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, why it was selected over the alternatives, 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 recognised methods are the recognised methods: CUP, resale price, cost plus, TNMM and profit split, and inspectors are not typically hostile to a well-reasoned TNMM on a routine distributor. What draws attention is a method selected because it produced a convenient answer, evidenced by a rejection of the alternatives 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. 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. It typically covers:
- intercompany agreements in force during the years under review, including amendments and any side letters;
- the Master File and Local File, required where consolidated group turnover is at least €50 million, and the Country-by-Country report, required where it is at least €750 million;
- the underlying article 8b documentation showing how prices were determined, which applies irrespective of any turnover threshold;
- the benchmarking study, with the raw search strategy and the accept/reject reasoning, not only the final comparable set;
- segmented profit and loss data by entity and by transaction type;
- board minutes, delegation of authority matrices and signature schedules;
- organisational charts by headcount and function, with role descriptions for key staff;
- internal correspondence relating to the pricing arrangement and to the transactions themselves.
The last item is the one 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. 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. Where a taxpayer has not maintained a record showing how its transfer prices were determined, the burden of demonstrating that the prices are arm’s length is treated as resting with the taxpayer rather than the inspector, which is a materially different position from the one in which most tax disputes are conducted. If matters escalate to a formal information order, the evidential position deteriorates further.
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 in force since 1 January 2022 restrict downward adjustments in the Netherlands where no corresponding upward adjustment is recognised in the counterparty jurisdiction; the informal capital positions that once absorbed such asymmetries no longer produce the same result. 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. 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 turnover of €340 million, squarely within the Master File and Local File regime. 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, but 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% top-bracket corporate income tax rate that is additional corporate income tax of approximately €3.41 million, before belastingrente 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 recognise. 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.