Dutch court highlights importance of robust transfer pricing support for intercompany loans

2. Comparability adjustments must be supportable

The Court set out three core techniques to construct a reliable set of comparables: select, correct (where reliably supportable) or eliminate. Perfect comparability is not required, but adjustments must have sufficient factual support.

The Court accepted adjustments for differences in credit rating, maturity and currency where these could be supported by observable market evidence. Geography also mattered. The Court considered that both the countries in which the borrower and its subsidiaries operated and the borrower’s own country of residence could affect interest pricing. In the circumstances of this case, comparables from Western Europe, preferably the Netherlands, were considered the most appropriate way to address that factor.

The Court rejected several adjustments proposed by the taxpayer because they could not be demonstrated with sufficient reliability. For example, the Court did not accept a general liquidity adjustment for the difference between private intercompany loans and traded bonds, nor did it accept the taxpayer's regression-based country-risk adjustments as sufficiently reliable for the individual facilities.

3. The full arm's-length range can be used

The Court distinguished between different comparable sets. A single highly reliable comparable may directly support the price. With a small number of good comparables, a range can be established and, for purposes of a correction, the price most favourable to the taxpayer is used. An interquartile range may instead be useful where there is a larger set of comparables with comparability deficiencies.

In the circumstances of this case, the Inspector could therefore not simply correct to the median where the maximum of the arm’s-length range still represented an acceptable arm’s-length outcome.

4. Total financing costs were assessed on an ex-ante basis

The Court accepted a total-cost approach for the facilities at issue. Interest and the relevant facility-related fees were considered together, and the Court assessed the overall pricing ex ante using forward rates reflecting information available when the financing arrangements were entered into.

The Court expressly rejected the tax authorities' argument that the charges should instead be tested after the fact, holding that this would involve an unnecessary use of hindsight.

The Court applied a two-step process. First, the agreed remuneration was tested against an arm’s-length spread determined from comparables. If the upper end of the relevant arm’s-length range was below the ex-ante total-cost spread, there was a basis for correction. The correction itself was then calculated separately using the arm’s-length interest spread on the outstanding principal, without adding commitment fees.

Pricing models should therefore reflect contemporaneous market expectations, including forward interest rates where relevant.

5. TP documentation matters beyond compliance

The Court found that the taxpayer’s transfer pricing documentation and benchmark analysis contained important defects and that it was not sufficiently plausible that borrower specific creditworthiness analyses were available when the tax returns were filed.

To reach its conclusion that the burden of proof should be reversed and aggravated, the Court followed a two step approach. First, under the normal burden of proof it established that the accepted corrections produced both relatively and absolutely significant differences between declared and actually due tax for each year (a quantitative trigger). Second, because the missing contemporaneous evidence made an ex ante transfer pricing assessment impossible, the Court concluded the taxpayer had at least acted carelessly and therefore had, or should have had, awareness at the time of filing that the declared pricing could be incorrect. Combining the quantitative shortfall and the awareness, the Court held the taxpayer did not submit the “required return”. Under articles 27e and 27h AWR this results in reversal and aggravation of the burden of proof. As a result, the Inspector may rely on a reasonable estimate, and the taxpayer must now convincingly rebut that estimate rather than merely making its position plausible.

Although the Court reduced one adjustment and cancelled another where the taxpayer produced sufficiently convincing comparables, the shifted burden made the taxpayer's position significantly harder to defend. This underlines that robust, contemporaneous TP documentation is critical not only for supporting the arm's-length nature of intercompany financing, but also for preserving the taxpayer's procedural position in litigation.