Transfer pricing is increasingly influencing significant changes in tax legislation around the world. This 18th issue of BDO’s Transfer Pricing Newsletter focuses on recent developments in the field of transfer pricing in Australia, Israel, the Netherlands, and India. Transfer pricing is becoming increasingly important for both tax authorities and tax payers around the world, with various countries introducing new legislation and guidance with respect to transfer pricing. As you will read, various countries are also showing initiatives following the finalization of OECD’s BEPS project, which are expected to expand over the coming months.
We are very pleased to bring you this issue of BDO’s Transfer Pricing News, which we were able to produce in close co-operation with our colleagues from the above-mentioned countries. We trust that you will find it useful and informative. If you would like more information on any of the items featured, or would like to discuss their implications for your business, please contact the person named under the item(s). The material discussed in this newsletter is intended to provide general information only, and should not be acted upon without first obtaining professional advice tailored to your particular needs.
NETHERLANDS- TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING
The Netherlands has released new draft legislation implementing new transfer pricing documentation requirements in line with Base Erosion and Profit Shifting (BEPS) Action 13. Multinational enterprises (MNEs) will have to take a three-tiered (master file, local file and CbC (Countryby- Country) Report) approach to transfer pricing documentation. Under the draft law, the master file, local file, and CbC Report requirements will be applicable for fiscal years starting on or after 1 January 2016. Noncompliance will lead to legal sanctions.
Transfer pricing documentation requirements (master file and local file)
For members of an MNE group resident in the Netherlands (with a minimum consolidated turnover of EUR 50 million), additional (obligatory) transfer pricing documentation requirements are introduced. The qualifying MNE group should have a master file and local file available at the level of the Dutch entity for the previous financial year at the time of filing the corporate income tax return. Separate Ministerial regulations will determine further rules on the form and content of the master file and local file. Under the draft Dutch legislation, the master file should provide an overview of the MNE group business, including:
- The nature of the business activities;
- The general transfer pricing policy; and
- The global allocation of income and economic activities.
Further guidance is given by the OECD which also mentions the following elements as being part of the master file (not exhaustive):
- Organizational structure;
- A brief functional analysis describing the principal contributions to value creation;
- Intercompany financing activities; and
- Financial and tax positions of the Group (such as a description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among jurisdictions).
The local file should include information relevant to the transfer pricing analysis of inter-company transactions between the Dutch entity and a related foreign entity. This information should help to substantiate the arm’s length nature of the transactions.
Information supporting the arm’s length allocation of profits to a permanent establishment should be included in the local file as well.
The OECD guidance lists the following additional elements of a local file (not exhaustive):
- A description of the management structure;
- A description and the amounts of the relevant intercompany transactions;
- An indication of the most appropriate transfer pricing method and the reasons for selecting this method;
- Relevant financial information regarding the entity, intercompany transactions and comparables used in the analysis;
- A detailed comparability and functional analysis; and
- Details of APAs, and other rulings to which the Dutch tax authorities are not a party and which are related to the relevant intercompany transactions.
The Netherlands has a penalty regime regarding tax administration and the existing regime is also applicable to the master file and the local file. It should be noted that the existing documentation requirements remain applicable for Dutch tax resident group entities that have a consolidated turnover of less than EUR 50 million. However, this may differ in a situation where the head of the MNE group is established in a jurisdiction that does not have these minimum documentation requirements in place. In that case, a Dutch entity might still be required to prepare (more) comprehensive transfer pricing documentation.
The CbC requirements apply to Dutch tax resident entities which are members of an MNE group with a minimum consolidated group turnover of EUR 750 million. The consolidated group turnover for this purpose is calculated based on the fiscal year preceding the fiscal year to which the CbC report applies. The primary purpose of CbC reporting should be a risk assessment tool for tax administrations and should be used to assess the accuracy of the transfer pricing policy applied within an MNE group.
The MNE group is obliged to provide a CbC report within one year after the end of the reporting (financial) year to the tax authorities where the ultimate head of the group is located. CbC reporting obliges companies to provide the tax authorities with:
- Aggregate, jurisdiction-wide information on global allocation of income;
- Details of taxes paid (including withholding taxes); and
- Indicators of economic activities. CbC reports should be filed with the jurisdiction of the ultimate parent entity of a group. The ultimate parent entity of an MNE group which has its tax residency in the Netherlands is obliged to file a CbC report, apart from the corporate income tax return, with the Dutch Tax Administration. However, in specific cases, this obligation can also be on a Dutch resident group entity that is not the ultimate parent entity of the group. Local filing or filing to the next tier parent entity may be required if:
- The ultimate parent jurisdiction does not require CbC reporting; or
- There is no adequate mechanism for the timely exchange of CbC reports; or
- There is a systematic failure to exchange information in practice.
Furthermore, there will be an ‘implementation package’ in place to facilitate effective exchange of information, including by way of automatic exchange. The filed CbC report will subsequently be exchanged automatically with jurisdictions in which the MNE is operating, with whom the Netherlands has concluded an information exchange agreement.
The draft legislation requires all group entities which are Dutch tax resident to notify the tax inspector if they are the ultimate parent entity of the group. If the Dutch group entity is not the ultimate parent entity, it is obliged to disclose the identity and the tax residency of the reporting entity. If the CbC reporting filing obligation is not met, penalties can be imposed to the entity. Not satisfying the requirements to submit the CbC report will be regarded as a criminal offence, and non-compliance will lead to a monetary fine.
Although the Ministerial regulations need to provide additional specifics to the new regulations, companies meeting the EUR 50 million and/or EUR 750 million condition should ensure that their transfer pricing documentation is prepared in time, and that they identified which entity within their group should file CbC reports.
Your BDO contact in The Netherlands: