Netherlands: Transfer pricing issues in context of COVID-19

Netherlands: Transfer pricing issues, COVID-19

What can taxpayers learn from initial experiences regarding transfer pricing issues in the context of the coronavirus (COVID-19) pandemic?

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Key considerations and approach

The impact of the COVID-19 crisis for each group and how they deal with this situation is different. Some multinationals have already decided to change their transfer pricing arrangements, whereas others are waiting to see how the rest of the year develops. One approach that taxpayers may consider is a two-step approach:

  • Assess the impact of COVID-19 on the organization
  • Decide how and when to address this in the transfer pricing arrangements (if at all)

Also taxpayers need to carefully consider interaction between transfer pricing arrangements and adjustments with government measures (for instance, NOW in the Netherlands).

If the decision to amend the transfer pricing arrangements is taken, then taxpayers need to implement and document this with the relevant references to third-party behaviour in the taxpayer’s industry.

Common transfer pricing challenges for multinationals.

There are several key transfer pricing challenges that multinational clients encounter when dealing with the COVID-19 measures in the various countries that they operate in. Questions to consider include the following:

  • Report a low and stable margin, even though little or no services are provided?
  • How to manage existing financial arrangements, including liquidity and cash management?
  • May existing contracts be adjusted or terminated?
  • Can a force majeure clause be invoked?
  • Adjust the transfer pricing policy now, or post COVID-19?
  • Can the taxpayer adjust its internal policies based on third-party conduct?
  • Can the taxpayer stop charging headquarter costs / management fees?

Taking action—what to consider?

Most companies are considering what to do with their transfer pricing policies, especially in dealing with a significant decrease of revenues. Even though there are different types of business models—ranging from centralized to decentralized—in all types of models challenges are faced. Although the whole group may face a loss position, routine remunerations could still result in cash tax to be paid. In this respect, it is important to consider if there is a need for action, and if now is the best moment for action. Taxpayers considering to undertake measures need to note the following:

  • The start of the process needs to be an assessment of the intercompany agreements in place.
  • From a transfer pricing perspective, it is key to consider how third parties would behave in a particular situation and try to mirror this conduct in intercompany situations.
  • Many intercompany contracts typically include a “force majeure” clause. Such clause could be invoked in case of exceptional circumstances which may also take place between third parties. In instances when no force majeure clause is included in an intercompany agreement, there could still be arguments to find a possible opening to renegotiate intercompany agreements.
  • As a last resort, it could be considered to terminate the existing contract and renegotiate a new contract, wherein for instance a lower remuneration is agreed for a longer-term contract.

Taxpayers also need to evaluate the changes at a later time, and decide if the adjustments made are sufficient. Changes or adjustments must always be considered on an individual basis, taking into account the specific circumstances of the company. Furthermore, this requires documentation and substantiation of the reason for invoking force majeure as well as of the revised arm’s length situation to be applied. Other realistically available alternatives need to be taken into account. Even if the taxpayer decides not to make any adjustments, it will be prudent to document the reasons why no adjustments are made.

Time to perform a new benchmark study?

Routine entities such as service providers, limited-risk distributors (LRDs), and contract or toll manufacturers are entitled to a routine remuneration, even if their business is currently loss-making due to the impact of COVID-19. In most cases, benchmark studies have been performed in past years to determine the arm’s length remuneration. It may be that LRDs are likely to show a drop in the 2020 data benchmarks and that it may be possible to reduce target margins for routine LRD entities. It may be that the 2020 figures will show a drop in margins. However, for making adjustments now in 2020, such information is not yet available, so other data sources need to be considered to estimate what that drop in margin for 2020 could be.

Benchmark approaches to consider:

  • It can be considered to use the most recent data and make appropriate financial and other comparability adjustments by setting parameters which take into account the current business circumstances as much as possible (e.g., lower revenue thresholds, include loss-making companies).
  • Also, the use of the 2020 quarterly and half-year data of public/listed companies can be considered, provided this information is available.
  • In addition, margin data taken from a previous recession period can be used.

Timing considerations

Despite a decline in turnover, some companies are making changes and others are not, while awaiting further developments. To decide if this is the right moment to make adjustments in existing transfer pricing policies, taxpayers need to consider:

  • The current period may not provide sufficient insights in the development of the transfer pricing model under the circumstances.
  • As business circumstances may be complex, changes in the transfer pricing model may affect the way the business is managed and structured (e.g., the IT implementation of the changes).
  • Changes in the transfer pricing policy could raise questions by local authorities and thus need to be implemented consistently. Substantiate and document the reasons for the changes relating to transfer pricing.
  • Companies are also considering what to do if they have an APA. In this respect, taxpayers are in principle bound by the APA and the transfer pricing policy agreed in that APA. Companies wanting to change the margins applied need to prepare their arguments, also with reference to third-party behaviour. Here also companies are considering what is the right time to approach the Dutch tax authorities to discuss this and what data to present.

Concurrence of transfer pricing with governmental measures: NOW

The concurrence of transfer pricing with the Dutch governmental measures in the context of the COVID-19 crisis, specifically the Dutch subsidy relief program “temporary emergency bridging measure to retain jobs” (Tijdelijke noodmaatregel overbrugging voor behoud van werkgelegenheid—NOW), needs to be considered. The NOW is aimed at providing a compensation for payroll costs. This compensation is relative to decline in turnover. With respect to the concurrence of the NOW with transfer pricing, note the following items:

  • As a general rule, the decline in turnover for the NOW is calculated at the group level of Dutch companies. For the definition of “group,” reference is made to the provisions of the Dutch civil code. If the decline in turnover at group level is less than 20%, but an individual operating company within the group experiences a decline in turnover of at least 20%, the NOW is possible using a separate entity approach. The key note to remember from the text adjoining the regulations is that if the separate entity approach is applied, no transfer pricing policies may be adjusted.
  • Conversations with auditors reveal that they will be careful when reviewing the drop in revenues and will not automatically follow a change in transfer pricing. If the drop in revenue cannot (fully) be confirmed, the subsidy needs to be repaid to the Dutch government. An auditor’s statement does not have to be submitted in 2020 but this may very well be in 2021 depending on the dates as set for the final NOW subsidy application to which an auditor’s statement must be attached. The Dutch association of accountants (NBA) is currently in consultation with the Ministry of Social Affairs and Employment in order to determine what is to be included in the auditor’s statement and how the auditor should perform an audit for the NOW. On the website of the NBA, a list of frequently asked questions (FAQs) in relation to the NOW group definition, turnover definition and auditors’ statement can be found.

There is still some uncertainty as to whether cost-plus entities that change their transfer pricing can successfully apply for the NOW. Based on the Dutch Transfer Pricing Decree (2018), it can be assumed that subsidies—such as the NOW—will be deducted from the cost base only if there is a direct link between the subsidy and the supply or service and, cumulative, the subsidy in question must be granted in the form of a discount, or as a contribution to costs. For a grant like the WBSO (wage tax subsidy), there is an allowance for deduction from the cost basis. It is still unclear whether the NOW could be treated akin to a WBSO subsidy or not.

For example regarding the NOW application for cost-plus entities:

  • In a “people-driven organization” such as a shared services center, operational expenses include mainly payroll costs. Therefore, for such companies, changes to the cost-plus percentage alone may not exceed the required 20% turnover drop. Therefore, in practice, it may be difficult to successfully apply for the NOW unless there are very good arguments and reasoning to reduce reimbursement of cost as such.
  • For service entities and manufacturing entities, (variable) costs are likely to have decreased. Costs—and revenue—of these cost-plus entities may decrease with more than 20% in case the multinational is heavily affected by the crisis, without making transfer pricing adjustments. For these companies, there could be an opportunity to opt for the NOW.


Read a June 2020 report prepared by the KPMG member firm in the Netherlands

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