On the 15th of September 2015 the Dutch legislator announced new Dutch reporting standards for the Dutch Corporate Income Tax Act. The annual TP documentation package should consist of a master file and a local country file (Dutch or English language).
The report is used to assess material transfer pricing risks and other risks that relate to base erosion and profit shifting and monitor possible non-compliance to transfer pricing rules by members of the group.
The reporting standard is intended for intercompany transactions with more than €50 million annual revenues. Further Country by Country (CbC) reporting requirements are also included with an treshold of €750 million. A penalty is included as well.
The report will be mandatory per January 2016 due to obligations with OESO /G20.
The Dutch Ministry of Finance will issue a decree at a later stage that provides more detailed rules about form and content of the master file, local file and CbC-reporting.
Specific penalties for non-compliance
Not being compliant with submission the CbC report qualifies as a criminal offense. Non-compliance will lead to a monetary fine as of 1 January 2014: €8,100) or custody of six months at the most for the party involved. In case non-compliance occurs intentionally, then a fine of the fourth category applies in addition to an imprisonment of four years at the most.
The authority to levy an administrative penalty will expire five years after the end of the calendar year in which the requirement originated. Criminal prosecution will generally be reserved for the most serious cases.
OECD's definitions 'master file' and 'local file'
The master file should provide an overview of the MNE group business, its overall transfer pricing policies, and its global allocation of income and economic activity in order to place the MNE group’s transfer pricing practices in their global economic, legal, financial and tax context.
The Report states that it is not intended to require exhaustive listings of minutiae as this would be both unnecessarily burdensome and inconsistent with the objectives of the master file.
In producing the master file taxpayers should use prudent business judgment in determining the appropriate level of detail for the information supplied, keeping in mind the objective of the master file to provide tax administrations with a high-level overview of the MNE’s global operations and policies.
The use of cross-references to other existing documents, together with copies of the relevant documents, should be deemed to satisfy the relevant requirement.
The Report indicates that information is considered important if its omission would affect the reliability of the transfer pricing outcomes. It does not provide more detailed guidance, such as materiality thresholds, on what is considered important.
The information required in the master file can be grouped in five categories: (i) the MNE group’s organizational structure; (ii) a description of the MNE’s business or businesses; (iii) the MNE’s intangibles; (iv) the MNE’s intercompany financial activities; and (v) the MNE’s financial and tax positions.
Taxpayers should present the information in the master file for the MNE as a whole but organization of the information by line of business is permitted where well justified by the facts.
The Report states that where line of business presentation is used, care should be taken to assure that centralized group functions and transactions between business lines are properly described in the master file.
The master file differs from typical current documentation standards. It has a global scope and should provide a global overview. A description of the supply chain for the group’s largest products and/or service offerings will have to be included.
Important transactions with respect to intangibles, financial transactions, and business restructurings must be listed. Finally, the master file should contain a list and brief description of the MNE group’s existing unilateral advance pricing agreements (APAs) and other tax rulings relating to the allocation of income among countries.
These differences will require companies to review their existing documentation and their process for preparing the documentation.
While the master file provides a high-level overview, the local file should provide more detailed information relating to specific material intercompany transactions.
The information required in the local file should supplement the master file and help in assessing whether the taxpayer has complied with the arm’s length principle in its material transfer pricing positions affecting a specific jurisdiction.
Individual country transfer pricing documentation requirements should include specific materiality thresholds that take into account the size and the nature of the local economy, the importance of the MNE group in that economy, and the size and nature of local operating entities, in addition to the overall size and nature of the MNE group.
It is recommended that small and medium-sized enterprises (SMEs) should not be required to produce the amount of documentation that might be expected from larger enterprises. However, SMEs should be required to provide information and documents about their material cross-border transactions upon a specific request of the tax administration in the course of a tax examination or for transfer pricing risk assessment purposes.
Like the new rules for the master file, the guidance for the local file contains some specific deviations from typical current documentation standards. First, it is clear that a specific local file will have to be prepared, including financial information and allocation schedules to show how the financial data used in applying the transfer pricing method may be tied to the annual financial statements. This implies that generic documentation describing the transfer pricing policy for the group as a whole can be used. Furthermore, the local file should contain a description of the reasons for concluding that relevant transactions were priced on an arm’s length basis based on the application of the selected transfer pricing method.
A company will need to be able to support that both the transfer pricing policy and the actual results are at arm’s length.
The local file requires that the reporting amount of intra-group payments and receipts for each category of controlled transactions involving the local entity (i.e., payments and receipts for products, services, royalties, interest, etc.) be broken down by tax jurisdiction of the foreign payer or recipient. It should be noted that the Report refers to payments and receipts and not to consideration charged.
The Report indicates that various types of agreements will have to be reported, including all material intercompany agreements concluded by the local entity and copies of existing unilateral and bilateral or multilateral APAs and other tax rulings to which the local tax jurisdiction is not a party and which are related to controlled transactions described above.
Like for the master file, these differences will require companies to review their existing documentation and the process to prepare such documentation.
The report contains specific guidance with respect to certain “compliance issues” such as timing and penalties, among others. The Report states that taxpayers should try to determine transfer prices based upon information reasonably available at the time of the transaction and should confirm the arm’s length nature of their transactions at the time of filing their tax returns.
Among the compliance issues listed, several are of specific practical importance for taxpayers. The Report recommends that transfer pricing documentation be periodically reviewed in order to determine whether functional and economic analyses are still accurate and relevant as well as to confirm the validity of the applied transfer pricing methodology.
In general, the master file, the local file and the CbC report should be reviewed and updated annually. With respect to database searches for comparables, the Report indicates that these should be updated every three years. However, the financial data for the comparables should be updated every year. The Report further expresses a strong preference for the use of local comparables over the use of regional comparables.
The language in which transfer pricing documentation should be submitted should be established under local laws. Countries are encouraged to allow for the filing of transfer pricing documentation in commonly used languages where the usefulness of the documents will not be compromised. Where tax administrations believe that translation of documents is necessary, they should make specific requests for translation and should provide sufficient time.
See chapters: Tax Transparency and Enhanced Relationships
BEPS 2015 Final Reports
BEPS and Indirect Tax
Let's highlight action 7 and 13:
- Prevent the artificial avoidance of PE status'
- Country-by country reporting (CbC)
Action 7 – prevent the artificial avoidance of PE status
The final BEPS report includes changes to the definition of PE for income taxes of Article 5 of the OECD Model Tax Convention. Action 7 broadens the threshold to determine when such PE status exists. Currently such a PE status does not exist for commissionaire arrangements and the specific activity exemptions in treaties, such as warehousing, purchasing and preparatory and auxiliary activities.
The indirect tax definition of a fixed establishment (FE) is different from a PE and has its foundation in EU VAT law and should therefore not be affected by the BEPS initiative or OECD definition. Some countries however do (still) not accept the absence of a FE once a PE has been established. Note that the amount of PEs will increase when "Action 7" is in force.
As businesses are facing global challenges it makes sense that the existing business model is reevaluated and amended when necessary to meet the new PE environment. That most likely means moving away from a commissionaire structure?
Action 13 – country-by country reporting (CbC)
Action 13 provides a template for multinationals to report on an annual basis and for each tax jurisdiction in which they operate revenue figures and other key figures. The data of these reports give direct tax authorities the possibility to audit the amount of direct tax paid.
However for indirect tax authorities it is useful data as well. From a custom perspective it could be supportive during auditing the valuation of the transactions when customs duties are due and for VAT cross border intercompany transactions have always qualified as a high risk area.
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format for both corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
- The changing tax world and taxpayer's impact
- Tax rulings and other measures similar in nature or effect
- Anticiperen op onze 'nieuwe' belastingwereld
- BEPS 2015 Final Reports
- UK - Improving large business compliance
- Developing a common framework for disclosing tax information
- Reputational risks
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.