The time to reconcile your financial results (year-end)
In the realm of transfer pricing, the end of the year is typically the moment to start with the reconciliation of the actual (financial) results of group companies with the relevant transfer pricing policies. In case the actual financial results do not align with the group’s transfer pricing policy, adjustments should be considered.
What are year-end adjustments
Transfer pricing is an ongoing process from record (setting the prices) to report (evaluate, adjust and report the prices). Prior to year-end closing, a periodical review of the group’s transfer pricing policy and actual financial results could result in making adjustments to the group companies’ actual financial results to assure these are aligned (so-called ‘year-end adjustments): a true-up in case your financial results were too low and a true-down in case your financial results were too high. These year-end adjustments are generally implemented by means of an additional invoice between the related parties after year-end (and prior to closing of the books).
Relevance of year-end adjustments
Incorrect application of the group’s transfer pricing policies, could result in serious challenges made by tax authorities, potentially resulting in transfer pricing adjustments (and double taxation), interest and penalties. It is, therefore, important to review your transfer policies and correct your transfer prices (if necessary) in a timely manner.
Restrictions in the Netherlands: timing is key
As of January 2022, Dutch legislation on the elimination of mismatches in the application of the arm’s length principle (“Wet tegengaan mismatches bij toepassing zakelijkheidsbeginsel”) entered into force: mismatches can occur when a taxpayer adjusts its taxable income with a downward correction, while the related entity in the other jurisdiction does not adjust its taxable income with a (taxable) corresponding upward correction. These mismatches are eliminated by a denial of the downward correction of the taxable income at the level of the the Dutch entity (please refer to our blog regarding this new legislation). In order to prevent these adverse effects, it is essential to apply year-end adjustments before closing the financial accounts (rather than in the tax return) to assure a corresponding upward correction.
A well-structured periodical review process of the transfer pricing policy applied, could prevent potential challenges from tax authorities, whereas timing is key. In certain cases, year-end adjustments can no longer be applied solely in the Dutch corporate tax return. Companies should therefore timely and carefully review the extent to which year-end adjustments should made and make sure these are implemented in the financial accounts prior to closing the accounts.
Should you have any questions regarding the above (or transfer pricing in general), the STP transfer pricing specialists are of course happy to assist you with their expertise.