NETHERLANDS Trends and Developments Contributed by: Dirk Brouwers, Wessel van Dijk, Erwin Boomsma and Rocio Martel, RED Transfer Pricing
Application of the Cost-Plus Method (Transfer Pricing Memorandum, May 2025) This internal note provides practical guidance on the application of cost-based methods, with particular emphasis on the determination of the appropriate cost base and its implications for arm’s length pricing. While grounded in the OECD Transfer Pricing Guide - lines (2022) and the Dutch Transfer Pricing Decree (2022), the note highlights operational complexities that significantly influence outcomes in practice. Although the document is intended as internal guid - ance for tax inspectors and does not create rights for taxpayers, it provides insight into the interpretative approach currently taken by the Dutch tax authorities when assessing cost-based transfer pricing arrange - ments. A central insight is that the composition of the cost base is often more decisive than the level of the mark- up itself. This is particularly evident in relation to raw materials, which may constitute a substantial share of total costs. Whether such costs are included in the cost base depends on a functional analysis, espe - cially regarding control over risks. If an entity does not exercise control over procurement-related risks (for example pricing, sourcing, or inventory risk), raw material costs may be excluded from the cost base, effectively limiting the profit indicator to operating costs. Conversely, where functions such as supplier selection or risk management are performed, inclu - sion of raw materials is appropriate. This distinction can dramatically alter the absolute remuneration even where mark-ups differ significantly. The note further stresses that budgeted costs rather than actual costs should generally form the basis of remuneration when correctly determined on all rel - evant parameters, reflecting arm’s length behaviour between independent parties. Budget-based pricing incorporates incentives for efficiency, whereas cost reimbursement based on actuals may inappropriately shift inefficiency risks to the counterparty. Deviations between budgeted and actual costs require careful analysis: inefficiencies typically remain with the ser - vice provider, while risks outside its control (ie, capac - ity underutilisation in contract manufacturing) may justify price adjustments depending on contractual allocation and functional reality.
Regarding financing costs, the note clarifies that these are not part of the cost base for cost-based method purposes. However, they remain economically rel - evant: the mark-up must be sufficient to ensure an adequate return on both debt and equity capital. In capital-intensive activities, this implies that higher cost-plus margins may be required. Thus, reliance solely on operating profit metrics (for example: EBIT margins) is insufficient without considering whether the return covers the entity’s cost of capital. A related consideration concerns replacement costs. While OECD guidance generally relies on historical costs, the note emphasises that arm’s length out - comes should allow for asset replacement over time. If depreciation based on historical cost understates the economic cost of using assets (for example: due to inflation or fully depreciated assets), the cost base may not reflect economic reality. In such cases, a higher margin may be necessary to ensure that replacement investments can be financed, thereby safeguarding the long-term viability of the tested party. Finally, the treatment of disbursements is addressed. Certain costs such as government fees or third-par - ty charges incurred on behalf of a principal may be excluded from the cost base if independent parties would not apply a mark-up to such expenses. Simi - larly, raw material costs may qualify as pass-through costs if the tested party does not bear associated risks. However, the note cautions against both over- and under-inclusion: inappropriate classification of costs as disbursements can distort the profit level indicator and lead to non-arm’s length outcomes. A critical, fact-based assessment is therefore required. In conclusion, the note underscores that the appli - cation of cost-based methods hinges on a rigorous functional analysis, particularly in determining the appropriate cost base. The interaction between cost composition, risk allocation, and margin determina - tion is central to achieving arm’s length results, with practical challenges arising especially in benchmark - ing and comparability adjustments. It is expected that the complexity of audits involving transactions apply - ing the cost-based methods will increase.
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