In order to combat tax avoidance schemes in relation to the transfer of assets by entities located in low tax jurisdictions the Netherlands has proposed its transfer pricing rules. In a recently published draft bill the arm’s-length principle will be rendered ineffective in cross-border situations to the extent that it leads to reduced profits in the Netherlands without a corresponding inclusion in the counterparty’s jurisdiction. under the proposed rules a arm’s-length downward adjustment of a transaction between related parties will be denied unless the Dutch taxpayer can demonstrate that:
- there is a corresponding upward adjustment in the same transaction;
- the corresponding upward adjustment is subject to tax in the related party’s jurisdiction.
A downward adjustment is defined as taking into account higher expenses or lower profits than a third party would have agreed to. An upward adjustment is considered subject to tax if it is included at some point in the related party’s tax base. Jurisdictions that tax upward adjustments at a 0 percent rate or that would exempt the upward adjustment because of a domestic exemption (for example, an object exemption for permanent establishments) would also qualify, as long as the upward adjustment is included in the base. Jurisdictions that do not levy profit taxes, on the other hand, would not qualify because the upward adjustment would not be part of any tax base.
For more information on the proposed amendments contact Friggo Kraaijeveld, a partner of KC Legal.