This week’s TP update takes us to the Netherlands. The Dutch tax authorities have issued practical guidance that’s worth a close read for anyone applying or defending a cost-plus model.
In May 2025, the Dutch Tax Authorities’ Coordination Group Transfer Pricing (CGVP) released practical guidance on applying the cost-plus method, particularly for intra-group supplies that are not sold to third parties. These are often routine, low-complexity activities where costs can serve as a reliable indicator of value and where the tested entity bears limited risk.
For multinational enterprises managing intercompany transactions across multiple tax jurisdictions, this guidance offers valuable insights into how the Dutch authorities interpret cost bases, mark-ups, and the arm’s length principle under current transfer pricing regulations.
Understanding the Cost-Plus Method
The cost-plus method is a commonly used transfer pricing method for pricing controlled transactions where one party performs routine functions with limited risk.
Under this approach, the tested entity is compensated by applying a mark-up to its costs. The goal is to ensure that the entity earns a return consistent with what unrelated parties would receive for performing similar activities.
The method is frequently applied to:
- contract manufacturing
- routine service providers
- support functions within multinational groups
When applied correctly, the cost-plus method can help demonstrate compliance with the arm’s length principle and ensure that profits are appropriately allocated for income tax purposes.
However, determining the correct cost base is often the most contentious part of applying the method. Differences in how costs are defined or allocated can significantly affect profitability and may result in a transfer pricing adjustment if tax authorities disagree with the approach taken.
CPM vs the Net Cost-Plus Method
One of the more interesting aspects of the Dutch guidance is the distinction between the Cost-Plus Method (CPM) and what the authorities describe as the Net Cost-Plus Method (NCPM).
Under the traditional cost-plus method, the cost base typically includes direct and indirect production costs.
By contrast, the Net Cost-Plus Method—which resembles an application of the Transactional Net Margin Method (TNMM)—can include broader operating expenses that cannot be reliably attributed to a specific transaction.
This distinction highlights one of the long-standing quirks of transfer pricing practices.
In academic literature, CPM is often treated as a gross margin method, meaning that only production-related costs are included in the base.
In real-world business environments, however, many companies apply mark-ups to fully loaded costs, effectively treating CPM as a net margin method.
The Dutch guidance attempts to clarify this issue by encouraging taxpayers to clearly define the cost base when applying the transfer pricing method, ensuring that the approach reflects the economic reality of the controlled transaction.
Raw Materials and the Cost Base
Perhaps the most valuable section of the guidance relates to how raw material costs should be treated when calculating the cost base.
In many disputes involving manufacturing activities, tax authorities question whether material costs should earn a mark-up.
According to the Dutch guidance, the answer depends on the outcome of a detailed functional analysis.
Raw materials may be included in the cost base when the tested entity exercises meaningful control over activities such as:
- managing the transformation process
- making product specification decisions
- conducting research and development
- bearing inventory or obsolescence risk
- making sourcing or substitution decisions
If the entity performs these functions, it is contributing real value and may therefore earn a mark-up on material costs.
However, if the entity simply performs contract manufacturing or assembly with limited decision-making authority, the materials may be treated as pass-through costs that should not generate a mark-up.
This analysis aligns with broader OECD principles emphasizing that profits should follow functions, assets, and risks.
Budget vs Actual Costs
The Dutch guidance also discusses whether companies should rely on budgeted costs or actual costs when applying the cost-plus method.
In many arm’s-length arrangements between unrelated parties, pricing is determined using budgeted or standard costs, particularly when contracts are negotiated before the relevant financial year.
The CGVP guidance identifies several practical considerations when determining the appropriate cost base, including:
- production efficiency and capacity utilization
- pricing outcomes relative to market benchmarks
- the specification and categorization of costs
- financing and replacement costs
- treatment of pass-through costs
- whether the cost base should reflect fully loaded or marginal costs
These factors are particularly important when performing comparative analysis to determine appropriate mark-ups for the tested entity.
Ensuring that the cost base reflects real economic conditions is essential for maintaining compliance with the arm’s length principle and avoiding potential disputes with tax authorities.
Why This Guidance Matters
For multinational enterprises operating in the Netherlands, the CGVP guidance provides practical clarity on how Dutch tax authorities interpret the cost-plus method.
The treatment of raw materials is especially important. In many disputes involving manufacturing or supply chains, disagreements over whether material costs should earn a mark-up can significantly affect profitability.
If tax authorities conclude that a company’s functional analysis does not justify a mark-up on certain cost elements, they may impose a transfer pricing adjustment. This can increase income tax exposure and create additional compliance challenges across different tax jurisdictions.
For tax teams managing complex intercompany transactions, understanding how cost bases are interpreted is critical for managing transfer pricing risk and ensuring that pricing policies remain defensible.
Managing Complexity in Practice
Guidance like the Dutch CGVP note highlights how nuanced transfer pricing documentation can become when applying the cost-plus method. Questions around cost base composition, raw material treatment, and the use of budgeted versus actual costs often require detailed functional analysis, robust comparative analysis, and consistent documentation across multiple tax jurisdictions.
For multinational enterprises managing large volumes of intercompany transactions, maintaining this level of consistency can be challenging. Modern documentation platforms such as Reptune.net help tax teams centralize the data used in transfer pricing documentation, ensuring that cost bases, benchmarking analyses, and controlled transaction descriptions remain aligned across jurisdictions.
By automating documentation workflows and standardizing key analyses, tax teams can reduce transfer pricing risk, support the arm’s length principle, and strengthen their ability to demonstrate compliance with evolving transfer pricing regulations if tax authorities review their pricing policies.