Doing business internationally
If your company is based in more than one country, such as Germany and the Netherlands, you will have to deal not only with the Tax and Customs Administration in the Netherlands but also with the tax authorities in Germany, who will want to know how the profit is to be allocated. You will then have to deal with the issue of transfer pricing.
What is your transfer pricing policy?
Transfer pricing is important if you are established as an entrepreneur in more than one country. A transfer pricing policy sets out how the cross-border business generates profit and in which country or countries it should be taxed. It also states how a group’s prices are set. Many countries have introduced their own specific legislation on transfer pricing in recent years. It is mainly based on international guidelines and aims to prevent international groups channelling their profit through countries with very low tax rates or no tax at all.
Transfer pricing documentation requirements
The international guidelines have also been implemented in the Netherlands. These introduce transfer pricing documentation requirements for particular group entities of multinationals. They draw a distinction between entities with group revenues of up to €50 million, those with group revenues exceeding €50 million and those with group revenues exceeding €750 million.
Documentation requirements for entities with group revenues of up to €50 million
Entities with group revenues of less than €50 million must comply with the documentation requirements under Dutch corporation tax law and demonstrate how the transfer prices were arrived at. The profit must also be calculated in accordance with the ‘arm’s length principle’, which means the conditions that apply between related parties must be the same as those that independent parties would have agreed in similar transactions in similar circumstances.
The law also imposes a documentation requirement. If a taxpayer does not comply with this administrative obligation, he runs the risk that the burden of proof concerning the ‘arm’s length’ character of the transfer prices will shift from the tax inspector to himself.
Documentation requirements for entities with group revenues of €50 million or over
Entities with group revenues of at least €50 million must include a group file and a local file in their records and these must be updated each fiscal year. The group file is held in the head office and a local file is held in each country in which the group operates.
The Tax and Customs Administration in the Netherlands uses the information in the group file to assess whether there is a substantial transfer pricing risk. The group file must include a list of companies in the multinational group, a description of the business activities, the overall policy on transfer prices and the global allocation of income and economic activities.
The local file must include explanatory notes of relevance to an analysis of transfer pricing in transactions between a taxpayer and a related group entity in another country. These notes must demonstrate compliance with the ‘arm's-length principle’. The local file must also contain information on the permanent establishments to which business profits are allocated.
Documentation requirements for entities with group revenues of €750 million or over
If the multinational group’s consolidated revenues amount to at least €750 million, a country report must be submitted to the Tax and Customs Administration no later than 12 months after the end of the reporting year.
Since the regulations are very strict and every case has to be treated individually, we recommend that you contact us if you fall within this group.
A transfer pricing policy avoids taxation issues
In order to be certain that you fulfil the documentation requirements, no matter how large or small your company is, it is sensible to draw up a transfer pricing policy. You can then make sure nothing is overlooked. By meeting the documentation requirements, you ensure transparency with regard to the allocation of profit between the various entities in the group. We can help you draw up and implement a transfer pricing policy.