Transfer pricing

Transfer pricing, or transfer prices, are the prices that companies within a group charge for internal transactions, such as between parent and subsidiary companies. In cross-border transactions, the arm's length principle applies, treating trades as if they were between independent parties. This principle is enshrined in legislation, tax treaties, and OECD guidelines worldwide, forming the basis for effective transfer pricing policies.

Complying with transfer pricing rules prevents companies from artificially shifting profits to countries with lower tax rates. It also protects companies from tax risks, such as additional assessments, fines, and lengthy discussions with tax authorities over incorrect transfer pricing in internal transactions. A well-founded transfer pricing policy thus contributes to both tax compliance and financial stability.

Companies that conduct cross-border transactions between affiliated companies must demonstrate that these transactions occur at arm's length. Formal documentation requirements vary by country and are often linked to turnover or transaction thresholds. The purpose of this documentation is to demonstrate that the prices charged are market-based and in line with both local tax laws and international tax treaties, as well as OECD guidelines.

In the Netherlands, companies with a consolidated group turnover exceeding 50 million euros are required to prepare a Local File and a Master File. With global turnover exceeding €750 million, a Country-by-Country Report is added. Below this threshold, the obligation to substantiate the arm's length nature of internal transactions remains, but this is not subject to formal documentation requirements under the law.

Failure to comply with transfer pricing rules can have significant consequences. When internal transactions between affiliates are not substantiated or incorrectly documented, tax authorities may correct transfer prices and reallocate profits to another country. This can lead to double taxation, where two countries tax the same profit. Additional assessments, fines, and lengthy audits or legal proceedings may follow.

Besides financial risks, this also results in reputational damage and a deteriorated relationship with tax authorities. A well-founded and compliant transfer pricing policy is therefore essential to mitigate risks, ensure transparency, and create tax certainty. Adherence to the rules not only prevents sanctions but also contributes to the stability of international operations.

The arm's length principle is the global standard for setting transfer prices between affiliates. The premise is that internal transactions take place at arm's length, as if they were trade between independent parties. This principle is not just a theoretical guideline, but a legal obligation: it is enshrined in local legislation, tax treaties, and the OECD guidelines.

A well-founded transfer pricing policy and related documentation are essential for compliance with these rules. Failure or incorrect substantiation of the arm's length nature of transactions can result in significant tax risks, including additional assessments and fines. Moreover, solid policies provide transparency and predictability, which is essential for international business operations. The arm's-length principle helps create tax certainty and avoid disputes with tax authorities.