Dutch policy for advance pricing agreements

Last updated: 18-01-2006

Procedure for dealing with requests for advance certainty in respect of transfer prices in cross-border transactions (advance pricing agreements) 1

International Tax Policy and Legislation Directorate, Multilateral Affairs DivisionInternational Tax Policy and Legislation Directorate, Multilateral Division

Decree of 30 March 2001, No. IFZ2001/292M

The State Secretary for Finance has decreed as follows.

An advance pricing agreement (APA) provides advance approval on the determination of an arms length price or a method for the determination of such a price for cross-border transactions (goods and services) between associated entities and between different parts of the same entity. The Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations published by the OECD in 1995 (hereinafter the OECD Guidelines) provide detailed guidance on the arm's length principle as included in Article 9 of the OECD Model Tax Convention.

The possibility of requesting an APA is being introduced into the national legislation of a growing number of countries. In October 1999, the Committee for Fiscal Affairs of the OECD published further procedural guidance (hereinafter the APA Guidelines) for the provision of such advance certainty. The APA Guidelines constitute a detailed explanation of Paragraphs 4.124 to 4.166 of the OECD Guidelines. The APA Guidelines are included as an Annexe to the OECD Guidelines2. The present decree provides detailed guidance on the application of the APA Guidelines in the Netherlands' tax practice.

This decree is not aimed at violating the rights and obligations set out in the General Taxes Act. The provision by the Netherlands' tax authorities of certainty falls within the scope of the Decree on Fiscal implementation policy, standpoint provisions and appeals policy (the Decree of 21 July 1995 (No. AFZ 94/4519M), as amended by the Decree of 26 January 1998 (No. AFZ97/4609M) and as further expanded by the Decree on advance certainty and good faith between treaty partners of 30 March 2001 (No. BOB 2001/698M)).

Since an APA provides advance certainty on the determination of transfer prices in an international context, the consequences of this certainty will not be limited to the Netherlands' tax base. This is what distinguishes an APA from giving advance certainty in a national context.

1. Organisation

A request for an APA should be addressed to the competent tax inspector. The tax inspector will always submit the request to the APA/ATR team of the Tax Office (Large Enterprises) in Rotterdam for binding advice. The APA/ATR team of the Tax Office (Large Enterprises) in Rotterdam will consult with the Co-ordination Group on Transfer Pricing (CGTP) in respect of the possible policy related aspects associated with the request which have not been published yet as part of existing policy in order to ensure that policy is consistent in both principle and practice. One of the members of the APA/ATR team of the Tax Office (Large Enterprises) in Rotterdam will at the same time be a member of the Co-ordination Group on Transfer Pricing.

If a request for the conclusion of a bilateral APA is submitted, the APA/ATR team of the Tax Office (Large Enterprises) in Rotterdam will immediately send a copy of the request to the Co-ordination Group on Transfer Pricing and to the International Tax Policy and Legislation Directorate of the Ministry of Finance. The International Tax Policy and Legislation Directorate will, as the competent authority for the Netherlands, notify the competent authority of the other state concerned of the request in order to start the bilateral procedure.

In order to accelerate the procedure of bi- and multilateral APAs, associated entities that are involved in such APA requests are advised to submit a request simultaneously to the competent authority in all the other states concerned. This will allow the states to start the assessment of the request at the same time instead of successively.

2. Unilateral or bilateral

The proceedings of the Netherlands' tax administration will in principle be aimed at concluding a bilateral APA. The consultation with the competent authorities of treaty countries for the conclusion of bilateral APAs is based on Article 25 of the OECD Model Tax Convention. Although a bilateral APA provides advance certainty to both sides, the tax administration cannot prescribe its use by taxpayers. In addition, in order to be able to enter into a bilateral APA, the Netherlands must have entered into an agreement for the avoidance of double taxation with that state that contains a provision similar to Article 25 of the OECD Model Tax Convention. The other state must also be prepared to enter into such a preliminary consultation. These circumstances may prevent the conclusion of a bilateral agreement. In less complex cases, for example, when only limited functions are performed with which little risk is involved or in cases with sufficient comparable data available, an unilateral APA may be preferable.

In certain circumstances, a taxpayer may wish to seek advance certainty in more than two countries and requests a multilateral APA. The tax administration will, in principle, co-operate with such requests. Should one or more states have, however, any objections to such a procedure, the request will be regarded as a request for the conclusion of various separate bilateral APAs. The applicant will be informed by the Tax Office (Large Enterprises) in Rotterdam on the division of the request into various separate requests for bilateral APAs.

3. Scope of an APA

An APA may include all of the transfer pricing issues relating to a taxpayer. The taxpayer has, however, a certain amount of flexibility to limit the request to specified related entities or specific transactions. Reference is made to Paragraph 4.137 of the OECD Guidelines. This does not mean that an APA request will be assessed in isolation. In its assessment of the request, the tax administration takes into account all of the relevant facts and circumstances that relate to the transaction(s) for which advance certainty is requested, such as, for example, the organisational structure that is chosen.

4. Duration

An APA is valid for the period specified in the agreement. On the one hand, it is desirable to provide approval for as long as possible a period in order to assess the tax implications of a business decision in advance as accurately as possible. On the other hand, a long period makes the predictions as to the future conditions on which the request is based less accurate thereby potentially casting doubt on the reliability of the methodology used in the request. The applicant is required to indicate for what period the advance certainty is desired and to provide reasons to support the acceptability of the use of this period. The acceptability of the period will, in particular, depend on the character of the activities and the period for which the facts and circumstances that affect the determination of the transfer prices can be regarded as retaining their relevance. In principle, the duration of the arrangement will be limited to four or five years. Exceptions may be made relating to, for example, long-term contracts.

At the expiry of the agreed period, on the request by the taxpayer, the tax authorities will assess whether or not a new APA can be concluded under the same conditions.

5. Retroactive effect

Although an APA normally applies to future transactions, the transaction or transactions to which a request relates may already have taken place in whole or in part before agreement is reached on the APA request. Then an APA may in certain cases apply to the transactions already concluded, provided that the taxpayer has requested this retroactive effect.

In principle, a requirement for retroactive effect is that the relevant facts and circumstances in the relevant period in the past are comparable to the facts and circumstances that are the basis for the APA request. Should there be recognisable differences in the relevant facts and circumstances, such a request can be considered if the applicant can demonstrate that for these differences accurate adjustments can be made to eliminate the material differences. When a request is made for an unilateral APA, the tax administration will take a request for retroactive effect only into consideration when it has been established that the retroactive effect does not lead to a reduction of the taxable profits in the outstanding years, which could effectively lead to part of the profits not being taxed at all.

6. The APA request

Depending on the facts and circumstances of each case, the taxpayer will have to submit the following information to the tax administration:

(a) information on the transactions, products, business or arrangements that will be covered by the request (including, if applicable, a brief explanation of why not all of the transactions, products, business or arrangements of the taxpayer(s) involved in the request have been included);

(b) information about the enterprises and permanent establishments involved in these transactions or arrangements;

(c) the names of the other state or states to which the request relates;

(d) information regarding the worldwide organisational structure (including information on the beneficial owners of the applicant's capital), history, financial data, products and functions, including the assets (tangible and intangible) and risks of any of the associated enterprises involved;

(e) a description of the proposed transfer pricing methodology, including a comparability analysis which includes comparable data from unrelated market parties and possible adjustments;

(f) the assumptions underpinning the request and a discussion of the effect of changes in those assumptions or other events, such as unexpected results, which might affect the continuing validity of the request;

(g) the financial years to be covered; and

(h) a general description of market conditions, for example, industry trends and the competitive environment.

Ad e. Transfer pricing methodology

The tax administration will start the assessment of a request in accordance with Paragraph 4.9 of the OECD Guidelines from the perspective of the method as proposed by the applicant. It follows that the taxpayer is free, in principle, in his choice of a transfer pricing method, provided that the chosen method leads to an arm's length remuneration for the specific transaction for which advance certainty is requested. The taxpayer has to substantiate the choice for a specific method.

Ad f. Critical assumptions

An APA relates to remuneration for transactions that have not yet taken place. It is, therefore, necessary to include in the determination agreement the critical assumptions, for example, operational and economic circumstances that may affect remuneration for the transactions when they take place. The taxpayer should include a description of these critical assumptions in his request. The purpose of the critical assumptions is to protect both the taxpayer and the tax administration against the risk that the agreement leads to results that are not in accordance with the arm's length principle. The assumptions should be phrased in such a way that the certainty remains applicable when the elements that are covered by the critical assumptions stay within certain margins. This prevents the situation arising that, for every variation from the starting situation, the APA has to be revised or reconsidered. With this, flexibility is guaranteed. When the market share of a certain product influences the determination of the arm's length price, a range for the market share could be considered. Within such a range, a change in the market share is supposed not to influence the price. When an assumption is no longer valid, a review of (a part of) the agreement is, in principle, required.

An overview of possible critical assumptions is set out below. This overview is not exhaustive and serves only as an example, and includes:

(a) assumptions that show the consequences for the APA of the relevant changes in legislation, published policy or case law;

(b) assumptions regarding tariffs, duties, import restrictions and government regulations;

(c) assumptions regarding economic conditions, the market share, market conditions, the end selling price and sales volume;

(d) a description of the functions provided in the request, taking into account the assets used and the risks assumed by the enterprises that are involved in the transactions; and

(e) assumptions regarding exchange rates, interest rates, credit ratings and capital structure.

7. Assessment of the request

The facts as presented in the request will, in principle and where possible, be reviewed by the tax administration. The extent of this review will depend on the specific facts and circumstances of each case. Where necessary, further explanations and information will be requested from a taxpayer.

8. Exchange of information

As part of the determination agreement, the applicant is required to declare that the information as included in the APA is not subject to one of the exemption clauses set out in Article 13, Paragraph 3, of the International Assistance with Levying Taxes Act (Wet op de internationale bijstandsverlening bij de heffing van belastingen,WIB) regarding commercial, industrial or professional secrets. In this way possible conflicts between the tax administration and the applicant are avoided.

9. Determination agreements

In the case of a bilateral APA, the final consensus between the states involved will be recorded in an agreement between the states. In order to implement this bilateral agreement in the Netherlands, the tax administration will conclude a determination agreement with the same contents with the associated entities involved which are resident in the Netherlands. In the case of a unilateral APA, only the last form of determination agreement is concluded. The tax administration will take into account the framework for determination agreements, as described in the Decree of 1 December 1997 (No. AFZ97/2412). This decree includes a procedure on recording negative decisions on a request for a determination agreement. In this respect, the following should be noted. The orientational phase should not be regarded as constituting a form of consultation as defined in the above decree. There will only be a form of consultation for which a written record needs to be drawn up once the request in question is more or less fully consistent with the framework for APAs that is issued under the government's current policy. A decision by the tax inspector in this specific case not to conclude a determination agreement will be communicated to the taxpayer in writing. In this case, a record is drafted as described in the Decree of 1 December 1997 (No. AFZ97/2412).

The determination agreement will at least contain the following elements:

the names and addresses of the enterprises that are covered by the agreement;

the transactions, agreements or arrangements and financial years covered by the agreement;

a description of the agreed methodology and other related matters such as agreed comparable data or a range of expected results;

a definition of relevant terms that form the basis for applying and calculating the methodology, for example, sales, cost of sales, gross profit, etc.;

the critical assumptions upon which the methodology is based;

any agreed procedures to deal with changes in the factual circumstances that could occur during the term of the determination agreement, such that the effects that arise from relatively minor changes of facts and circumstances are set out in the determination agreement (the establishment of this adjusting mechanism prevents every change in facts and circumstances resulting in the termination of the validity of the determination agreement);

if applicable, the agreed tax treatment of related issues;

the terms and conditions that must be fulfilled by a taxpayer in order for the mutual agreement to remain valid, together with the procedures to ensure that the taxpayer fulfils these terms and conditions;

the provision that the determination agreement will be rendered invalid immediately upon a change in the relevant legislation (should a transitional arrangement have been made under which the determination agreement may remain in force for either the whole or part of its remaining period, the determination agreement will cease to be valid either at the end of the period specified in the transitional arrangement or, as the case may be, at the end of the remaining period of the determination agreement);

the declaration by the taxpayer that the information as included in the determination agreement is not subject to one of the exemption clauses specified in Article 13, Paragraph 3, of the WIB; and

the provision that the determination agreement will cease to be valid if the agreed transfer price or methodology is not actually set out in the contracts between the applicant and the associated enterprise or is not actually paid and/or received, unless otherwise agreed.

10. Tax audits

During periodic audits, which can be initiated by the competent tax inspector in respect of all taxpayers and, therefore, also with taxpayers with whom an APA has been concluded, it will be verified whether or not the transfer prices are set as agreed in the determination agreement. This will include a check on whether or not the critical assumptions in the determination agreement are still satisfied, and if not, whether or not the determination agreement requires adjustment or has ceased to be valid.

11. Exclusions

The Decree of 21 July 1995 (No. AFZ94/4519M), as most recently amended by the Decree of 26 January 1998 (No. AFZ97/4609M) and as further expanded by the Decree of 30 March 2001 (No. BOB2001/698M regarding good faith), sets out a general framework within which the tax administration is entitled to refuse to give advance certainty. In addition, the Decree on entities providing intra-group financial services without a real economic presence in the Netherlands; no advance certainty, exchange of information and limited opportunities for crediting withholding tax of 30 March 2001 (No. IFZ2001/294M) describes a number of specific situations in which no advance certainty is given. The Decrees in question apply equally to the conclusion of APAs.

12. Publication of APAs

With regard to the Decree of 21 July 1995 (No. AFZ94/4519M), as most recently amended by the Decree of 26 January 1998 (No. AFZ97/4609M), the policy underlying the decision to issue or, depending on the circumstances, to refrain from issuing, APAs will be published unless the relevant policy has been published before. The relevant APAs will be published either on an anonymous basis or -- if it is not possible to conceal the applicant's identity even if the name is not revealed and where the revelation of the applicant's identity may constitute a breach of the duty of confidentiality laid down in Article 67 of the General Tax Act -- in the form of a summary. In the latter case, the summary should contain all of the elements that have determined the policy pursued.

13. Entry into force

This Decree enters into force on 1 April 2001.

14. Cancellation of previous decrees

This Decree replaces the Decree of 19 October 1994 (No. IFZ94/855).