Netherlands: Proposed limitation to Dutch unilateral downward adjustments

In March 2021, the Dutch Ministry of Finance published an internet consultation on a draft proposal to amend the Dutch codification of the arm’s-length principle, the (“Draft Bill”). The Draft Bill, which is intended to enter into force on 01 January 2022, will limit unilateral downward transfer pricing adjustments of the Dutch taxpayer to the extent that the corresponding upward adjustment is not included in the taxable base of the (foreign) related entity. Under the current rules, unilateral downward adjustments of the profit of a Dutch taxpayer do not need to be mirrored by a corresponding adjustment at the level of the counterparty.

Takeaways

Considering the absence of grandfathering rules, Dutch taxpayers are well advised to review the potential (retro-active) impact of the Draft Bill on existing rulings and/or APAs. In addition, where contractual terms are applied that deviate from the arm’s-length principle, Dutch taxpayers will need to closely follow the legislative process of this Draft Bill.

The Draft Bill

The Draft Bill proposes to only allow downward adjustments to the extent that a corresponding adjustment is included in the taxable basis in the other jurisdiction. This implies that, for instance, deemed deductions that are not (entirely) picked up elsewhere would no longer be (fully) taken into account for Dutch tax purposes. The Draft Bill also applies to situations where the jurisdiction of the other related entity does not levy corporate income tax. However, deemed deductions are not limited where the corresponding income is not effectively taxed as a result of loss compensation rules or where the income is taxed at a rate of 0%.

The Draft Bill will also limit the tax amortisation of assets for which a step-up in basis to the (higher) fair market value was claimed. Like deemed deductions, this rule will kick in to the extent that the fair market value of such assets is not included in the taxable basis in the jurisdiction of the seller. This would have the effect that taxpayers can no longer claim a (full) tax-deductible amortisation on the fair market value of such assets. The proposed measures also limit the tax depreciation of such assets acquired in the five years prior to FY 2022 (i.e. the tax amortisation limitation will effectively have retro-active effect until FY 2017).

Rebuttal rule

When applying a one-sided transfer pricing method, e.g. the TNMM, the arm’s-length profit of a Dutch group company is determined based on an analysis of its functions, risks and assets. The (subsequent) price setting of the (various) intercompany transactions engaged in by the Dutch company is in fact a result of that arm’s-length profit. If tax authorities were to correct upwards the arm’s-length price of one of the intercompany transactions (i.e. representing additional taxable income for the Dutch company), whereas its arm’s-length profit is not challenged, based on the “total profit concept” the Dutch company can currently claim a corresponding downward adjustment (i.e. a correction on the cost side). On balance, the Dutch company would continue to report its arm’s-length profit (i.e. although based on higher income and cost).

However, under the Draft Bill, the corresponding downward adjustment cannot be claimed, as it cannot be argued that this adjustment is included in the tax base ‘elsewhere’. In addition to that, it is noted that the correction and the corresponding downward adjustment will often only be made multiple years after the end of the relevant FY. Often the “other related entity” will already have filed a tax return for the FY in question. In its current form, the Draft Bill will also be triggered in situations which are clearly not aimed at abusing mismatch situations.

Various commentators to the internet consultation have indicated that, if indeed enacted, Article 8ba of the Dutch Corporate Income Tax Act will need to include a rebuttal rule. Under such rule, Dutch taxpayers will need to have the possibility to argue that Article 8ba Dutch Corporate Income Tax Act does not apply in certain situations because, for example, given the mismatch situation it was not intended, or where the taxpayer’s remuneration continues to be at arm’s-length.¹

¹ In the Hornbach-Baumarkt case dated 31 May 2018, ECLI:EU:C:2018:366., the Court of Appeal of the EU conforms that, in case of alleged non-arms’-length conduct, a taxpayer will need to have the possibility to apply a rebuttal rule.

Read the WTS Global Transfer Pricing Newsletter here.