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NOW – Should you reconsider your cost-plus transfer pricing policy?

Monique Pisters Monique Pisters

For the NOW (Temporary Arrangement Compensation Labor Costs) the reduction of the turnover will be measured at the level of the Dutch company or a foreign company with a Dutch payroll. The subsidy is related to the percentage of the decrease in turnover. If a Dutch entity that is part of a Multinational Enterprise (MNE) earns a remuneration based on costs including a mark-up, this may lead to a stable income for the Dutch entity, while the rest of the MNE is in a loss-position following the corona crisis.

Temporary Arrangement Compensation Labor costs

Due to extraordinary circumstances, like the coronavirus, companies might have less or no work for their employees. As such the government introduced a new regulation, the ‘temporary arrangement compensation labor costs’ (NOW), aimed to compensate employers for wage costs when they are hit by a loss in turnover as a result of the coronavirus. This regulation will temporarily replace the current “werktijdverkorting-regulation”.

The new measure applies to employees with a permanent and a flexible employment contract. The main features of the new arrangement are as follows.

What is the compensation?
Companies expecting losses of turnover of 20% or more can request for compensation. Employers can be compensated for the wage costs of employees up to 90% of the salary costs. The amount of the compensation depends on the loss of turnover of a company.

Transfer pricing

Routine service entities
If a Dutch entity, which is part of an MNE, performs routine services, an at arm’s length remuneration might be determined on a cost-plus basis which is established in a transfer pricing policy.

The current circumstances with respect to the corona crisis in combination with the existing transfer pricing policy may lead to a situation where the turnover of the Dutch entity does not decrease at all, while the Group as a whole suffers significant losses.

Because the level of turnover of the Dutch entity remains the same as before the corona crisis, the Dutch entity cannot apply for the Temporary Arrangement Compensation Labor Costs.

Statement of Dutch Association of Tax Advisers
The Dutch Association of Tax Advisers brought the situation where a company no longer performs any services, to the attention of the Ministry of Finance. They are of the opinion that in such situations, regarding the revenue that qualifies for the Temporary Arrangement Compensation Labor Costs, not all costs should be included in the calculation of the cost-plus. If, for example, 90% of the production is lost, it is likely that a decrease in turnover for the Dutch entity should be taken into account.

View of Grant Thornton Netherlands
The corona crisis will likely have a significant impact on the global turnover of MNEs. Due to these extraordinary circumstances, the existing transfer pricing policy may have to be revised to be in line with the arm’s length principle. Losses that can be related to lower productivity should be properly allocated to entities of the MNE. Therefore, we would advise to take the following steps:

  1. Analyse and document the impact of the corona crisis on the value chain of the MNE and subsequently on the distribution of profits/losses within the MNE.
  2. Consider whether an adjustment is necessary to the cost base subject to mark-up of the Dutch entity.
  3. Consider whether an adjustment is necessary to the percentage mark-up to be applied on the (adjusted) cost base.
  4. Determine the decrease of turnover on a higher level in the value chain (i.e., the entity that the Dutch entity performs services for).

Revising the transfer pricing policy
As the OECD Transfer Pricing Guidelines state, transfer pricing is not an exact science. Business strategies are subject to change – especially in a crisis situation, business models may be revised. If it is decided that revising the transfer pricing policy as a result of the corona crisis is in line with the arm’s length principle, this decision should be documented and substantiated properly.


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