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Maurice tax session presentation dubai may Alliott Group conference 2011

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Alliott Group
Alliott Group

Borrie & Co is a tax law firm located in Rotterdam and Amsterdam with 120 staff and 10 partners. The document discusses transfer pricing and why it is important for multinational enterprises. Transfer prices refer to prices charged in related-party transactions, such as prices for goods, services, intellectual property, and loans. The arm's length principle requires comparing related-party transactions to uncontrolled transactions to ensure profits are appropriately allocated between jurisdictions. Non-arm's length transfer prices can result in tax savings but risk scrutiny from tax authorities. The Netherlands has thin capitalization rules to prevent corporate income tax base erosion through interest deductions on related-party debt.

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Borrie & Co Tax Lawyers The Netherlands Firm facts: Maurice Kruidenier  Located in Rotterdam, Amsterdam, Hilversum  120 staff, 10 partners
What is Transfer Pricing What are transfer prices? Transfer prices are prices charged in transactions between related parties (in multinational enterprises) Transfer prices can be:  Prices for goods  Prices for services including  Royalties for intellectual property (patents, copyrights, trademarks, other know-how)  Interest on related-party loans Transfer pricing is really about the allocation of (global) profits between entities residing in different jurisdictions
Why is it important 1994 or 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 earlier Argentina Australia Austria Belgium Brazil . Argentina Australia Austria Canada Chile China (People’s Argentina Belgium Republic Australia Brazil of) Austria Canada Colombia Belgium Chile Czech Argentina Brazil China Republic Australia Canada (People’s Denmark Austria Chile Republic Ecuador Belgium China of) Egypt Brazil (People’s Colombia Estonia Canada Republic Czech Finland Chile of) Republic France Argentina China Colombia Denmark Germany Argentina Australia (People’s Czech Ecuador Greece Australia Austria Republic Republic Egypt Hong Kong Austria Brazil of) Denmark Estonia Hungary Brazil Canada Colombia Ecuador France India Canada Chile Czech Egypt Germany Indonesia Chile China Republic Estonia Hungary Ireland Argentina China (People’s Denmark France India (Republic of) Australia (People’s Republic Estonia Germany Indonesia Israel Argentina Austria Republic of) France Hungary Israel Italy Australia Brazil of) Czech Germany India Italy Japan Austria Canada Czech Republic Hungary Indonesia Japan Korea Argentina Brazil Chile Republic Denmark India Italy Korea (Republic of) Australia Canada China Denmark Estonia Indonesia Japan (Republic of) Latvia Argentina Austria Chile (People’s Estonia France Italy Korea Latvia Lithuania Australia Brazil China Republic France Germany Japan (Republic of) Lithuania Luxembourg Austria Canada (People’s of) Germany Hungary Korea Latvia Luxembourg Malaysia Brazil Chile Republic Czech India India (Republic of) Lithuania Malaysia Mexico Canada China of) Republic Indonesia Indonesia Latvia Luxembourg Mexico Montenegro Chile (People’s Czech Denmark Italy Italy Lithuania Malaysia Montenegro Netherlands China Republic Republic Estonia Japan Japan Luxembourg Mexico Netherlands New Zealand (People’s of) Denmark France Korea Korea Malaysia Montenegro New Zealand OECD Australia Republic Czech Estonia Germany (Republic of) (Republic of) Mexico Netherlands OECD Peru Austria of) Republic France India Latvia Latvia Montenegro New Peru Philippines Brazil Czech Denmark Germany Indonesia Luxembourg Luxembourg Netherlands Zealand Philippines Poland Chile Republic France Indonesia Italy Mexico Malaysia New Zealand OECD Poland Portugal Czech Denmark Germany Italy Japan Montenegro Mexico OECD Peru Portugal Romania Australia Republic France Indonesia Japan Korea Netherlands Montenegro Peru Philippines Romania Russia Australia Austria France Germany Italy Korea (Republic of) New Netherlands Philippines Poland Russia Serbia Czech Czech Germany Indonesia Japan (Republic of) Latvia Zealand New Zealand Poland Portugal Serbia Singapore Republic Republic Indonesia Italy Korea Latvia Mexico OECD OECD Portugal Romania Singapore Slovak France France Italy Japan (Republic of) Mexico New Zealand Peru Peru Romania Russia Slovak Republic Germany Germany Japan Korea Latvia New OECD Philippines Philippines Russia Serbia Republic Slovenia Indonesia Indonesia Korea (Republic of) Mexico Zealand Peru Poland Poland Serbia Singapore Slovenia South Africa Australia Italy Italy (Republic of) Latvia New Zealand OECD Philippines Portugal Portugal Singapore Slovak South Africa Spain Czech Japan Japan Latvia Mexico OECD Philippines Poland Russia Russia Slovak Republic Spain Sri Lanka Republic Latvia Korea Mexico New Philippines Poland Russia Serbia Serbia Republic Slovenia Sri Lanka Sweden France OECD (Republic of) New Zealand Zealand Poland Russia Serbia Singapore Singapore South Africa South Africa Sweden Switzerland Germany Philippine Latvia OECD OECD Russia Singapore Singapore Slovak Slovak Sweden Sweden Taiwan Taiwan Indonesia s OECD Philippines Philippines Singapore Slovak Slovak Republic Republic Taiwan Taiwan (Republic (Republic Italy Poland Philippines Poland Poland Slovak Republic Republic South Africa South Africa (Republic (Republic of China) of China) Japan Singapore Poland Singapore Singapore Republic South Africa South Africa Sweden Sweden of China) of China) Thailand Thailand Poland Slovak Singapore Slovak Slovak South Africa Sweden Sweden Thailand Thailand Thailand Thailand Ukraine Turkey Singapore Republic Slovak Republic Republic Sweden Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine United Ukraine Slovak South Republic South Africa South Africa Ukraine United United United United United United Kingdom United Republic Africa South Africa Sweden Sweden United Kingdom Kingdom Kingdom Kingdom Kingdom Kingdom United Kingdom Sweden Sweden Sweden Ukraine Ukraine Kingdom United United United United United United States United States United United United United United United States States States States States States Venezuela Venezuela States States States States States States Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Vietnam Vietnam
General Consensus Article 9 of the OECD Model Tax Convention: The arm’s length principle [Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
Comparability The arm’s length principle requires  a comparison  of the conditions in  a controlled transaction with  the conditions in  transactions between independent enterprises. Not merely a comparison of prices, but all economically relevant characteristics of the situations being compared must be sufficiently comparable.
Example Company A Taxable profits 1.000 CIT 25% 250 Net profit 750 If the Company A can restructure its operations and subsequently shift 50% of its profits to a related Company B in a low tax jurisdiction (for example 10%) the following tax can be saved: Company A Taxable profits 500 CIT 25% 125 Net profit 375 Company B Taxable profits 500 CIT10% 50 Net profit 450 Tax savings would amount to (250-125-50) = 75
Example (2) Result: A decrease in profit potential of Company A and A decrease in the taxable base in the Netherlands Likely consequence: (Dutch) tax authorities will scrutinize the transfer of profits to Company B on the basis of the arm’s length principle Want to understand whether the intercompany transaction and subsequent remuneration for Company A and Company B is at arm’s length
Contact Details Borrie & Co Tax Lawyers Transfer Pricing and Tax Efficient Supply Chain Management Maarten Borrie Jan Leentvaarlaan 1 3065 DC Rotterdam The Netherlands PO Box 8565 3009 AN Rotterdam The Netherlands Tel +31 (0)10 266 77 33 Mob +31 (0)65 252 37 28 E-mail mborrie@borrie.nl
Dutch thin cap regulations Enacted in 1997 Anti abuse legislation against eroding the taxable base for the Corporate Income Tax (CIT)
Before 1997 example CIT base erosion NA Netherlands Antilles NA N.V. Interest taxed at 2,4%-3% Loan Interest NL NL B.V. Netherlands Interest deducted at 40% (loan returned as dividend)
CIT base erosion legislation (10a) For a company subject to Dutch CIT, interests and costs of a debt paid to an affiliated person, are not deductible, insofar the debt is connected to: a distribution of profits or a refund of capital, the acquisition or expansion of a share interest in an affiliated corporation,
CIT base erosion legislation (10a) Connected to: Very broad meaning, direct or indirect, for past and future debt! Affiliated: A corporation in which an 1/3 share interest is held; A corporation or natural person which holds an 1/3 share interest in the debtor. Escapes h)Debt was decisively incurred for commercial reasons; or •The interest is subject to an effective tax rate of 10%.
Example Interest subject to 2,4-3% tax NA NA N.V. 100% 100% Interest, not deductible! Loan NL NL NL B.V. Purchase B.V. Participation 100% of the shares
Thin Capitalization (10d) Interest paid on a debt to an affiliated corporation is not deductible if: The debtor is joined in a group. The interest paid to affiliated corporations exceeds the received interest from affiliated corporations. The debt vs equity ratio exceeds 3:1.
Thin capitalization 10d CIT  Group: corporations that are economically and organizationally linked.  3:1 debt vs equity ratio (safe harbour): Equity is always considered to be at least €1 + 500k. Surplus is not deductible.
Example Assets 10 mio Equity 1 mio Group loan 9 mio Safe harbor ratio (3:1) Calculation non deductible interest: (9 mio – 3*1 mio) -0,5 mio = 5,5 mio x 5%= 275k

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Maurice tax session presentation dubai may Alliott Group conference 2011

  • 1. Borrie & Co Tax Lawyers The Netherlands Firm facts: Maurice Kruidenier  Located in Rotterdam, Amsterdam, Hilversum  120 staff, 10 partners
  • 2. What is Transfer Pricing What are transfer prices? Transfer prices are prices charged in transactions between related parties (in multinational enterprises) Transfer prices can be:  Prices for goods  Prices for services including  Royalties for intellectual property (patents, copyrights, trademarks, other know-how)  Interest on related-party loans Transfer pricing is really about the allocation of (global) profits between entities residing in different jurisdictions
  • 3. Why is it important 1994 or 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 earlier Argentina Australia Austria Belgium Brazil . Argentina Australia Austria Canada Chile China (People’s Argentina Belgium Republic Australia Brazil of) Austria Canada Colombia Belgium Chile Czech Argentina Brazil China Republic Australia Canada (People’s Denmark Austria Chile Republic Ecuador Belgium China of) Egypt Brazil (People’s Colombia Estonia Canada Republic Czech Finland Chile of) Republic France Argentina China Colombia Denmark Germany Argentina Australia (People’s Czech Ecuador Greece Australia Austria Republic Republic Egypt Hong Kong Austria Brazil of) Denmark Estonia Hungary Brazil Canada Colombia Ecuador France India Canada Chile Czech Egypt Germany Indonesia Chile China Republic Estonia Hungary Ireland Argentina China (People’s Denmark France India (Republic of) Australia (People’s Republic Estonia Germany Indonesia Israel Argentina Austria Republic of) France Hungary Israel Italy Australia Brazil of) Czech Germany India Italy Japan Austria Canada Czech Republic Hungary Indonesia Japan Korea Argentina Brazil Chile Republic Denmark India Italy Korea (Republic of) Australia Canada China Denmark Estonia Indonesia Japan (Republic of) Latvia Argentina Austria Chile (People’s Estonia France Italy Korea Latvia Lithuania Australia Brazil China Republic France Germany Japan (Republic of) Lithuania Luxembourg Austria Canada (People’s of) Germany Hungary Korea Latvia Luxembourg Malaysia Brazil Chile Republic Czech India India (Republic of) Lithuania Malaysia Mexico Canada China of) Republic Indonesia Indonesia Latvia Luxembourg Mexico Montenegro Chile (People’s Czech Denmark Italy Italy Lithuania Malaysia Montenegro Netherlands China Republic Republic Estonia Japan Japan Luxembourg Mexico Netherlands New Zealand (People’s of) Denmark France Korea Korea Malaysia Montenegro New Zealand OECD Australia Republic Czech Estonia Germany (Republic of) (Republic of) Mexico Netherlands OECD Peru Austria of) Republic France India Latvia Latvia Montenegro New Peru Philippines Brazil Czech Denmark Germany Indonesia Luxembourg Luxembourg Netherlands Zealand Philippines Poland Chile Republic France Indonesia Italy Mexico Malaysia New Zealand OECD Poland Portugal Czech Denmark Germany Italy Japan Montenegro Mexico OECD Peru Portugal Romania Australia Republic France Indonesia Japan Korea Netherlands Montenegro Peru Philippines Romania Russia Australia Austria France Germany Italy Korea (Republic of) New Netherlands Philippines Poland Russia Serbia Czech Czech Germany Indonesia Japan (Republic of) Latvia Zealand New Zealand Poland Portugal Serbia Singapore Republic Republic Indonesia Italy Korea Latvia Mexico OECD OECD Portugal Romania Singapore Slovak France France Italy Japan (Republic of) Mexico New Zealand Peru Peru Romania Russia Slovak Republic Germany Germany Japan Korea Latvia New OECD Philippines Philippines Russia Serbia Republic Slovenia Indonesia Indonesia Korea (Republic of) Mexico Zealand Peru Poland Poland Serbia Singapore Slovenia South Africa Australia Italy Italy (Republic of) Latvia New Zealand OECD Philippines Portugal Portugal Singapore Slovak South Africa Spain Czech Japan Japan Latvia Mexico OECD Philippines Poland Russia Russia Slovak Republic Spain Sri Lanka Republic Latvia Korea Mexico New Philippines Poland Russia Serbia Serbia Republic Slovenia Sri Lanka Sweden France OECD (Republic of) New Zealand Zealand Poland Russia Serbia Singapore Singapore South Africa South Africa Sweden Switzerland Germany Philippine Latvia OECD OECD Russia Singapore Singapore Slovak Slovak Sweden Sweden Taiwan Taiwan Indonesia s OECD Philippines Philippines Singapore Slovak Slovak Republic Republic Taiwan Taiwan (Republic (Republic Italy Poland Philippines Poland Poland Slovak Republic Republic South Africa South Africa (Republic (Republic of China) of China) Japan Singapore Poland Singapore Singapore Republic South Africa South Africa Sweden Sweden of China) of China) Thailand Thailand Poland Slovak Singapore Slovak Slovak South Africa Sweden Sweden Thailand Thailand Thailand Thailand Ukraine Turkey Singapore Republic Slovak Republic Republic Sweden Ukraine Ukraine Ukraine Ukraine Ukraine Ukraine United Ukraine Slovak South Republic South Africa South Africa Ukraine United United United United United United Kingdom United Republic Africa South Africa Sweden Sweden United Kingdom Kingdom Kingdom Kingdom Kingdom Kingdom United Kingdom Sweden Sweden Sweden Ukraine Ukraine Kingdom United United United United United United States United States United United United United United United States States States States States States Venezuela Venezuela States States States States States States Venezuela Venezuela Venezuela Venezuela Venezuela Venezuela Vietnam Vietnam
  • 4. General Consensus Article 9 of the OECD Model Tax Convention: The arm’s length principle [Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly.
  • 5. Comparability The arm’s length principle requires  a comparison  of the conditions in  a controlled transaction with  the conditions in  transactions between independent enterprises. Not merely a comparison of prices, but all economically relevant characteristics of the situations being compared must be sufficiently comparable.
  • 6. Example Company A Taxable profits 1.000 CIT 25% 250 Net profit 750 If the Company A can restructure its operations and subsequently shift 50% of its profits to a related Company B in a low tax jurisdiction (for example 10%) the following tax can be saved: Company A Taxable profits 500 CIT 25% 125 Net profit 375 Company B Taxable profits 500 CIT10% 50 Net profit 450 Tax savings would amount to (250-125-50) = 75
  • 7. Example (2) Result: A decrease in profit potential of Company A and A decrease in the taxable base in the Netherlands Likely consequence: (Dutch) tax authorities will scrutinize the transfer of profits to Company B on the basis of the arm’s length principle Want to understand whether the intercompany transaction and subsequent remuneration for Company A and Company B is at arm’s length
  • 8. Contact Details Borrie & Co Tax Lawyers Transfer Pricing and Tax Efficient Supply Chain Management Maarten Borrie Jan Leentvaarlaan 1 3065 DC Rotterdam The Netherlands PO Box 8565 3009 AN Rotterdam The Netherlands Tel +31 (0)10 266 77 33 Mob +31 (0)65 252 37 28 E-mail mborrie@borrie.nl
  • 9. Dutch thin cap regulations Enacted in 1997 Anti abuse legislation against eroding the taxable base for the Corporate Income Tax (CIT)
  • 10. Before 1997 example CIT base erosion NA Netherlands Antilles NA N.V. Interest taxed at 2,4%-3% Loan Interest NL NL B.V. Netherlands Interest deducted at 40% (loan returned as dividend)
  • 11. CIT base erosion legislation (10a) For a company subject to Dutch CIT, interests and costs of a debt paid to an affiliated person, are not deductible, insofar the debt is connected to: a distribution of profits or a refund of capital, the acquisition or expansion of a share interest in an affiliated corporation,
  • 12. CIT base erosion legislation (10a) Connected to: Very broad meaning, direct or indirect, for past and future debt! Affiliated: A corporation in which an 1/3 share interest is held; A corporation or natural person which holds an 1/3 share interest in the debtor. Escapes h)Debt was decisively incurred for commercial reasons; or •The interest is subject to an effective tax rate of 10%.
  • 13. Example Interest subject to 2,4-3% tax NA NA N.V. 100% 100% Interest, not deductible! Loan NL NL NL B.V. Purchase B.V. Participation 100% of the shares
  • 14. Thin Capitalization (10d) Interest paid on a debt to an affiliated corporation is not deductible if: The debtor is joined in a group. The interest paid to affiliated corporations exceeds the received interest from affiliated corporations. The debt vs equity ratio exceeds 3:1.
  • 15. Thin capitalization 10d CIT  Group: corporations that are economically and organizationally linked.  3:1 debt vs equity ratio (safe harbour): Equity is always considered to be at least €1 + 500k. Surplus is not deductible.
  • 16. Example Assets 10 mio Equity 1 mio Group loan 9 mio Safe harbor ratio (3:1) Calculation non deductible interest: (9 mio – 3*1 mio) -0,5 mio = 5,5 mio x 5%= 275k