March 5, 2021 The Netherlands starts consultation on unilaterally addressing transfer pricing mismatches Executive summary On 4 March 2021, the Dutch Government initiated an online public consultation regarding the application of the arm's-length principle. In line with the initiatives of the Organisation for Economic Co-operation and Development (OECD) and the European Commission to combat international mismatches, the Netherlands intends to unilaterally address certain transfer pricing mismatches to avoid international double non-taxation. The new rules are designed to be applied mechanically and should take effect for fiscal years starting on or after 1 January 2022. If enacted, the new rules as included in the consultation document would impact Dutch corporate taxpayers involved in international related-party transactions (either as the payer or the payee). Under the consultation document, if a transaction is not based on arm's-length conditions, a resulting downward adjustment of the taxable income (based on the Dutch "informal capital or deemed dividend" doctrine) will only be applied to the extent a corresponding upward adjustment is included in the taxable income of the counterparty. The burden of proof lies with the taxpayer, i.e., the taxpayer must make the corresponding adjustment plausible. The documentation to demonstrate this is in principle form free. The implications of this draft consultation document must be carefully assessed on a case-by-case basis. Detailed discussion Background to the proposal In April 2020, the Advisory Committee on the Taxation of Multinationals, established by the Dutch Government, issued its report with recommendations on the revision of the Dutch Corporate Income Tax (CIT) for multinational enterprises, including revisions on the application of the arm's-length principle. The consultation document largely follows the recommendations of the report on the arm's-length principle. Although the Netherlands generally advocates a more globally coordinated approach to balance tax effects of international mismatches, the Government welcomed the suggestions in the report to amend the application of the arm's-length principle and announced a corresponding legislative proposal to be published in Spring 2021. The formal legislative proposal is preceded by this public consultation. Informal capital/deemed dividend doctrine For Dutch CIT purposes, transactions between related parties must be in accordance with the arm's-length principle, i.e., reflecting conditions that would have been agreed upon between unrelated parties under similar circumstances. To the extent transfer prices are not set at arm's length, a transfer pricing adjustment is made, including when it results in a downward adjustment. Such adjustment usually entails the subsequent recognition of either an informal capital contribution or a deemed dividend distribution, based on long standing case law of the Dutch Supreme Court. Although this doctrine is applied in a coherent and consistent manner, international mismatches may occur and may result in double (non-)taxation, e.g., in the case of differences in interpretation or calculation of an arm's-length transfer price or in the case of such principle not being applied in the other state. Corresponding upward adjustment The Dutch legislator intends to align the downward adjustments of the tax base of the Dutch taxpayer with the corresponding upward adjustments in the other state (in current or future years), to avoid non-taxation due to international transfer pricing mismatches. For example, the Netherlands would only allow for a deduction of arm's-length deemed interest expenses on an interest free loan, if there is a corresponding upward adjustment that is included in the taxable basis at the level of the creditor. The same approach applies with respect to any assets acquired from affiliated entities, i.e., an upward adjustment of the asset's costs price at the level of the Dutch acquiring entity will only be made to the extent a corresponding adjustment is made at the level of the transferor. To determine for which related entity a corresponding upward adjustment should be made, the arm's-length principle as incorporated in article 8b of the Dutch CIT law, the Dutch transfer pricing decree and the OECD Transfer Pricing Guidelines should be considered. It is noted that inclusion of income at the level of the (in)direct shareholder under controlled foreign company rules is not considered a corresponding upward adjustment. Business assets acquired between 2017 and 2022 The proposed approach, if enacted, would apply to transactions that take place in fiscal years starting on or after 1 January 2022. However, according to the consultation document, an effective partial retroactive effect will apply to business assets acquired from an affiliated entity at a non-arm's length price in the five years preceding the first book year starting on or after 1 January 2022. The annual depreciation of such business assets would going forward be limited, but the proposed rule does not entail an actual (downward) adjustment of the recognized book value of such assets for Dutch tax purposes. The annual depreciation would be limited and calculated based on the lowest of two amounts: i) the lower book value of the asset if the proposed main rule would have applied at the time of the transfer (i.e., a lower asset value would have been taken into account based on the above discussed rule); or ii) the book value of the asset at the moment preceding the start of the book year beginning on or after 1 January 2022. Timing and next steps The consultation runs from 4 March 2021 until 2 April 2021. During this period all stakeholders are invited to comment on the draft provisions. Contributions must be submitted online and the input received shall be processed by the Ministry of Finance. It is expected that formal legislative proposals will be sent to the Dutch Parliament during the first half of 2021. According to the consultation document, the approach will be enacted into the new Article 8ba CITA. This article should take effect as of 1 January 2022 and be applied to fiscal years starting on or after that date. ____________________________________ For additional information with respect to this Alert, please contact the following: Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Amsterdam
Ernst & Young Belastingadviseurs LLP, International Tax and Transaction Services, Rotterdam
Ernst & Young LLP (United States), Netherlands Tax Desk, New York
Ernst & Young LLP (United States), Netherlands Tax Desk, Chicago
Ernst & Young LLP (United States), Netherlands Tax Desk, San Jose/San Francisco
Ernst & Young LLP (Shanghai), Netherlands / EMEA Tax Desk, Shanghai
Ernst & Young LLP (Hong Kong), Netherlands Tax Desk, Hong Kong
Ernst & Young LLP (United Kingdom), Netherlands Tax Desk, London
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