In 2002, a provision was implemented in Dutch legislation to facilitate the tax authorities to check transfer prices. The purpose of this provision was to avoid that non arm’s length profit transfers between affiliated companies would affect the calculation of the taxable profit.
If affiliated companies agree on non-arm’s length terms for the supply of goods and provision of services, the calculation of their taxable profit will still be based on arm’s length terms. This goes for both national and international groups. Thus, elements that are not at arm’s length and clearly result from affiliation can be excluded from the calculation of the taxable profit.
Not only a shareholder relationship but also a managing or supervisory director relationship can lead to affiliation. Affiliation not only presents itself in parent-subsidiary relationships, but also in relationships between affiliates. Affiliation can also exist in situations where management or supervision is exercised. The degree of the affiliation has deliberately not been regulated. A relevant aspect for establishing affiliation is whether a shareholder, supervisory director and/or managing director has sufficient control to exert influence on the transfer pricing process.
Prices at arm's length documented
Moreover, an important administrative measure has been implemented to secure availability of the required information to assess whether the agreed upon transfer prices are at arm’s length. The required information must be available to the tax authorities from the moment the transaction has taken place. The company must keep a tax file with underlying documentation which demonstrates that the transfer prices are at arm’s length.
If this information turns out not to be readily available to the taxpayer, it must gather this documentation within 4 weeks minimum and 3 months maximum. If the taxpayer still fails to comply with the administrative requirement after this term, the burden of proof as regards the arm’s length nature of the transfer prices applies will shift to it, and the tax payer will have to demonstrate that the transfer prices are at arm’s length.