Handling the Dutch implementation of the Danske Bank ruling on intragroup supplies

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Handling the Dutch implementation of the Danske Bank ruling on intragroup supplies

How to align transfer pricing and VAT?   

In July 2022, the Dutch VAT policy introduced the Danske Bank ruling which will enter in force as of January 2024. This means that from then on, certain intercompany transactions between a main establishment (“ME”) and a fixed establishment (“FE”) will be VAT taxable under certain conditions. This is especially relevant for the Financial Services Industry, since MNEs often operate cross-border by means of branches, and have a limited right to deduct input VAT (pro-rata). What does this mean for Dutch banks and insurers that are operating on an international level? How should they handle the Dutch implementation of the Danske Bank ruling, and how should they align their transfer pricing and VAT?

A few key questions

Before we discuss the above, let’s take a step back and ask ourselves a few key questions. First of all, have such supplies ever been accurately delineated from a transfer pricing (“TP”) perspective? And second, based on such delineation, is the remuneration formula in line with the arm’s length principle perspective? Since VAT and TP professionals have a different focus (and mind you, not always a focus on the arm’s length principle, which is quite alarming), we have taken this opportunity to take a holistic view on intercompany transactions from both lenses - TP and VAT. 

The relevant VAT concepts

It is worth considering three VAT concepts relevant to our discussion: 

  1. Some transactions do not fall within the scope of VAT and some that do, are exempt of VAT. This is determinant of the VAT pro rata
  2. The VAT FE concept does not necessarily overlap the direct taxation concept of permanent establishment (such as branches) and can be defined based on functional dependency - that one related to the assumption of key entrepreneurial risk taking functions and business risks that we as TP practitioners are used to. 
  3. The VAT group concept so far was comprised by 2 or more VAT-registered persons that are either established in the Netherlands and/or that have an FE in the Netherlands. If a FE of a foreign company has joined a Dutch VAT group, the foreign ME was automatically included in the VAT group. If a Dutch company had one or more FEs outside the Netherlands, these were automatically included as well. Supplies of goods and services within the VAT group were disregarded for VAT purposes, so no VAT was due on intragroup transactions (considering that those were dependent on the ME and could not operate their business on a standalone basis). As a result, cross-border supplies to or from a foreign FE or ME were outside the scope of VAT in the Netherlands (and other countries such as Spain). However, this will change because of the Danske Bank EUCJ case law. 

How to ensure consistency between TP and VAT

Once this is (at least a bit) part of our TP mindset, we can ask ourselves whether VAT supplies were accurately delineated considering the functions, assets and risks assumed by each of the parties, and whether those are remunerated in line with such functionality. While this is supposed to be reflected in the MNE’s operating model, it is not always the case that TP and VAT “talk to each other” and are aligned. Based on our experiences, we have composed the following list of questions to ensure consistency between TP and VAT:  

  1. Are VAT exemptions consistently and accurately described within your TP documentation?
  2. Are the cross border operations through VAT dependent FEs accurately described in the functional analysis of your TP documentation?  
  3. Supplies are usually remunerated based on a C+. Have you checked whether this makes sense from a TP perspective? And if so, whether all cost centers considered are actually allocable? 
  4. Are supply recipients invoiced by providers or are there intermediate entities invoicing on cascades (presumably to simplify cost allocation processes), potentially multiplying VAT by 2 or even 3 times?
  5. Is your pro rata as high as it should be? 
  6. After restructuring, are your operating model and new intercompany flows still subject to VAT and if so, are they or are they not VAT exempt? 
  7. Would a legal entity rationalization not only reduce the compliance burden across the Group but also the amount of supplies? 
  8. Has the functional profile of entities remunerated as service providers been accurately checked? Are they indeed routine, low value added service providers, or significant contributors or co-entrepreneurs to the ME’s business? 
  9. Could specific VAT regimes apply (in certain situations) that reduce the accumulation of VAT, such as the cost sharing exemption, consortium or joint-cost agreements?

Would you like to delve deeper into this topic? Please reach out to us. We have profound (global and local) expertise in the field of e.g., transfer pricing, VAT and the financial services industry, and understand your specific needs very well. Let’s brainstorm together! 

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