New transfer pricing decree sets out Dutch tax authorities’ interpretation of the 2017 OECD Transfer Pricing Guidelines

On 11 May 2018, the State Secretary of Finance published a new transfer pricing decree in which he sets out his interpretation of the arm’s length principle as embedded in Dutch tax law (the Decree). The Decree explains the view of the Dutch tax authorities (DTA) on the 2017 OECD Transfer Pricing Guidelines (2017 Guidelines) and it documents certain positions of the DTA on topics where the 2017 Guidelines leave room for interpretation.

The Decree enters into effect on 12 May 2018. The State Secretary takes the position that, to the extent that the revisions of the 2017 Guidelines are a further clarification of the arm’s length principle, they also apply to years before publication of the 2017 Guidelines. However, the Decree remains silent on which parts of the guidance are ‘new’ and which parts are merely a clarification. If taxpayers act in line with the Decree, this reduces the risk of discussions with the DTA. If taxpayers deviate from the Decree, this does not necessarily mean that their transfer pricing needs to change. If, however, taxpayers take positions that differ from the contents of the Decree, they may expect discussions with the DTA and this might lead to controversy and potentially to litigation.

Important topics
The Decree reiterates various positions from an earlier decree published in 2013 (see our newsletter Quoted, May 2014), but includes new views of the DTA on the following topics.

• The Decree confirms that the DTA follow the position taken in the 2017 Guidelines that the performance of risk control and risk mitigation functions, and the financial capacity to assume a risk, overrule contractual arrangements.
• The Decree recognizes the relevance the 2017 Guidelines attach to the development, enhancement, maintenance and protection (DEMPE) in respect of the entitlement to the returns on intangibles. The Decree states that ‘development’ and ‘enhancement’ generally weigh heaviest.
• The discounted cash flow method can be used to determine the value of an intangible asset from the perspective of the buyer and the perspective of the seller. According to the Decree, the price of the intangible is somewhere between those two values.
• The Decree claims that the DTA are authorized to use ‘hindsight’ to determine whether the transfer pricing for so-called ‘hard-to-value intangibles’ should be challenged.
• The Decree mentions that purchase price allocations prepared in relation to an acquisition “can be a good indicator” for the minimum price the taxpayer would like to receive for the intangible.
• The Decree gives the DTA’s view on which costs are to be included in the cost base when using cost based transfer pricing methods, and which costs should be treated as disbursements. Only costs that are an indicator of value creating functions should be included in the cost base.
• The Decree offers more flexibility for low value adding services, by accepting both the OECD’s simplified method for low value adding services involving a 5% profit mark-up and on-charging low value adding services without a mark-up.
• The Decree explicitly mentions that the DTA will consider imposing penalties “depending on the facts and circumstances of the case”. The Decree explicitly states that the DTA will not do so for every deviation from the policy set out in the Decree.

Relevance of the Decree
The contents of the Decree help taxpayers understand why the DTA take certain positions in practice. If taxpayers act in line with the Decree, this reduces the risk of discussions with the DTA.

If a taxpayer deviates from the Decree, this does not necessarily mean that changes need to be made. Only the DTA is bound by the contents of the Decree and taxpayers are at liberty to take different positions. If taxpayers take positions that differ from the contents of the Decree, they may expect discussions with the DTA and this might lead to controversy and potentially to litigation. When deviating from the Decree, we recommend thoroughly documenting the justification of the transfer pricing system.

Entry into force
The Decree enters into effect on 12 May 2018. The State Secretary takes the position that, to the extent that the revisions of the 2017 Guidelines are a further clarification of the arm’s length principle, these revisions also apply to years before the 2017 Guidelines were published. Therefore, the DTA may apply certain elements of the Decree with retroactive effect. However, the Decree remains silent on which parts of the guidance should be considered ‘new guidance’ and which parts are merely a clarification.

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