The term ‘transfer pricing’ stands for setting prices for internal transactions between a related multinational group of entities. Transfer pricing may well lead to a tax benefit when part of the group is located in tax friendly countries. The aim will be to attribute as much profit as possible to these tax friendly countries. In principle the main question when preparing a transfer pricing calculation is what a third party would be willing to pay for a certain service. When an activity contains more risk, the price should be higher. Therefore the sort of activities are of importance to determine the profit margin. Examples of these activities are: production, sales, R & D, distribution and storage. Although all these activities may only lead to one final product, the various internal production stages should be priced separately in order to allocate the profit on the product to these various activities within the group.
For a realistic and reliable transfer pricing calculation, the point of view should be that the attribution of the profits is backed up by the factual situation. This means that the profit allocation should be based upon the actual performing of the activities in a certain country. So transfer pricing can be especially interesting for structures which are not yet set up, as in that case the most interesting countries for tax and business purposes can be chosen.
To include a strategic entity of the Netherlands in this group of companies offers access to a wide range of tax treaties with other countries, also some countries with low tax rates. This will make it more interesting when e.g. dividends are distributed from this Dutch company. Furthermore the Netherlands do not levy tax at source on interest and royalty’s and offers an interesting participation exemption. Also the Netherlands offer a so called ‘APA’ tax ruling, which will give certainty upfront by the tax authorities regarding the required margins attributable to the Netherlands. A bilateral ruling could also be possible between all involved countries. It is however not obligatory to close such a ruling. There are several methods available to determine a defensible allocation of profits, the entrepreneur is free to choose the most beneficial. The companies within the group should calculate, and document, businesslike fees for their activities within the group. In some cases the Dutch tax authorities will assist with setting the height of acceptable prices within the group; the benefit is that the group does not have to make their own detailed and costly report to this purpose.
If a group company, located in the Netherlands, does not have a ruling and no documentation of its prices, than the tax authorities will grand this company some time to get its documentation in order. In case the documentation is not in order after this period, than the burden of proof regarding the height of the amounts for internal services may shift to the entrepreneur. If the pricing is set too low, the tax authorities may deviate from the tax returns filed in the past (in principle maximum five years back) and rectify these with the higher, businesslike, taxable profit. In that case the group runs a risk on double taxation when the other related country does not agree with the deviations made by the Dutch tax authorities. So in most cases it would be best to close a ruling or in any case take care of a well documented transfer pricing file which is in accordance with the various accepted calculation methods.
