In May 2025, the transfer pricing coordination group of the Dutch tax authorities (DTA) published its second internal paper in a series on transfer pricing scrutiny, this time examining how the cost-plus method should be applied in practice. Although aimed at inspectors, the paper gave taxpayers a clear sense of where the DTA sees risk and where future questions are likely to land.

Now that the OECD has published its recent public consultation draft on revisions to Chapter VII of the OECD Transfer Pricing Guidelines on intra-group services, it is a good moment to revisit that paper. The OECD draft points in the same direction on cost base integrity, pass-through costs, and the need for evidence beyond the benchmark study.

The paper also highlights the distinction between the cost plus method and the Transactional Net Margin Method (TNMM) where cost is used as the profit level indicator. Because the two methods operate at different levels of the profit and loss account, they can produce different views of the appropriate cost base. Under a cost-based TNMM, operating expenses are generally included as well, which makes it particularly important to understand which costs form part of the base and on what basis.

The key point is this: while transfer pricing analysis often focuses on justifying the mark-up through benchmarking, the DTA’s paper shows that the composition of the cost base may matter just as much. A defensible margin applied to the wrong base will not produce an arm’s length result.

Like the first paper in the series, this paper is not formally binding. Even so, it offers a useful indication of how inspectors are likely to approach these arrangements in practice.

Where the DTA Is Likely To Focus

• Cost Base Composition: Whether the right costs are included in the base over which the mark-up is applied. For manufacturers, the question will often be whether raw material costs belong in the cost base at all. For service providers, the same principle applies more broadly: the cost base should reflect the functions actually performed and the risks actually borne.
• Pass-Through Costs: Whether costs excluded from the mark-up base genuinely fall within a narrow pass-through category, rather than being carved out too broadly for convenience. The DTA notes that errors can run in both directions, with some companies excluding too much and others including costs that should not be included.
• Budgeted Versus Actual Costs: Whether pricing reflects budgeted costs, as would generally be expected in an arm’s length arrangement, or whether actual costs are used in a way that transfers efficiency and pricing risks to the counterparty without a clear functional and risk rationale.
• Benchmark Comparability: A benchmark is not reliable simply because the companies operate in the same sector. If the tested party’s cost base excludes a major category of cost that is included in the comparables, the comparison may not be meaningful, and the DTA notes that this type of mismatch is not easily resolved through adjustments.

Why the OECD Consultation Matters Too

• The consultation reinforces the DTA’s focus on cost base composition by distinguishing between direct, indirect and operating costs, and by warning against distortions caused by costs arising from controlled transactions. The core message is the same - the cost base itself materially affects the arm’s length outcome.
• It also underlines that method selection should follow the accurately delineated transaction, not a default assumption that cost plus is always appropriate for intra-group services.
• On pass-through costs, the draft confirms that no mark-up is appropriate where the entity is only a paying intermediary, but a mark-up may be warranted where the entity contributes value. This aligns closely with the DTA’s narrow view of what should fall outside the marked-up cost base.
• The draft also clarifies that the 5% mark-up for low value-adding services should not be treated as a general benchmark outside that simplified regime.

What Businesses Should Take From This

• Cost base questions are not secondary. They go directly to whether the pricing method produces an arm’s length outcome.
• Contracts are the starting point, not the conclusion. Where the facts do not match the contract, particularly around who manages procurement decisions and absorb price fluctuations, the DTA will look at what is actually happening on the ground.
• Pass-through cost classifications that have grown over time or have not been subject to a formal review are a specific area of risk. The DTA expects these to be narrow and well-supported.
• The OECD consultation separates two questions: did the recipient receive value, and was the service priced at arm’s length? The DTA is likely to focus on whether the claimed benefit, the pricing and the recipient’s commercial position align. If not, it will look closely at the pricing method and, where relevant, the cost base and mark-up.

Questions to Ask Now

• Review Your Cost Base Definition: Understand precisely which costs are included in the base and why. For service providers, the key question is whether the costs in the base genuinely reflect the functions performed and risks borne. The same principle applies in other contexts, and contractual terms alone are insufficient if they do not match the underlying facts.
• Assess Your Pass-Through Classifications: If costs are excluded from the mark-up base on the basis that they are treated as pass-through, ensure that classification is supportable. If the entity does more than simply incur the cost on behalf of another group company, the basis for treating it as pass-through should be examined carefully.
• Check Your Pricing Basis: If pricing is based on actual rather than budgeted costs, document the rationale clearly. Be prepared to explain why an independent party in the same position would have accepted that arrangement.
• Revisit Your Benchmark Study: Consider whether the companies in your set of comparables have a similar cost base structure to your entity. Where there are material differences, particularly in the treatment of raw materials or major cost categories, those differences need to be addressed rather than overlooked.
• Review Your Entity’s Financial Outcomes: If results are consistently misaligned with the functional profile, expect questions about whether the remuneration remains arm’s length.
• Align Documentation With Emerging OECD Expectations: Groups should be able to explain the accurately delineated transaction, articulate the benefit received, and show that the pricing method, cost base, and any allocation keys are consistent with that analysis.

This is the second paper in a wider DTA series, following earlier guidance on transfer pricing risk assessments and it sits alongside a further paper on guarantee fees. Read together, the papers suggest an increased focus on how transfer pricing models operate in practice, not just how they are described in the documentation.

For businesses using cost-based pricing, the direction of travel is clear. The focus is no longer only on the mark-up but also on the construction of the cost base itself and on whether the supporting evidence stands up when examined closely.