A transfer pricing review seldom opens with an attack on a margin. It opens with a request for documents and a sequence of questions whose purpose is not, at first, to test whether a price is arm’s length at all, but to establish whether the group’s own account of itself holds together: whether the contracts, the documentation and the observable conduct of the people involved describe the same business. Groups that lose these reviews rarely lose them on the economics. They lose them because three versions of the same arrangement exist and only one was written down.
The review begins with coherence, not comparables
The first phase of a Belastingdienst review is a reconciliation exercise. The inspector has, or will shortly have, three bodies of material: the intercompany agreements, the transfer pricing documentation, and the operational record of what the group actually did. The question underlying the first round of correspondence is whether those three align.
The ordering is deliberate. Benchmarking is only meaningful once the functional profile is settled: there is no point debating whether a net margin sits inside an interquartile range if the entity earning it performs functions the range was never built to price. The facts come first, and they are established by looking for contradictions between sources produced at different times, by different people, for different purposes.
That is why a review feels oddly indirect at the start. Questions about who signs off on pricing, who approves capital expenditure and who negotiates with key customers are not preliminaries. They are the review.
The order in which the questions arrive
In practice the sequence is fairly consistent. It begins with the structural: group chart, related-party transactions, the intercompany agreements governing them, and the Local File. Then it narrows to the functional: who performs which activities, with which staff, bearing which risks, and with what decision-making authority. Only then does it reach the financial: the method selected and the basis on which it was selected, the tested party, the profit level indicator, the comparable set and the search criteria used to build it.
The method discussion is usually the shortest part. The recognized methods are the recognized methods: CUP, resale price and cost plus among the traditional transaction methods, and the transactional net margin method and the transactional profit split among the transactional profit methods, as paragraph 2.1 of the OECD Transfer Pricing Guidelines sets them out, and inspectors are not typically hostile to a well-reasoned TNMM on a routine distributor. It is worth being exact about what the selection actually requires, because the point is often overstated. The standard is the most appropriate method for the particular case, which paragraph 2.2 of the same Guidelines frames by reference to the strengths and weaknesses of the recognized methods, the nature of the controlled transaction as determined by the functional analysis, the availability of reliable information and the degree of comparability. What that standard is not is a best method rule. The same paragraph states that it is not necessary to prove that a particular method is unsuitable in the circumstances, and the Verrekenprijsbesluit 2022 is explicit that a taxpayer need not assess every method and then argue why the one chosen produces the best outcome, while equally explicit that the choice made does have to be substantiated. The same decree records that the Belastingdienst will always begin its examination from the perspective of the method the taxpayer applied at the time of the transaction. What draws attention, then, is not a thin survey of the alternatives but a method selected because it produced a convenient answer, evidenced by reasoning that reads as though it was written after the number was chosen.
Where intangibles are involved, the questions turn to DEMPE almost immediately: development, enhancement, maintenance, protection and exploitation. The inspector will want to know which entity’s personnel perform each function and who controls the associated risk. This is the analysis that came out of Actions 8 to 10 of the OECD and G20 base erosion and profit shifting project, and it now sits in Chapter VI of the Guidelines, where paragraph 6.32 records that although the legal owner of an intangible may receive the proceeds of exploitation, other group members that performed functions, used assets or assumed risks contributing to its value must be compensated for those contributions. The Verrekenprijsbesluit 2022 takes the same line from the Dutch side, adding that the DEMPE functions are weighted rather than counted, with development and enhancement generally carrying more weight than maintenance, protection and exploitation, and that a legal owner performing none of the relevant functions can be allocated only a relatively limited return. Legal ownership is the starting point of that conversation and almost never the end of it.
What is actually requested
The request is broader than the statutory package, and much of it sits outside the tax function. Its legal basis is wider than the transfer pricing rules themselves: article 47 of the Algemene wet inzake rijksbelastingen obliges a taxpayer to provide the inspector, on request, with the information relevant to its taxation and to make available the books, records and other data carriers whose consultation may matter for establishing the facts that bear on it, with the inspector, not the taxpayer, choosing whether to be given those records themselves or their contents. That is why the request reaches well past the tax file.
It starts with the intercompany agreements in force during the years under review, amendments and any side letters included, because those are the group’s own statement of what the arrangement is and everything produced afterwards is read against them. The statutory package follows. The Master File and Local File are governed by article 29g of the Wet Vpb 1969, which requires a Dutch taxpayer belonging to a multinational group to include both in its administration within the period set for filing its corporate income tax return, and whose fourth paragraph sets the threshold at consolidated group revenue, geconsolideerde groepsopbrengsten, of at least €50 million in the financial year immediately preceding the year the return covers. The measure is group revenue on a consolidated basis, not the Dutch entity’s own net turnover, and the distinction decides membership of the regime in a good many borderline cases. The Country-by-Country report sits in article 29c, whose fifth paragraph disapplies the reporting duty to groups that achieved less than €750 million of consolidated group revenue in the immediately preceding reporting year, so that the obligation bites at or above that figure. The two figures have very different pedigrees, and the difference matters to any group with operations outside the Netherlands. The €750 million comes from Action 13 of the base erosion and profit shifting project, which set country-by-country reporting at annual consolidated group revenue of €750 million or more in the immediately preceding fiscal year and made it a minimum standard, which is why the same figure recurs across jurisdictions. The €50 million has no such origin. Action 13 framed the three-tier package, but it placed the Master File and the Local File outside the minimum standard and left their materiality thresholds to each jurisdiction, so the €50 million in article 29g is a purely Dutch number. It determines nothing about whether local documentation is required in any other country, and a group operating in several has to test each of them against its own rules. Beneath both sits the underlying article 8b documentation showing how prices were determined, which is requested irrespective of any revenue threshold and therefore reaches groups well below either figure.
From there the request moves to the workings behind the numbers. The benchmarking study is asked for with the raw search strategy and the accept or reject reasoning attached, not only the final comparable set, so that a conclusion can be followed back to the steps that produced it, and segmented profit and loss data by entity and by transaction type is asked for alongside it, because a consolidated result says nothing about what any single transaction earned.
Then the request leaves the tax file altogether. Board minutes, delegation of authority matrices and signature schedules record who was entitled to decide what. Organizational charts by headcount and function, with role descriptions for key staff, show where the people who perform those functions actually sit. Last comes the internal correspondence relating to the pricing arrangement and to the transactions themselves, and that is the material that does the damage.
The documentation duty under article 8b of the Wet Vpb 1969 is not a filing obligation with a threshold; it is a standing requirement that the administration contain a record of how prices were set. The third paragraph of the article puts it in those terms, requiring the related entities to include in their administration the data from which it appears how the transfer prices were arrived at and from which it can be determined whether those prices reflect conditions that independent parties would have agreed. That record is compared against everything else the group produced without a tax audience in mind.
The functional chart against the internal email
Of all the contradictions a review can surface, the most damaging is the gap between the functional analysis and the group’s own internal communications. A functional analysis is an assertion prepared for a reader. An internal email is evidence of conduct. When they disagree, the inspector has no difficulty deciding which one describes the business.
The pattern recurs. The Local File describes a Dutch entity as a limited-risk distributor under central direction. The correspondence shows the Dutch commercial director setting discount policy, approving credit terms for the largest accounts and deciding which product lines to discontinue. Or the file places entrepreneurial risk with a foreign principal whose staff appear in the correspondence only to countersign decisions taken elsewhere.
A transfer pricing file is not an account of what a group would like to have happened. It is an account of what happened, written before anyone asked.
Once such a contradiction is on the table, the review changes character. The inspector is no longer testing a margin against a range but rebuilding the functional profile from primary evidence, and the group’s own documentation has become an exhibit for the other side.
What the burden of proof means when there is no file
The documentation requirement in article 8b is procedurally consequential, but it is worth being precise about how, because the point is frequently put too strongly. The third paragraph attaches no sanction of its own and reverses nothing by its own terms. What it does is settle who is left explaining. Where a taxpayer has not maintained a record showing how its transfer prices were determined, it is the taxpayer who must make the arm’s length character of those prices plausible, for the simple reason that its administration contains nothing from which that character follows.
The harder consequence sits elsewhere, in the general tax code rather than in article 8b. Where a request under article 47 is not met, the inspector may record the failure in a formal information order, an informatiebeschikking, under article 52a of the Algemene wet inzake rijksbelastingen, which also covers a failure to comply with the general administration duty in article 52. Once such an order has become irrevocable, article 27e requires the court to dismiss the appeal unless the taxpayer has shown that, and to what extent, the decision on objection was wrong. That is where the burden is genuinely reversed and raised, and it follows from the information order, not automatically from a thin file.
The practical effect is that the inspector may advance a reasoned position and the group must displace it. Where that position concerns returns from an intangible developed over several years by staff whose activities were never contemporaneously recorded, displacing it retrospectively is difficult and expensive.
Two further points shape the outcome. First, the mismatch rules applying to financial years beginning on or after 1 January 2022 restrict downward adjustments in the Netherlands. Article 8bb of the Wet Vpb 1969 disregards a downward adjustment of profit on a relationship with a related entity to the extent the taxpayer does not make it plausible that a corresponding upward adjustment is taken into account in a profits tax at that entity, and article 8bd applies a parallel logic to capital transactions, capping the book value of an asset acquired from a related entity by way of capital contribution, profit distribution, repayment of paid-in capital or liquidation payment at the value taken into account abroad. It is worth being exact here too: the informal capital doctrine was not abolished, and article 8b continues to determine the arm’s length profit. What changed is that the Dutch downward leg is now set aside unless the corresponding upward leg abroad is demonstrated, so the informal capital positions that once absorbed such asymmetries no longer produce the same result. Article 35 carries the transitional rules, which reach depreciable business assets acquired from a related entity in book years beginning on or after 1 July 2019 and before 1 January 2022.
Second, a Dutch upward adjustment does not automatically produce relief abroad. Relief generally requires a mutual agreement procedure, and while the EU dispute resolution rules provide a defined timetable and, in principle, access to arbitration, outside the EU the position depends on the treaty. The Besluit Onderlinge overlegprocedures sets out how the Dutch competent authority runs those procedures, and the shape of the EU route is visible in it: a request under the Wet fiscale arbitrage must be made within three years of the first notification, the competent authority decides on admissibility within six months, the mutual agreement period is two years and can be extended by at most one further year, and arbitration becomes available if no agreement is reached within it. Either way the process takes years, and the exposure in the meantime is the gross adjustment.
A worked example: a royalty that outran its functions
Consider a group with consolidated group revenue of €340 million, squarely within the Master File and Local File regime and comfortably below the country-by-country threshold. A Dutch operating company records third-party net sales of €120 million a year and pays a royalty of 4% of net sales, €4.8 million annually, to a related intangible-holding company for the group’s product technology and brand. The arrangement rests on a licence agreement and a Local File treating the Dutch entity as a licensee performing manufacturing and distribution functions.
The review covers four financial years. The inspector requests headcount by function and finds the entire product development team, thirty-one people, employed by the Dutch company throughout the period. Project approvals, budget decisions and the decision to abandon two development programmes were taken in the Netherlands. The intangible-holding company has two employees, neither with a technical background, and funds development through intercompany loans.
The inspector accepts that the intangible owner performs a funding function and controls the associated financial risk, and allows a return on that funding, which is the outcome paragraph 6.61 of the OECD Transfer Pricing Guidelines describes, where a party providing funding that controls the financial risk but assumes no other specific risk can generally expect only a risk-adjusted return on that funding. The inspector concludes that development, enhancement and protection sit with the Dutch entity. The royalty is reduced from 4% to 1.25%, or €1.5 million a year. The adjustment is €3.3 million a year and €13.2 million across the four years; at the 25.8% rate that article 22 of the Wet Vpb 1969 applies to the taxable amount above €200,000 that is additional corporate income tax of approximately €3.41 million, before the belastingrente that article 30fc of the Algemene wet inzake rijksbelastingen charges on an additional assessment, accruing over the period.
The counterparty jurisdiction has meanwhile taxed the full royalty receipts. Set against that exposure, a contemporaneous DEMPE analysis and a supporting royalty benchmark, prepared at the outset and refreshed periodically, would have been a defined and modest cost. Their absence left the group carrying the burden of proof on the single question the review turned on.
A prepared file against a reconstructed one
The difference between the two is visible almost immediately, and inspectors read it accurately. A prepared file contains a functional analysis that matches the agreements, agreements that match the invoices, and a method selection written before the results were known. Its comparable set has an audit trail. It has been refreshed when the business changed, and where it changed without the file changing, the file says so and explains why the conclusion still holds. Reviews of such files narrow quickly to two or three genuine points of disagreement, which is a manageable outcome.
A reconstructed file behaves differently. It is internally consistent, because it was written all at once, but inconsistent with everything around it. Dates cluster, and agreements are signed years after the transactions they govern. The functional analysis describes an operating model the correspondence does not recognize. Every answer produces two further questions, and the review broadens rather than narrows.
This is not primarily a documentation problem. It is a design problem that surfaces as one, and it is why a group’s transfer pricing position is best settled when the structure is put in place, whether that is a Dutch holding structure being established for the first time or an existing arrangement spanning several European jurisdictions. A file that documents a coherent arrangement is a straightforward exercise. A file that has to explain an incoherent one is not a file; it is a defence.
Montclare has published a short self-assessment, the Transfer Pricing Readiness Check, which sets out ten questions that identify where a group’s exposure sits. It can be downloaded from our transfer pricing page.
This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.