Understanding the Dutch MAP Decree and its Application in Transfer Pricing Disputes

In the complex world of international taxation, transfer pricing disputes often arise when multinational enterprises (MNEs) operate across different jurisdictions. These disputes can lead to double taxation, where the same income is taxed in more than one country, posing significant challenges for businesses. To address such issues, various mechanisms are in place, including the Mutual Agreement Procedure (MAP) and unilateral corresponding adjustments. In this blog, we delve into the theory behind the Dutch MAP decree and explore one recent practical case involving a Dutch company within a European-headquartered group and how we unilaterally successfully resolved the double tax that resulted after a foreign (non-Dutch) adjustment of the taxable base in the Netherlands.

The theory behind the Dutch MAP Decree

The MAP is a dispute resolution mechanism provided for under tax treaties and under the EU Arbitration Directive, allowing competent authorities of the involved countries to negotiate and resolve issues of taxation that is not in line with a double tax treaty (hereafter: ‘double taxation’).  The mentioned directive has been implemented in the Netherlands as the “Wet Fiscale Arbitrage”.

The 2022 Dutch MAP decree is an integral part of the Netherlands' approach to dealing with international tax disputes, particularly those related to transfer pricing.

Under the 2022 Dutch MAP decree, taxpayers can request assistance from the Dutch tax authorities to resolve disputes arising from the application of tax treaties. The decree aims to facilitate discussions between the Netherlands and the other involved jurisdiction to reach a mutually agreeable solution, thereby ideally eliminating all double taxation. The MAP process is generally preferred for its ability to provide a structured and cooperative framework for resolving complex tax issues. Typically the Dutch tax authorities would act as an ally of the Dutch taxpayer in cases of non-Dutch tax adjustments.

However, the MAP process can be time-consuming and resource-intensive, often requiring extensive negotiations between the competent authorities of different countries. As a result, some taxpayers may seek alternative solutions, such as unilateral corresponding adjustments, to address double taxation more swiftly. How? The following case explains this.

Case Study: Addressing Double Taxation for a Dutch Company

Consider a Dutch company that is part of a European-headquartered group, facing a transfer pricing dispute with the German tax authorities (GTA). The Dutch company operates as a routine sales distribution entity. A German company within the group acts as a supplier, performing key R&D/DEMPE and manufacturing functions. This German company is considered the transfer pricing entrepreneur. The Dutch company is the least complex party in the transaction and therefore the tested party in the transfer pricing analysis with Germany.

Following an audit by the GTA, the GTA concluded that the Dutch company's profits exceeded the top of the interquartile (benchmark) range. The GTA argued that these excess profits should be taxed in Germany and adjusted the taxable profit of the German group company. Under Dutch tax law, if the transfer pricing applied is within an arm’s length benchmark range, the Dutch tax authorities typically accept such pricing. 

This finding raised the risk of double taxation, as the same profits would be subject to taxation in both Germany and the Netherlands.

To mitigate this risk, the Dutch company obtained a unilateral corresponding transfer pricing adjustment from the Dutch tax authorities for the transfer pricing adjustment by the GTA (within a short time frame and without a full MAP procedure) with our help. This approach reduced the taxable profits in the Netherlands, aligning them with the GTA's findings and thereby fully eliminating the double taxation issue. The Dutch request was based on the argument that the Dutch company was overcompensated from an OECD transfer pricing perspective.

The Effectiveness of Unilateral Adjustments

In similar cases, unilateral corresponding adjustments have proven effective and time efficient, particularly when there is clear evidence that the compensation received by the tested party was above the arm's length range. By presenting a well-substantiated case, including comprehensive transfer pricing reports, benchmarking studies, and relevant correspondence with the foreign tax authorities, the Dutch company was able to obtain the necessary unilateral adjustment (without a MAP).

This approach offers several advantages over the MAP process. It is generally faster and less costly, allowing businesses to resolve double taxation issues without the need for prolonged negotiations between competent authorities. Moreover, it provides a straightforward solution when the facts clearly indicate overcompensation according to OECD guidelines. Finally, it should be noted that initiating a MAP remains an option if the local tax inspector does not go along with unilateral relief.

Conclusion

The Dutch MAP decree and unilateral corresponding adjustments are valuable tools in addressing transfer pricing disputes and preventing double taxation. While the MAP process offers a structured framework for resolving complex issues, unilateral adjustments can provide a quicker and more efficient solution in certain circumstances.

For businesses facing similar challenges, it is crucial to prepare comprehensive transfer pricing documentation and analyses to support their claims. By leveraging these mechanisms effectively, companies can navigate the complexities of international taxation and ensure fair treatment across jurisdictions.

In the case of the Dutch company within the European-headquartered group, the pursuit of a unilateral corresponding adjustment exemplifies a proactive approach to resolving transfer pricing disputes. By aligning taxable profits with the findings of foreign tax authorities, businesses can safeguard against double taxation and maintain compliance with international tax standards. 

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In cases of (potential) double taxation, don’t be put off by time-consuming and sometimes costly MAPs but act now to avoid unilateral double taxation. The unilateral option does not work in all cases, but there is always the full MAP option.

KPMG Meijburg & Co provides personalized strategies tailored to each client's unique circumstances, ensuring that solutions are both effective and efficient.