The Dutch Tax Authority’s guidance from last year on the cost-plus method sends a clear message to multinationals: you should not only focus on your mark-up percentage. Your construction of the cost base on which you apply the mark-up matters more than you think.
The core risk
Cost-plus method works well for routine, low-risk intra-group services, but only when the cost base is correctly constructed. The guidance is explicit: contracts define the starting point, but actual conduct overrides legal form. If your entity is genuinely making procurement decisions, setting specifications, or managing raw material risks, the tax analysis must follow the economic reality, regardless of what the contract says.
That gap between contractual and actual behaviour is where most disputes begin.
Manufacturing: the raw materials question
For manufacturers, the stakes are particularly high. Whether raw material costs sit inside or outside the cost base can dramatically shift the picture. A toll manufacturer excluding raw materials applies a mark-up toa relatively small cost base, which may result in a higher markup percentage (e.g. 25%) but earn a modest absolute return. By contrast, a contract manufacturer including raw materials applies a mark-up to a larger cost base, which may result in a lower percentage (e.g. 8%) but a higher overall remuneration for the functions performed. The guidance highlights that standard benchmark studies may not adequately capture these differences, as publicly available data often lacks sufficient granularity to determine how cost bases are constructed. As a result, reliance on benchmarking without a detailed functional and cost base analysis can be misleading.
Three practical risks to manage now
- Cost overruns: Inefficiency-driven cost overruns should remain with the performing entity which controls the underlying activities and manages the associated risks, not be passed on to the group. If your pricing automatically recovers all costs incurred, that’s a red flag.
- Shared service centres: The simplified 5% markup for low value-adding services applies only when the services are genuinely supportive, non-core, and priced on the appropriate cost base. In practice, many groups apply it too broadly which can be challenged by the tax authorities.
- Budget vs. actual: Pricing should be based on budgeted costs. Migrating from actuals to budgets, and managing true-ups appropriately, is often overlooked in practice.
What good documentation looks like
The determination of the cost base is inseparable from the functional analysis, particularly in assessing which entity controls and bears the risks associated with key cost components such as raw materials.
A defensible cost-plus position requires three elements working together: a functional analysis that reflects how the business actually operates, a cost base that has been deliberately constructed and tested, and documentation capable of withstanding detailed comparison with third-party data.
A benchmark study alone may not be enough to justify the the arm’s length nature of the remuneration.
How we help
Our TP team works with multinationals at exactly this intersection, reviewing cost base construction, stress-testing benchmark analyses, and preparing documentation built for scrutiny. When disputes arise, we provide audit defence and negotiation support directly with the Dutch Tax Authority.
If your cost-plus structure hasn’t been reviewed recently, now is the right time.
