Jian-Cheng Ku and Tim Mulder, DLA Piper Netherlands NV
On March 4th, the Dutch government published its legislative proposal to combat double non-taxation due to transfer pricing mismatches. The legislative proposal will be published in the form of an internet consultation document and interested parties can submit their contributions by April 2nd. The Dutch government is aiming for the legislative proposal to come into force from January 1, 2022, although the measures will have substantial retroactive effect for five years.
In the Netherlands, the transfer prices do not match
The aim of the legislative proposal is to address tax avoidance structures that benefit from the different application or interpretation of the arm’s length principle in Dutch corporate tax law. Such differences can be defined as mismatches between transfer prices and result in a portion of the multinational company’s profit not being included in the tax base.
The legislative proposal is in line with one of the recommendations of the Dutch Advisory Committee on Taxation of Multinational Corporations, published on April 15, 2020. If the legislative proposal is adopted, the Dutch corporate tax law will be changed.
The legislative proposal contains three points in order to reduce mismatches between transfer prices.
Current Dutch arm’s length principle
Currently, the Netherlands requires that related party transactions be priced on an arm’s length basis. The definition of the arm’s length comparison corresponds to the transfer pricing guidelines of the OECD, ie the parties must enter into contracts if they are independent parties.
If the pricing of a transaction is not based on market conditions, the Dutch taxpayer concerned should make a transfer price adjustment for Dutch tax purposes. A transfer pricing adjustment may adjust the taxable profit of the taxpayer up or down. An upward revision means that the Dutch taxpayer’s taxable profit increases due to an increase in his income or a decrease in his expenses. A downward revision means that the Dutch taxpayer’s taxable profit decreases due to a decrease in his income or an increase in his expenses. In the case of a downward revision, such a difference between accounting and tax profit will be reported by the Dutch corporate tax payer as an informal capital contribution. This approach is expressly confirmed in Dutch case law.
A decrease in a Dutch corporation taxpayer’s expenses may result not only from an adjustment in their payments to a related party, but also from increased depreciation expenses. For Dutch tax purposes, if the tax cost price of an asset is increased due to a transfer pricing adjustment, the depreciation charge may exceed the amount of the depreciation charge for accounting purposes. According to the Dutch transfer pricing rules, the tax cost price must correspond to the fair value.
Unlike certain other jurisdictions, the Netherlands currently does not require that in the event of a downward revision, a corresponding upward taxable revision be reported at the overseas party level.
Legislative proposal
In accordance with the recommendations of the Advisory Committee on Taxation of Multinational Corporations, the legislative proposal allows a downward revision of the Dutch taxpayer only if a corresponding upward revision is reported at the level of the foreign related party.
In accordance with the recommendations of the Advisory Committee on Taxation of Multinational Corporations, the legislative proposal allows a downward revision of the Dutch taxpayer only if a corresponding upward revision is reported at the level of the foreign related party.
A taxable upward revision means that the adjustment is included in the related party’s taxable base. The justification for the legislative proposal confirms that this condition is also met if the upward adjustment is subject to an effective tax rate of zero, for example because the corporate tax rate is zero, the taxpayer has losses that can be used, or the taxpayer is part of a consolidated group. However, the condition is not met if the recipient’s tax sovereignty has no income tax at all or if the income is only taxed according to a controlled foreign company regime at the level of another group company.
The legislative proposal aims to eliminate transfer pricing mismatches in three situations.
First, a downward revision should be refused if no appropriate upward revision is made at the related party level.
Second, for assets transferred to the Dutch taxpayer on or after January 1, 2022, no increase in the base is allowed for Dutch tax purposes if the market price exceeds the trading price agreed between the parties and no corresponding taxable adjustment is reported to the level of the transferor .
Third, the depreciation of assets acquired by the Dutch taxpayer in the five financial years prior to 2022 will be capped if the Dutch taxpayer reported an increase in the base when acquiring the asset while no corresponding taxable adjustment was reported at the level of the transferor . The legislative proposal provides that depreciation costs will be limited to the lowest value of the asset from 2022 if the adjustment to the tax cost price at the time of acquisition or the tax cost price of the asset has not been taken into account prior to the first financial year, which is on or after January 1, 2022 begins.
Next Steps
The consultation is open to input from interested parties until April 2nd. The Dutch government can then update its legislative proposal and justification and send the legislative proposal to the Dutch parliament. Possibly the legislative proposal will be part of the Dutch tax plan 2022, which will be published on budget day 21 September.
Comments from the authors
The legislative proposal is one of the last tax proposals from the Dutch government ahead of the Dutch parliamentary elections on March 17th. However, since most parties in the Dutch government are likely to become part of the new government, we expect the legislative proposal to do so will be sent to the Dutch parliament later this year.
Therefore, it is important for multinational companies to review the impact of this legislative proposal on their Dutch structures, especially when Dutch taxpayers are part of an intra-group licensing or financing agreement and a downward adjustment of transfer pricing is made for Dutch tax purposes.
If a Dutch taxpayer has acquired assets from a group company since 2017, it is important to carefully monitor whether an increase in the base is reported for Dutch tax purposes and depreciation charges. The legislative proposal may affect the deductibility of future depreciation costs and an asset transfer may therefore be considered.
Jian-Cheng Ku advises on international tax law and transfer pricing with a special focus on international tax planning, M&A and private equity transactions, corporate restructuring and the planning and design of transfer pricing guidelines.
Jian-Cheng Ku
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Tim Mulder advises on Dutch and international tax issues in connection with international tax planning, M&A transactions, corporate restructurings, private equity and investment fund transactions.