Jian-Cheng Ku and Tim Mulder, DLA Piper Netherlands N.V.
On March 4, the Dutch government published its legislative proposal to tackle double non-taxation resulting from transfer pricing mismatches. The legislative proposal is published in the form of an internet consultation document, and interested parties can provide their input by April 2. The Dutch government aims to have the legislative proposal become effective as of January 1, 2022, although measures will have a material retroactive effect for five years.
Dutch transfer pricing mismatches
The purpose of the legislative proposal is to tackle tax avoidance structures benefiting from the different application or interpretation of the arm’s length principle in the Dutch corporate income tax act. Such differences can be defined as transfer pricing mismatches and may result in a situation where part of the multinational’s profit is not included in taxable basis.
The legislative proposal is in line with one of the recommendations of the Netherlands advisory committee on taxation of multinationals as published on April 15, 2020. If the legislative proposal is adopted, an amendment will be made to the Dutch corporate income tax act.
The legislative proposal contains three items to mitigate transfer pricing mismatches.
Current Dutch arm’s length principle
Currently, the Netherlands requires that the pricing of transactions between related parties should be at arm’s length. The definition of arm’s length is in line with the OECD transfer pricing guidelines, meaning that parties must contract if they are independent parties.
Insofar as the pricing of a transaction is not at arm’s length, the Dutch taxpayer involved should make a transfer pricing adjustment for Dutch tax purposes. A transfer pricing adjustment can result in an upward or downward adjustment of the taxpayer’s taxable profit. An upward adjustment means that the Dutch taxpayer’s taxable profit increases due to an increase of its income or decrease of its expenses. A downward adjustment means that the Dutch taxpayer’s taxable profit decreases due to a decrease in its income or increase in its expenses. In case of a downward adjustment, such a difference between the accounting and tax profits is reported as an informal capital contribution by the Dutch corporate taxpayer. This approach is explicitly confirmed in Dutch case law.
A decrease in a Dutch corporate taxpayer’s expenses can not only arise from an adjustment of its payments to a related party but also from increased depreciation expenses. For Dutch tax purposes, depreciation expenses can exceed the amount of depreciation expenses for accounting purposes if the fiscal cost price of an asset is increased due to a transfer pricing adjustment. Dutch transfer pricing rules require that the fiscal cost price should be equal to the fair market value.
Contrary to certain other jurisdictions, the Netherlands currently does not require that in case of a downward adjustment, a corresponding taxable upward adjustment is reported at the level of the foreign-related party.
Legislative proposal
Following the advisory committee’s recommendations on taxation of multinationals, the legislative proposal only allows a downward adjustment to the Dutch taxpayer if a corresponding taxable upward adjustment is reported at the level of the foreign-related party.
Following the advisory committee’s recommendations on taxation of multinationals, the legislative proposal only allows a downward adjustment to the Dutch taxpayer if a corresponding taxable upward adjustment is reported at the level of the foreign-related party.
A taxable upward adjustment means that the adjustment is included in the related party’s taxable basis. The legislative proposal’s explanatory memorandum confirms that this condition is also met if the upward adjustment is subject to an effective tax rate of nil, for example, because the corporate tax rate is zero, the taxpayer has losses that can be utilized, or the taxpayer is part of a consolidated group. However, the condition is not met if the recipient’s tax jurisdiction has no income tax at all or if the income is only taxed under a controlled foreign company regime at the level of another group company.
The legislative proposal aims to tackle transfer pricing mismatches in three situations.
First, a downward adjustment should be denied if no corresponding upward adjustment is made at the level of the related party.
Second, no step-up in basis for Dutch tax purposes will be allowed for assets transferred to the Dutch taxpayer as of January 1, 2022, if the arm’s length price exceeds the commercial price agreed between parties, and no corresponding taxable adjustment is reported at the transferor’s level.
Third, the depreciation of assets acquired by the Dutch taxpayer in the five fiscal years prior to 2022 will be limited if the Dutch taxpayer reported a step up in basis upon the acquisition of the asset, while no corresponding taxable adjustment was reported at the level of the transferor. The legislative proposal provides that, as of 2022, depreciation expenses will be limited to the lowest amount of the value of the asset if the adjustment of the fiscal cost price was disregarded at the moment of the acquisition or the fiscal cost price of the asset immediately prior the first financial year starting on or after January 1, 2022.
Next steps
The consultation is open till April 2 for input from interested parties. Subsequently, the Dutch government may update its legislative proposal and explanatory memorandum and send the legislative proposal to the Dutch parliament. Potentially, the legislative proposal will be part of the Dutch tax plan 2022 that will be published on Budget Day on September 21.
Authors’ comments
The legislative proposal is one of the last Dutch government tax proposal prior to the Dutch parliament elections on March 17. However, since it is likely that most parties of the Dutch government will become part of the new government, we expect that the legislative proposal will be sent to the Dutch parliament later this year.
Therefore, it is essential for multinationals to review the impact of this legislative proposal on their Dutch structures, in particular where Dutch taxpayers are part of an intercompany licensing or financing agreement, and a downward transfer pricing adjustment is made for Dutch tax purposes.
Furthermore, if a Dutch taxpayer acquired assets from a group company since 2017, it is important to carefully monitor whether a step-up in basis is reported for Dutch tax purposes and depreciation expenses are reported. The legislative proposal may affect the deductibility of future depreciation expenses, and therefore a transfer of assets might be considered.
Jian-Cheng Ku
Jian-Cheng Ku advises on international tax law and transfer pricing with a particular focus on international tax planning, M&A and private equity transactions, corporate reorganisations, and planning and design of transfer pricing policies.
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Jian-Cheng Ku
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