royalty benchmarks The Decree questions the general practice of applying royalty benchmarks, based on a database search for determining the remuneration of the use of intangibles. The State Secretary doubts whether the publicly available information in the databases is sufficiently comparable to the intercompany intangible transaction. The use of these databases and benchmarking studies will be critically assessed. In view of the State Secretary, an acceptable method, if certain conditions are met, could be based by determining the remuneration of a least complex tested party (which does not use intangibles) compared to any available residual profits attributable to the intangible asset and related functions and risks. Low-value-adding services The Decree implements the OECD simplified approach to remunerate low-value-adding services, based on a 5% markup on the direct and indirect costs. The OECD criteria to apply the simplified approach are repeated, and several examples are provided to illustrate the approach. The State Secretary also accepts the practical approach of charging out actual costs for low-value-adding services without a mark-up, as mentioned in paragraph 7.37 of the OECD Guidelines. In the previous Decree, the State Secretary explicitly mentioned this zero percent mark-up option for services related to accounting, legal, tax, and HR that contribute only marginally to the primary business processes. These specific examples are not included in the new Decree. The zero percent markup is only accepted based on a cost-benefit analysis that concludes that the additional tax revenue does not justify the additional administrative burden. Further, the Decree mentions that in case this approach of charging the actual costs without a markup is chosen, the finance costs also have to be taken into account. 3 pwc

4 Retroactivity The State Secretary sees this Decree as a further clarification of the arm slength principle. As the arm s-length principle also was applicable in earlier years, the Decree applies retroactively to transfer pricing positions in these previous years. It seems that this position is taken with an eye on mutual agreement procedures with other states over transfer pricing issues of previous years. Unchanged topics Other topics of the 2013 Decree are also included in the new Decree. These contain minor changes. The sections on Financial Transactions (guarantees, (re)insurance, and internal loans) include minor changes compared to the 2013 Decree. Comparable statements as in the other sections are added to the Financial Transactions sections concerning applying a two-sided approach, characterization of the transaction based on parties conduct, and the commercial rational of the (loan) transaction s terms and conditions, including a risk allocation. Other topics included in the new Decree with minor changes are captive insurance, intra-group procurement, cost contribution agreements, and intragroup service provision. Transfer pricing documentation Documentation requirements under Article 8b, sub 3, CIT Act are applicable on domestic and on crossborder transactions. The Master File, Local File, and country-by-country reporting requirements (Art. 29b-29h CIT Act) are applicable on crossborder transactions and permanent establishments for MNCs passing the threshold of consolidated group revenue of EUR 750 million. The standards for the Master File and Local File also will be sufficient to comply for the situations that are below this threshold and thus fall under the initial mentioned situations (i.e., Art 8b CIT Act requirements for both domestic and cross-border transactions). New Decree on Coordination Group Transfer Pricing The Decree of August 11, 2004 (DGB2004/1339M) also was replaced with a new Decree (DGB 2018/4380) concerning the Coordination Group Transfer Pricing. The new decree was updated following the international developments on transfer pricing documentation and information exchange. The Decree clarifies the responsibilities and tasks of the Coordination Group within the organization of the Tax Authorities regarding consistency in application of laws and rules and supporting tax authorities in (local and international) transfer pricing cases. The takeaway The new Decree provides additional guidance on the position of the Dutch Tax Authorities in the post-beps era. The Decree follows the trend to provide more guidance and clarity on many complex transfer pricing topics. By emphasizing the importance of conduct over contract, and functions to control risks, and explicitly mentioning penalties, the State Secretary conveys its message that the field of transfer pricing has matured and that both multinationals and Tax Authorities are actively working with the new BEPS/OECD guidance. 4 pwc

5 Let s talk For a deeper discussion of how this issue might affect your business, please contact: Transfer Pricing Jeroen Peerbooms, Amsterdam +31 (0) jeroen.peerbooms@pwc.com Michel van der Breggen, Amsterdam +31 (0) michel.van.der.breggen@pwc.com Eric Vroemen, Rotterdam +31 (0) eric.vroemen@pwc.com Transfer Pricing Global, Americas, and US Leaders Isabel Verlinden, Brussels Global Transfer Pricing Leader isabel.verlinden@be.pwc.com Horacio Peña, New York Americas Transfer Pricing Leader horacio.pena@pwc.com Paige Hill, New York US Transfer Pricing Leader paige.hill@pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions Tune into TP Talks, PwC s global Transfer Pricing podcast series. Listen to PwC professionals sharing perspectives and the latest insights on today s key transfer pricing developments around the world. SOLICITATION 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC, our purpose is to build trust in society and solve important problems. We're a network of firms in 158 countries with more than 236,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at 5 pwc