Transfer Pricing Tax Manual for your intercompany transactions between Germany and The Netherlands (Holland)
National laws and international guidelines on the area of Transfer Pricing (TP) require group entities to conduct business with each other at arm’s length, as they would with any third party company. For goods delivered and services rendered between affiliated companies, the at arm’s length principle is the standard. The intercompany price (transfer price) has to reflect a similar price for goods or services if they were delivered or provided between independent parties. The Dutch and German tax authorities pay increasing attention to the transfer price calculated, and the way companies find the correct transfer price for a certain intercompany transaction. Special attention is payed to the attribution of functions, assets, costs and risks to the entities within a group of affiliated companies. Transfer Pricing documentation is required by law in The Netherlands and Germany for intercompany transactions.
When does the at arm’s length principle apply and what are the risks?
Transfer Pricing is always present in relation between affiliated companies/entities of an international business group. When a certain transfer price between two affiliated businesses is set to low (compared to prices calculated for the same transaction in the market), one business will pay too little company tax and the other will pay too much. This also counts in situations where the transfer price is set too high. Especially in situations where there are international relations between affiliated businesses, companies could achieve a certain advantage by attributing profits to a country that has a lower tax rate. That is why in those situations, the transfer prices that are used for transactions between affiliated entities are meticulously monitored and scrutinized. An additional issue that may arise is that when dealing internationally, more than one tax authority will have an opinion about the transfer pricing within your group and those opinions may differ on how profits should be taxed and where. Thus causing a real risk of double taxation.
The risks of not having Transfer Pricing documentation that provides a clear overview are easily determined. When a tax authority of a certain country does not agree with a transfer price calculated for the transactions between affiliated companies, a correction of profits has to take place in the businesses involved. When the tax authorities of the other state of the business involved in the transaction do not accept the correction of profits, double taxation will occur. Apart from (higher) taxation, discussions about transfer pricing will cause a high administrative burden and extra costs. Tax authorities will carry out an audit and the business will have to provide evidence for calculating a certain transfer price between affiliated entities. Both the Dutch and German tax authorities expect you to then provide a statement with evidence in a short period of time (usually 6 weeks). This will not make life any easier. It is much preferred to take a certain stance in advance about the transfer prices calculated between affiliated companies within your business, than having to refute arguments made by the tax authorities stating the transfer price is incorrect.
Solutions for your business in Germany and The Netherlands
We have developed the Transfer Pricing Tax Manual to fulfil your needs in the area of Transfer Pricing. Your business entities will be judged on their functions performed, assets used and risks incurred in an extensive analysis (FAR analysis). The first step is to collect all the necessary data about intercompany transactions that take place and then a business analysis follows. On the basis of the data and analyses transactions are judged on market conformity and a substantiation for attributing profits and costs to the various entities is formulated.
In this process it is important to capture all the intercompany transactions in separate contracts. For some examples, think of:
- Management contracts;
- Loan contracts;
- Cost-sharing contracts;
- Distribution and agency contracts;
- Secondment and model contracts;
- Alternative contracts on documentation within the business group.
Significant advantages of the Transfer Pricing Tax Manual:
- You are prepared for any discussion that may arise with tax authorities through extensive documentation within the manual. You will have all the substantiation of your position you need, before any questions are asked.
- You will get a better insight in your business’ internal processes and will be able to test your current TP policy to see if it matches future goals and strategies.
- Every transaction within the business group is captured in contracts and documented in a way that provides you a clear overview.
Do you have any questions? We are able to provide assistance when you want to expand your business activities to Germany and The Netherlands or if you work as an intermediary for clients in these matters. Please fill out our contact form and we will contact you as soon as possible.