How Do US and Dutch Transfer Pricing Methodologies Differ?

Comparing the various transfer pricing methodologies available under US and Dutch laws, this series of articles examines and identifies which country’s body of law appears to be more substantive (i.e., provides more guidance for the taxpayers and tax authorities of that country) than does the body of law of the other country. My intention, however, is not to expressly conclude—or by implication, suggest—that one country’s law concerning transfer pricing is superior to the other. Rather, my intention is for these articles to serve as a useful resource for both US and Dutch tax professionals. Specifically, it is my hope that tax professionals from these two nations can utilize these articles in order to obtain a better understanding of what law is available to their counterparts as well as what their counterparts must adhere to and satisfy when negotiating a bilateral or multilateral advance pricing agreement with their respective taxing authority.

Overview of US and Dutch Taxation on Nonresidents

US Taxation
A non-US taxpayer is typically taxed in the US only on income from US sources. There are specific sourcing rules for periodic payments, such as interest, dividends, rents, or royalties. With certain exceptions, interest and dividends are generally sourced based on the residence of the payor. Rents are sourced based on where the subject property is located. Royalties are sourced based on where the property is used or where the property is located. Income from the disposition of real property located in the US is US-source income. Compensation for labor or personal services performed in the US is US-source income. The general sourcing rules, as well as other rules regarding foreign income, can be found in §861 through §863 and §865 of Title 26 of the US Code. A Dutch business entity must be cognizant of potential US tax exposure (in various types of situations where the 1994 Tax Convention does not provide tax relief) and therefore must also be tangentially aware of transfer pricing exposure in related-party transactions. See Moens, Scott, Andrus and Silhan, 6580 T.M., Foreign Income: US Inbound Business Tax Planning.

Dutch Taxation
On the other side of the Atlantic, Article 2(1) of CITA lists the entities that are subject to corporate income tax in the Netherlands. These entities are:

1. Public companies (Naamloze Vennootschap, N.V.);
2. Private companies (Besloten Vennootschap, B.V.);
3. Open limited partnerships (open commanditaire vennootshappen);
4. Cooperatives;
5. Mutual insurance associations;
6. Associations and other non-public entities to the extent they conduct business;
7. Mutual funds; and
8. Certain public legal entities.

See van Dam and Dijkstra, 6965 T.M., Foreign Income: Transfer Pricing: Rules and Practice in Selected Countries (M-P).

The eight different types of entities listed immediately above that are incorporated under Dutch law are deemed—pursuant Article 2(4) of CITA—to be residents of the Netherlands. Public and private companies as well as open limited partnerships that are not incorporated in the Netherlands or organized under Dutch law are treated as Dutch residents if they are effectively managed in the Netherlands. See van Dam and Dijkstra, 6965 T.M., Foreign Income: Transfer Pricing: Rules and Practice in Selected Countries (M-P).

Under Dutch law, a nonresident corporation is an entity that is neither effectively managed in the Netherlands nor organized under Dutch law. However, it may still be subject to Dutch taxation as a nonresident taxpayer if it is a qualifying entity that derives certain types of income from sources in the Netherlands. See Lukkien and van der Lans, 7250 T.M., Foreign Income: Business Operations in the Netherlands.

Pursuant to Article 3 of the Corporate Income Tax Act of 1969 (CITA), qualifying entities under Dutch law include: (1) legal entities that are recognized as having a legal personality under the laws of the country in which they were organized; (2) limited partnerships (without legal personality) with transferable shares and other associations without legal personality the capital of which is divided, either partially or completely, into shares; and (3) funds. See Lukkien and van der Lans, 7250 T.M., Foreign Income: Business Operations in the Netherlands.

Nonresident entities are subject to Dutch taxation based on the same categories of income as nonresident individuals. This includes business income derived from a Dutch permanent establishment (PE). See Lukkien and van der Lans, 7250 T.M., Foreign Income: Business Operations in the Netherlands.

Dividends, interest and royalties are included in a PE’s gross income only if it is effectively connected to a PE’s business. A nonresident business entity may also be subject to Dutch taxation pursuant to the following types of income: (1) income and capital gains related to real property located in the Netherlands; (2) income from profit-sharing rights in a business that is effectively managed in the Netherlands; (3) interest from a resident company, provided a nonresident company owns at least 5% of the outstanding shares of the resident company as an artificial arrangement or transaction and the non-resident company holds the shares with the main objective of income tax avoidance for the benefit of another person; (4) capital gains realized on the disposal of shares of or dividends received from a resident stock company under the same circumstances as set forth under no. 3 described immediately above; and (5) remuneration for formal directorships of Dutch resident companies and fees received for executive management activities provided to Dutch resident companies. See Lukkien and van der Lans, 7250 T.M., Foreign Income: Business Operations in the Netherlands.

Therefore, as a US business entity must be cognizant of potential Dutch tax exposure (in various types of situations where the 1994 Tax Convention does not provide tax relief), it must also be tangentially aware of transfer pricing exposure in related-party transactions.

The US Corporate Income Tax rate for 2022 was 21% of taxable income when this article was first prepared and presented as a CLE. It has not changed in the past three years.

The Dutch Corporate Income Tax rate for 2022 was 25.8% of taxable income. A lower rate of 15% applied to the first €395,000. Anything over that specified amount would be taxed at 25.8%. The standard Dutch CIT rate as of February 26, 2025 was still 25.8%. There are two taxable income brackets in 2025. A lower rate of 19% (15% in 2022) applies to the first income bracket of €200,000 (€395,000 in 2022). The standard rate applies to the excess of taxable income.

The Transfer Pricing Methods

Comparable Uncontrolled Price Method
The CUP method under both US law (26 C.F.R. §1.482-3(b)) and Dutch law (OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, ¶¶2.14-2.26) are similar in most respects. The taxing authorities of both nations rely on regulations that focus on the following elements: (1) the best method rule; (2) comparability; and (3) range.

When utilizing the CUP method in transactions involving intangibles, the Dutch tax practitioner should pay particular attention to the comparability of the intangibles or rights in intangibles in the controlled transaction to the potential comparable uncontrolled transaction. The economically relevant characteristics or comparability factors described in Section D.1 of Chapter I should be considered. The matters described in Sections D.2.1 to D.2.4 of Chapter VI are of particular importance in evaluating the comparability of specific transferred intangibles and in making comparability adjustments, where possible. See 2022 OECD TP Guidelines, ¶6.146.

In a CUP method transaction, the taxpayer and/or tax practitioner should remain cognizant of the fact that the Dutch government recently determined that it would go beyond bare reliance on OECD TP Guidelines when examining and interpreting the issue of range. The particulars as to any differences between OECD Guidelines and the Dutch government’s interpretation of range may be found in §2.6 of the June 14, 2022 Decree issued by the Directorate-General for Tax and Customs Policy for the Netherlands (Decree No. 2022/0000139020). Specifically, the State Secretary for Finance provided as follows:

“Sometimes it is possible to arrive at a single transfer price that reliably reflects the conditions of a transaction agreed at arm’s length. Because transfer pricing is not an exact science, however, it will often be the case that the application of one or more transfer pricing methods leads to a range of transfer prices based on a certain degree of comparability. This raises the following question: which observations are appropriate to determine the arm’s-length nature of the transaction (the arm’s-length range) and to which observation must an adjustment be made if the transfer price applied is outside that arm’s-length range.

“In determining an arm’s-length range, a distinction must be made between situations in which the comparables consist of highly reliable figures and a situation where use is made of comparables which, in terms of comparability, have shortcomings which cannot be qualified and/or quantified. In the first situation, the range is composed of all comparables. In the second situation, the use of statistical methods, such as the interquartile range, can improve the reliability of the comparables. The use of such statistical methods reduces the range, so that a relevant arm’s-length range remains which is expected to consist of better comparables.

“After the arm’s-length range has been determined, an assessment must be made to verify whether the price of the transaction(s) falls within this range. If the compensation falls within the range, no adjustments will be made (see paragraph 3.60). If the compensation falls outside the range and the taxpayer cannot provide adequate reasons for this, an adjustment will be made. In the first situation described in the previous paragraph, an adjustment can be made to any point in the range. If it is plausible that one specific point within the range best matches the conditions of the transaction, an adjustment should be made to this point. In the second situation described in the previous paragraph, I am of the opinion that an adjustment should be made to the median (see paragraph 3.62) to reduce the risk of errors due to unknown or unquantifiable comparability defects.”

Resale Price Method
The resale price method under both US law (26 C.F.R. §1.482-3(c)) and Dutch law (2022 OECD TP Guidelines, ¶¶2.27-2.44) are similar in most respects. Both taxing authorities use regulations which focus on the following elements: (1) best method rule; (2) comparability; and (3) range.

It is noteworthy that under Dutch law, the appropriate gross margin (the “resale price margin”) can be determined in one of two ways. The first way is through the resale of property by the tested party (the reseller) to an independent, third-party and the property at issue was initially purchased by the reseller at issue from an independent, third-party (internal comparable). The second way is through the resale of property by an independent, third-party to an independent, third-party and the initial purchase was from another independent, third-party. (external comparable). See 2022 OECD TP Guidelines, ¶2.28).

The US Treasury regulations do not expressly utilize the terms internal and external comparables. However, the Dutch tax practitioner should know the US Treasury regulations do, in fact, adopt the concept of internal and external comparables. 26 C.F.R. §1.482-3(c)(3)(ii)(A).

As to range, the taxpayer and/or tax practitioner should be aware of §2.6 of the June 14, 2022 Decree issued by the Directorate-General for Tax and Customs Policy for the Netherlands. Decree No. 2022/00001392020.

Cost Plus Method
The cost plus method under both US law (26 C.F.R. §1.482-3(d)) and Dutch law (2022 OECD TP Guidelines, ¶¶2.45-2.61) are similar in most relevant respects. Both taxing authorities utilize regulations which focus primarily on the following elements: (1) the best method rule; (2) comparability; and (3) range. In addition, under this method both authorities – through their respective laws and regulations – rely heavily on the utilization of gross profits.

Comparable Profits Method and the Transactional Net Margin Method
The comparable profits method is recognized under US law by 26 C.F.R. §1.482-5. Its counterpart under the OECD Regulations (and thus Dutch law) is the transactional net margin method (TNMM) found under 2022 OECD TP Guidelines, ¶¶2.64-2.113. They are essentially the same transfer pricing method. Each method compares the net profit margin of a controlled transaction to the net profit margins of comparable uncontrolled transactions in order to determine whether the price set in a controlled transaction is arm’s length.

Both methods utilize a number of elements we have seen before in other methods. Specifically, these elements are: (1) the best method rule; (2) comparability; and (3) range. As to range, the taxpayer and/or tax practitioner should be aware of §2.6 of the June 14, 2022 Decree issued by the Directorate-General for Tax and Customs Policy for the Netherlands. Decree No. 2022/0000139020.

The two methods require the use of: (1) an appropriate base (sales, costs or assets); (2) profit level indicators ratios; and (3) subsequent quotients.

There is one overall, comprehensive difference between these two methods which a taxpayer and/or tax practitioner will need to keep in mind. Specifically, 2022 OECD TP Guidelines, ¶¶2.74-2.113 provide far more guidance and detail compared to 26 C.F.R. §1.482-5 as to the utilization of profit level indicators ratios. In my opinion, the OECD TP Guidelines provide the Dutch tax practitioner with a thorough level of guidance, which, in turn, can provide that individual’s client a number of options during planning stages. These options can assist in avoiding issues arising as to net profits generated under the following bases: (1) sales; (2) costs; or (3) assets. 26 C.F.R. §1.482-5 (US), in my opinion, does not provide this same comprehensive level of detailed guidance.

26 C.F.R. §1.482-5 establishes costs, sales and assets as the appropriate bases under the comparable profits method. 26 C.F.R. §1.482-5(b)(4)(i)(ii); 26 C.F.R. §1.482-5(d)(1); 26 C.F.R. §1.482-5(d)(3); 26 C.F.R. §1.482-5(d)(6). This section also establishes the following profit level indicator ratios: (1) ratio of operating profit to operating assets (non-financial ratio); (2) ratio of operating profits to sales (financial ratio); and (3) ratio of gross profits to operating expenses (financial ratio). 26 C.F.R. §1.482-5(b)(4)(i)-(ii)(A)(B).

Continuing, 26 C.F.R. §1.482-5 establishes some limited guidance as to the following issues related to comparability: (1) functional risk and resource comparability (26 C.F.R. §1.482-5(c)(2)(ii)); (2) varying cost structures (such as age of plant and equipment), business experience, and management efficiency (26 C.F.R. §1.482-5(c)(2)(iii)); and (3) adjustments for differences between the tested party and the uncontrolled taxpayer as to assets and operating profits (26 C.F.R. §1.482-5(c)(2)(iv); 26 C.F.R. §1.482-1(d)(2)). Beyond that, however, 26 C.F.R. §1.482-5 provides very little further, substantive guidance as to comparability and the US tax practitioner may be left to render the best advice or argument he or she can muster based on the available facts and circumstances.

The Dutch tax practitioner does not face these same limitations. He or she can rely on the 2022 OECD TP Guidelines. Section B.3.1 of Chapter II provides substantive guidance as to the comparability standard to be applied to the TNMM. See 2022 OECD TP Guidelines, ¶¶2.74-2.81.

Section B.3.2 of Chapter II provides guidance as to the selection of the net profit indicator. See 2022 OECD TP Guidelines, ¶2.82.

Section B.3.3 of Chapter II provides substantive guidance as to the determination of the net profit. See 2022 OECD TP Guidelines, ¶¶2.83-2.91.

Section B.3.4 of Chapter II provides substantive guidance as to the weighting of the net profit. See 2022 OECD TP Guidelines, ¶¶2.92-2.95.

Section B.3.4.1 of Chapter II provides examples of the net profit when it is weighted to sales. See 2022 OECD TP Guidelines, ¶¶2.96-2.97.

Section B.3.4.2 of Chapter II provides examples of the net profit when it is weighted to costs. See 2022 OECD TP Guidelines, ¶¶2.98-2.102.

Section B.3.4.3 of Chapter II provides examples of the net profit when it is weighted to assets. See 2022 OECD TP Guidelines, ¶¶2.103-2.104.

Section B.3.4.4 of Chapter II provides guidance as to the identification of other profit level indicators. See 2022 OECD TP Guidelines, ¶2.105.

Section B.3.5 of Chapter II provides guidance relating to Berry ratios. See 2022 OECD TP Guidelines, ¶¶2.106-2.108.

Section B.3.6 of Chapter II provides additional guidance related to the use of non-transactional third-party data. See 2022 OECD TP Guidelines, ¶¶2.109-2.110.

Section B.4 of Chapter II provides examples of the application of the TNMM. See 2022 OECD TP Guidelines, ¶¶2.111-2.113.

In fairness, however, the US Treasury regulations do provide a number of examples pertaining to fact specific applications of the comparable profits method. Specifically, these examples are as follows:

1. Transfer of tangible property resulting in no adjustment;
2. Transfer of tangible property resulting in an adjustment;
3. Multiple year analysis;
4. Transfer of intangible property to offshore manufacturer;
5. Adjusting operating assets and operating profit for differences in accounts receivable; and
6. Adjusting operating profit for differences in accounts payable.

26 C.F.R. §1.482-5(e)(1)-(6).

Profit Split Method
The profit split method under both US law (26 C.F.R. §1.482-6) and Dutch law (2022 OECD TP Guidelines, ¶¶2.114-2.183) are similar in most respects. Both taxing authorities use regulations which focus on the best method rule and comparability.

As to range, the tax practitioner should be aware of §2.6 of the June 14, 2022 Decree issued by the Directorate-General for Tax and Customs Policy for the Netherlands (Decree No. 2022/0000139202). The tax practitioner should also remain cognizant of the fact that 26 C.F.R. §1.482-6 does not expressly include the element of range in the application of the profit split method under either the comparable profit split allocation analysis or the residual profit split allocation analysis.

Under the second step (allocation of residual profit), the residual profit is based on non-routine contributions. Unfortunately, the Treasury regulations do not provide a precise definition of non-routine contributions. In cases where such non-routine contributions are present, there normally will be an unallocated residual profit after the allocation noted in the first step (allocation of income into routine contributions). 26 C.F.R. §1.482-6(c)(3)(i)(B).

The taxpayer and/or tax practitioner should be aware of one difference in the implementation of this method under the two sets of law. Under Dutch law, the two most prolific profit approaches are known as: (1) the contribution analysis; and (2) residual analysis. Under US law, the two most prolific profit approaches are: (1) the comparable profit split allocation analysis; and (2) residual profit split allocation analysis.

The contribution analysis (Dutch) and the comparable analysis (US) are similar in most respects. However, under the Dutch analysis, the division of the relevant profits can be supported in one of two ways. The first means of support is through the use of comparable data. However, if no comparable data is available, the contribution analysis permits support through the utilization of internal information related to the associated controlled entities involved in the transaction at issue. This second method of support serves as a proxy for the division that independent enterprises would have achieved. Section §1.482-6 does not recognize a proxy method. Rather, the comparable profit split allocation analysis relies solely on external market benchmarks. See 2022 OECD TP Guidelines, ¶2.150; 26 C.F.R. §1.482-6(c)(2)(i)-(ii)(D)).

Analysis of Intangibles (Regardless of Method)

Controlled transactions may involve goods, intangibles and/or services. In controlled transactions involving goods—depending on the circumstances—any of the methods outlined in sections B1 through B5 of Part IV of this article can be applicable under either US or Dutch law.

The same is not true for controlled transactions involving intangibles (see supra). Under US law, only four methods are recognized as appropriate when faced with a controlled transaction involving intangibles: (1) the comparable uncontrolled transaction method (CUT); (2) the comparable profits method; (3) the profit split method; and (4) unspecified methods. 26 C.F.R. §1.482-4(a)(1)-(4).

Intangibles Under Dutch Law
The OECD TP Guidelines (and therefore Dutch law) provide that – depending on the circumstances – any of the five transfer pricing methods described in Chapter II of the 2022 OECD TP Guidelines may constitute the proper method in a controlled transaction involving intangibles. The Guidelines further establish, however, that the resale price method and the TNMM are not considered the most reliable methods in this type of transaction. Finally, the Guidelines determine that the CUP method and the profit split method are the two appropriate methods to utilize when determining whether a controlled transaction involving intangibles is arm’s length. See 2022 OECD TP Guidelines, ¶¶6.136, 6.141, 6.145.

It is noteworthy that the neither the OECD, the Dutch Ministry of Finance nor the Dutch Tax Authority officially recognizes the comparable uncontrolled transaction method (CUT). See 2022 OECD TP Guidelines, ¶6.153; van Dam and Dijkstra, 6965 T.M., Foreign Income: Transfer Pricing: Rules and Practice in Selected Countries (M-P).

The Dutch tax practitioner is obligated to refer to Chapter VI of the 2022 OECD TP Guidelines. The Dutch tax practitioner also has the benefit of relying on §5.1 through §5.5 of Decree No. 2022/0000139020. When added together, these two bodies of regulatory law provide a thorough foundation upon which to properly interpret a controlled transaction involving intangibles under a variety of established methods.

Dutch taxing authorities acknowledge that it can be difficult to determine the value of an intangible at the time of the transfer. Sufficient insight generally does not exist as to potential benefits and risks related to intangibles when the transfer is completed. Paragraph 6.185 of the 2022 OECD TP Guidelines notes that if independent entities would have agreed to a price adjustment clause in similar circumstances, then a tax authority should be permitted to determine the pricing based on such a clause. A price adjustment clause, in this context, is an agreement in which compensation is in line with the anticipated future benefits that the intangible asset generates. Agreeing to a benefits-dependent payment may help to ensure that taxation is more in line with the benefits actually achieved. See §5.2 of Decree No. 2022/0000139020).

The OECD TP Guidelines also leave open the possibility of a renegotiation of the price if independent parties would have considered subsequent events so fundamental that their occurrence would have led to a prospective renegotiation. See 2022 OECD TP Guidelines, ¶6.185.

The Dutch Tax Administration took the position in 2022 that it is not arm’s length to agree on a fixed price if the valuation at the time of the transaction is highly uncertain and, further, independent parties acting in a commercially rational manner would not have agreed on a fixed price in a similar situation. In such a case, an adjustment clause should be included in the agreement between the associated parties where the price is dependent, at least in part, on the future benefits generated by the intangible fixed asset. See Decree No. 2022/0000139020, §5.2.

An example of the situation outlined above would be where a unique intangible asset has been developed but soon after is transferred to a related entity. However, at the time of its transfer, its economic potential is still unknown due to the fact that it has not yet generated any revenue and the estimation of its future revenues is unknown. In such a case, an adjustment clause should be included in the agreement between the associated parties. See Decree No. 2022/0000139020, §5.2.

In the case of the transfer or licensing of intangible assets, as described in ¶6.189 of the 2022 OECD TP Guidelines, the Dutch Taxing Authority has conceded that it is difficult to assess value in relation to the present transactions. The difficulty lies in projecting any future value. In these cases, the Dutch Tax Administration is authorized to utilize data drawn from actual results realized with relevant intangible assets when assessing the arm’s-length nature of the price at
the time the transaction was entered. See Decree No. 2022/0000139020, §5.3.

Uncertainty notwithstanding, if both elements of the following two-part, conjunctive test are satisfied, the Dutch Tax Administration can evaluate the price set when the transaction was entered, with a reference to the results actually realized, if:

1. There are major discrepancies between the results achieved and the expectations/resulting forecasts that formed the basis for the price determination at the time of the transaction; and

2. These discrepancies cannot be explained based on facts and circumstances occurring after the date of the price determination.

See Decree No. 2022/0000139020, §5.3.

A major discrepancy is a difference of over 20% compared with the projections that formed the basis for the original price. The intangible assets will not be regarded as hard-to-value intangibles if such a discrepancy occurs subsequent to a five year period after revenues were first realized in a transaction involving the intangibles at issue with independent parties. See Decree No. 2022/0000139020, §5.3.

Intangibles Under US Law
The US tax practitioner has the benefit of relying on 26 C.F.R. §1.482-4. This section provides a thorough foundation upon which to properly interpret a controlled transaction involving intangibles under a variety of established methods.

The 1968 Treasury regulations were revised twenty-six years later, and these revised regulations stand as the current version of the Service’s interpretation of the Tax Code. However, the 1968 regulations – especially certain sections of 26 C.F.R. §1.482-1(d) and 26 C.F.R. 1.482-2 as well as 26 U.S.C. 351 of the Code – are key to understanding how intangible products and transfer pricing interact. See Maruca, 6900 T.M., Foreign Income: Transfer Pricing: The Code, The Regulations and Selected Case Law.

In 2017, Congress broadened the definition of intangible property. Under the current regulations, an intangible is anything that falls within one of the following six categories: (1) patents, inventions, processes, designs, patterns or know-how; (2) copyrights and literary, musical or artistic compositions; (3) trademarks, trade names or brand names; (4) franchises, licenses or contracts; (5) methods, programs, systems, procedures, campaigns, surveys, studies, forecasts, estimates, customer lists or technical data; and (6) other similar items if they derive their value primarily from intellectual content or other intangibles rather than from their physical attributes. 26 C.F.R. §1.482-4(b)(1)-(6); see Maruca, 6900 T.M., Foreign Income: Transfer Pricing: The Code, The Regulations and Selected Case Law.

The complexity of valuing intangibles transfers has resulted in many unilateral, bilateral, and multilaterial APAs; but it has also resulted in significant litigation. See Maruca, 6900 T.M., Foreign Income: Transfer Pricing: The Code, The Regulations and Selected Case Law.

In the 2017 tax act, Congress added 26 U.S.C. §367(d)(2)(D), which provides that the Secretary shall require: (1) the valuation of transfers of intangible property, including intangible property transferred with other property or services, on an aggregate basis, or (2) the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers. See Maruca, 6900 T.M., Foreign Income: Transfer Pricing: The Code, The Regulations and Selected Case Law.

The 2017 tax act also amended 26 U.S.C. §482 by adding the following sentence to the end of the statute:

“For purpose of this section, the Secretary shall require the valuation of transfers of intangible property (including intangible property transferred with other property or services) on an aggregate basis or the valuation of such a transfer on the basis of the realistic alternatives to such a transfer, if the Secretary determines that such basis is the most reliable means of valuation of such transfers.”

See Maruca, 6900 T.M., Foreign Income: Transfer Pricing: The Code, The Regulations and Selected Case Law.

Analysis of Services (Regardless of Method)
The Dutch tax practitioner has the option of referring to Chapter VII of the 2022 OECD TP Guidelines. The Dutch tax practitioner also has the benefit of relying on §6.1 through 6.3 of Decree No. 2022/0000139020. When added together, these two bodies of law provide a thorough foundation upon which to properly interpret a controlled transaction involving services under a variety of established methods.

Under the 2022 OECD TP Guidelines, the Dutch Ministry of Finance determined that intra-group services exist if an activity is carried out for the benefit of a group member that adds economic or commercial value and for which that group member would normally be willing to pay. This does not include activities that are carried out in the capacity of a shareholder. See Decree No. 2022/0000139020, §6.

With regard to the method to be used in determining the transfer price for a service, a choice can be made between one of the two following options: (1) application of the arm’s-length principle using one of the five transfer pricing methods recognized by the OECD outlined in §6.1 of the 2022 Decree; or (2) a simplified method for low value-adding intra-group services as outlined in §6.2 of the 2022 Decree. See Decree No. 2022/0000139020, §6.

In practice, it appears that a cost-based remuneration based on the TNMM is often chosen. A functional analysis will typically be carried out to determine whether the remuneration for the intra-group services in question should be determined in this manner. This approach will typically be applied only to routine services. Moreover, when applying this approach (remuneration based on costs), an arm’s-length remuneration can, in principle, only exist if a suitable profit mark-up is considered when determining the remuneration. See Decree No. 2022/0000139020, §6.1.

The US tax practitioner has the benefit of relying on 26 C.F.R. §1.482-9. This sub-section provides a thorough foundation upon which to properly interpret a controlled transaction involving services under a variety of established methods.

As previously presented, the US taxpayers under 26 C.F.R. §1.482-9 can utilize the following methods when dealing with a controlled transaction involving services: (1) the services costs method; (2) the comparable uncontrolled services price method; (3) the gross services margin method; (4) the cost of services plus method; (5) the comparable profits method; (6) the profit split method; and (7) unspecified methods. See 26 C.F.R. §1.482-9(a)(1)-(7).

Conclusion

Chapter III of the 2022 OECD TP Guidelines
A note regarding Chapter III of the 2022 OECD TP Guidelines is in order. This chapter provides guidance concerning comparability analysis. The Dutch tax practitioner will undoubtedly be well versed with this chapter. The US tax practitioner should therefore be familiar with this chapter as well if engaged in drafting a bilateral or multilateral advance pricing agreement involving a controlled Dutch business entity.

Chapter III sets forth two approaches—the additive and the deductive—as possible ways in which to either select or reject comparables. See 2022 TP OECD TP Guidelines, ¶¶3.41-3.46.

Continuing, as to comparability adjustments, Chapter III addresses the following: (1) the different types of comparability adjustments; (2) the purpose of comparability adjustments; (3) the reliability of any adjustments; and (4) documenting and testing comparability adjustments. See 2022 OECD TP Guidelines, ¶¶3.47-3.54.

Chapter III provides guidance as to the issue of range; specifically, as to: (1) general background issues; (2) the selection of the most appropriate point in a range; and (3) comparability considerations in situations involving extreme losses or unusually high profits. See 2022 OECD TP Guidelines, ¶¶3.55-3.66.

Finally, Chapter III outlines an accepted (though not compulsory) nine-step process that can be followed when performing a comparability analysis. See 2022 OECD TP Guidelines, ¶¶3.4-3.6.

Cost Sharing Agreements and Cost Contribution Arrangements
As previously presented, cost sharing arrangements (CSAs) under US law fall under 26 C.F.R. §1.482-7. Part II of this article provided a brief overview of CSAs.CSAs’ counterparts under Dutch law are cost contribution arrangements (CCAs). A detailed comparison between these similar arrangements is beyond the scope of this article. However, I would recommend the reader examine this thorough and well-reasoned Chapter of the 2022 OECD TP Guidelines. See generally 2022 OECD TP Guidelines, ¶¶8.1-8.53.

The Advance Pricing Agreement Option
When faced with a potential transfer pricing issue, the tax practitioner (whether Dutch or American) has two options. The first is to go it alone and try to structure the transaction so that it will not trigger the attention of the respective taxing authority. Proper utilization of any applicable transfer pricing methodology (depending on the type of transaction) outlined in this article is advised at any stage of the transaction; but especially at the outset.

The second option would be the formation of a bilateral advance pricing agreement involving both the Dutch and US taxing authorities. Bilateral advance pricing agreements involving US and Dutch transactions will be the subject of my next article.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Patrick Beattie‘s practice areas include tax planning, tax controversy, estate planning, insurance coverage actions, toxic tort litigation, and commercial litigation in the Philadelphia area.

This article, initially prepared as a continuing legal education class at the Jenkins Law Library in Philadelphia in 2022, has been extensively modified and additional sections, including content on the revised 2022 OECD TP Guidelines and the Dutch Ministry of Finance’s new decree replacing Decree 2018/6865, have been added prior to publication. The information contained herein is of a general nature and based on authorities that are subject to change. This article represents the views of the authors only and are for informational purposes only.