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Banks may request a substantiation of your
transfer pricing: be prepared!

Recently the Dutch Central Bank published a guideline for banks titled “Good practices tax integrity risks with clients of banks”. These good practices include an analysis of clients’ intercompany transactions, with a substantiation of the transfer prices applied.

The Act on Financial Supervision requires banks to undertake sufficient measures to secure their business integrity, including their tax integrity. The Dutch Central Bank encourages banks to implement a risk appetite policy towards tax avoidance structures applied by its clients. In line with their risk appetite policy, banks have to investigate whether tax integrity risks of their clients are acceptable.

It should be emphasized that the Dutch Central Bank is not only challenging cases of tax evasion (illegal structures), but also tax planning structures that are – although legal – considered as aggressive.
The guidelines provide good practices on how to analyze the tax integrity risks at bank clients.
This analysis may be part of a bank’s client acceptance procedure, client review procedure or following from a systematic integrity risk analysis. From a transfer pricing perspective, certainly the following good practices should require your attention:

  • Specifically the transactions involving intangible assets; and
  • in general, intercompany transactions and external financing.


Transactions involving intangible assets
The guideline states that transactions involving intangible assets increase the tax integrity risks for banks. For instance, because corresponding royalty payments might be tax driven. It is therefore considered good practice that banks request:

  1. Insight in the economic rationale behind the transactions; and
  2. a substantiation of the arm’s length nature of the transaction.


Intercompany transactions and external financing
It is considered good practice that banks request their clients to provide transfer pricing documentation that answers the following:

  1. How do the intercompany transactions fit within the group structure?
  2. Are arm’s length remunerations and terms applied?
  3. Are the intercompany transactions tax driven?

Additionally, banks may pay more attention to clients receiving external financing. Clients need to indicate how the external financing fits within their business profile and whether the external financing is tax driven (e.g. interest deductibility on debt). Also back-to-back loans and guarantees provided by third-parties will be scrutinized.


Our thoughts

Although it is questionable whether banks are the appropriate body to determine whether a tax structure is acceptable or not, it is expected that banks will reject clients if they constitute a (potential) tax integrity risk. When setting-up a tax structure, companies should be aware and be able to document  the structure and the arm’s length nature of the intercompany prices applied.

This prevents the situation that a tax structure is legally accepted, but actually cannot be implemented because, for example, bank accounts cannot be opened.

If you have any further questions or remarks, please do not hesitate to contact the undersigned.

Stefan Ubachs
s.ubachs@quanteraglobal.com