Transfer pricing: align profit allocation with reality

Transfer pricing starts with your business

Transfer pricing is often seen as a tax documentation obligation, but the documentation is the final step. What matters first is how the group actually operates. That raises a number of questions: which company develops the products? Where are commercial decisions taken? Who maintains the customer relationships? Who owns the valuable assets? And which company bears the risk when revenue disappoints, a product fails or a customer does not pay?

The answers determine which part of the group profit belongs to each company. This plays a role in virtually every transaction between related companies. An invoice therefore never tells the whole story. The terms, the responsibilities and the allocation of risk have to be taken into account as well.

Arm’s-length conditions between group companies

Independent companies each negotiate from their own interest. Within a group, conditions are often set centrally. That creates the risk that a charge does not match what independent parties would have agreed in a comparable situation.

The arm’s-length principle requires transactions between related companies to be assessed as if independent parties were dealing with each other. A written contract matters, but it is the way things work in practice that ultimately determines which company creates value and which result belongs to it.

OneLane sets this out in a policy that is clear and workable – usable for tax, finance, controlling and the local administration alike.

Benchmarking and comparable companies

Many transfer pricing methods require market information. A benchmark study helps establish the prices, margins, mark-ups or interest rates that independent companies apply. The selected companies or transactions must be sufficiently comparable to the activity under review. The benchmark then forms part of the broader substantiation.

Intercompany services and management fees

Central services are regularly provided within groups: management, finance, IT, HR, marketing, legal support or procurement. We establish whether the receiving group company genuinely receives a benefit. The next step is to determine which costs may be recharged, which allocation key is appropriate and whether a mark-up is required.

Group financing and arm’s-length interest

Loans, current-account positions, cash pooling and guarantees each call for a separate transfer pricing analysis. An interest rate cannot be based solely on the group’s funding costs or on a general market rate. The borrower’s creditworthiness, the term, the currency, the security provided and the other conditions are relevant too. We also assess whether independent parties would have entered into the financing in the chosen form. The terms of the loan are an important part of that assessment.

Intellectual property and value creation

Brands, technology, software, data, know-how and other intangible assets can represent a significant part of the group’s value. Legal ownership matters, but so does where the development, enhancement, maintenance, protection and exploitation activities are carried out and controlled. Establishing this usually requires a broader valuation or profit-split analysis.

Local file and master file

Was the group turnover more than EUR 50 million last year? Then you are required to keep a local file and a master file in your records and to provide them to the Dutch Tax and Customs Administration on request. Both must be in place before the corporate income tax return for that year is filed. Transfer pricing documentation that is not in order can lead to substantial sanctions and penalties.

Transfer pricing moves with developments

When a business grows internationally, reorganises, or is involved in a merger or acquisition, functions and responsibilities often change faster than the transfer pricing policy does. Because the factual situation shifts, the existing profit allocation shifts with it. OneLane assesses the transfer pricing position before the new structure is implemented, so that legal, tax, financial and operational choices can be made together.

Audits by the Dutch Tax and Customs Administration

In a transfer pricing audit, the tax authorities look beyond the report itself. Agreements, emails, organisation charts, financial data, decision-making and the actual activities carried out may all be examined. OneLane makes sure the technical positions are supported by the facts and that the business presents one consistent story.

In some cases – for significant or recurring transactions, for example – it can be worthwhile to obtain more certainty about the tax treatment in advance. We can then enter into advance consultation with the Dutch Tax and Customs Administration on your behalf.

One story across policy, contracts and figures

Transfer pricing is in order when the commercial reality, the legal agreements, the financial processing and the tax documentation all line up.

That takes more than updating a file once a year. It takes clear arrangements that people within the organisation understand and can apply.

OneLane brings tax, finance and business operations together, so that transfer pricing becomes a controlled part of doing business internationally.