There is a particular kind of pressure in a cross-border tax examination that a domestic one never produces: two authorities, in two countries, looking at the same transactions from opposite sides, each with an incentive to tax the same profit. Handled well, it resolves. Handled badly, it produces the outcome a cross-border structure most fears, which is the same income taxed twice with no relief.
The two authorities want opposite things
When a group prices a transaction between two of its entities, one country’s authority may argue the price was too high, shifting profit out of its jurisdiction, while the other argues it was too low, shifting profit into the first. Both cannot be right, but both can assess, and if they do, the group is taxed twice on the same margin. This is the structural risk of a transfer pricing examination that spans borders, and it is why the two examinations cannot be handled as if they were separate. What is conceded to one authority may be handed as a weapon to the other.
Consistency is the first discipline
The group’s position has to be the same in both countries, because the fastest way to lose is to tell two authorities two different stories. A transfer pricing policy that reflects the real functions, assets and risks, documented consistently, is the foundation, and a group that has that documentation enters the examination defending a position rather than inventing one. We set out what that documentation requires in our note on master file and local file in the Netherlands, and what an authority looks for in our note on what the Belastingdienst looks for in a transfer pricing review.
Two authorities examining the same margin is not two problems. It is one problem seen from both ends, and it has to be answered with one consistent story.
The mechanisms to resolve double taxation
Where both authorities do assess, there are routes to relief that exist precisely for this situation. The mutual agreement procedure allows the two tax authorities to negotiate between themselves to eliminate the double taxation, and within the European Union there are dispute resolution mechanisms with binding timelines. These are not automatic and they are not fast, but they exist, and a group facing double taxation should invoke them rather than absorbing the cost. The existence of these routes is also why advance certainty, through an advance pricing agreement, is so valuable, as we describe in our note on advance pricing agreements and rulings.
Manage the two timelines
Two examinations run on two timetables, with two sets of deadlines, information requests and procedural rights. Missing a deadline in one country can prejudice the position in both, and information given to one authority may reach the other. The examinations have to be coordinated as a single exercise, with advisers in both countries working to one strategy rather than each defending its own front. This is the same coordination discipline we describe across our cross-border work.
What to have done before it happens
The groups that come through a dual examination well are the ones that prepared for it before it arrived: a defensible transfer pricing policy, consistent documentation, and where the stakes justify it, advance certainty from the authorities. The groups that struggle are the ones whose intercompany pricing was never documented and is now being reconstructed under examination. Our note on our auditor has flagged our intercompany pricing deals with the earlier warning that often precedes exactly this situation.
If you are facing this, we can help. Montclare handles exactly these situations for international businesses and families. Our services are set out on our services page.
This article is informational and does not constitute tax, legal or financial advice. The right course depends on the facts. Each engagement is subject to scope and applicable regulation.