Despite the fact that Belgium still does not have formal statutory transfer pricing documentation requirements, transfer pricing is omnipresent in the Belgian tax landscape. Sloppy implementation of the group's transfer pricing policy and lack of transfer pricing documentation at the level of the Belgian group companies result in a substantial risk of being selected for a transfer pricing audit and, as such, of adjustments being made and penalties being levied.
Transfer pricing audits at cruising speed
Transfer pricing audits are being conducted at full speed. The tax officers of the special transfer pricing audit department (of which the numbers doubled in 2013) have indeed been very active and have manifested themselves prominently within their client base with the help of data-mining tools. They use more or less standardised, lengthy requests for information, through which they solicit detailed input from the taxpayer on all sorts of intragroup transactions and on any other information (for example, legal and operational structure, supply chain structure, business trends, etc.) that may be relevant to assess whether the taxpayer respects the arm's length principle.
A significant number of companies active in a wide variety of industries (for example, companies incurring long start-up losses, undergoing business restructurings, showing fluctuating key performance indicators, hosting intragroup financing or cash pooling arrangements, etc.) have, in the meantime, been selected for a thorough transfer pricing audit. Experience from these audits shows that it pays to be well prepared and to proactively map all intragroup transactions and support the arm's length nature of the transfer prices being applied. Also, adherence to the provisions and conditions laid down in intragroup agreements should be monitored with great care. Indeed, by not complying with the provisions of their own agreements, taxpayers are quite often a sitting duck for the special transfer pricing audit department of the Belgian Tax Authorities.
There is still a clear focus on loss-making companies and groups in Belgium that have undergone a business restructuring. The deductibility of losses and restructuring costs are challenged if it appears that they are not supported by the function and risk profile of the taxpayer. Furthermore, the Belgian Tax Authorities are also focusing on the correct application of the transfer pricing policy in the operational transfer prices at business-unit level. As part of the standard transfer pricing questionnaire, a summarised split profit and loss account is being asked.
Given the current budgetary needs of the Belgian government and the ongoing tax and transfer pricing developments at the level of the OECD and the EU, the audit activity of the special transfer pricing audit department will, most likely, further increase from 2015 onwards. A new wave of transfer pricing audits at the beginning of 2015 is thus to be expected.
Increased audit activity coincides with an increased number of transfer pricing rulings
Adjustments to transfer prices following an audit usually give rise to double taxation. That is an annoying problem because nobody likes to pay taxes twice on the same income. Sometimes there are ways to redress this problem of double taxation. If Belgium has concluded a double taxation treaty with the other country involved and this provides for a mutual agreement procedure (under article 25 of the OECD model convention), one can try to invoke this. Within the European Union, companies may also invoke the provisions of the European Arbitration Convention. Both procedures work in practice but take a lot of time.
Of course, it is better to prevent the double taxation problem. That is not always possible, but any prudent manager would at least have to try. A first step is to draw up a carefully written transfer pricing policy document and the necessary transfer pricing documentation. If these documents are well written, you already have a sound basis to defend your case. However, there is no guarantee that the (Belgian) tax authorities will automatically accept these documents and the transfer prices.
One can try to obtain certainty by reaching an agreement beforehand with the tax administration(s) concerned. By means of this kind of transfer pricing ruling, the tax administration concerned declares in advance that it agrees with the transfer pricing policy applied so that companies can be certain that their transfer prices will not be amended by the tax authorities.
In Belgium, taxpayers can obtain such rulings. Unilateral transfer pricing rulings can be obtained from the Service for Advance Decisions in tax matters or the so-called Ruling Commission. Bilateral or multilateral advance pricing agreements can be applied for with the Belgian competent authority, the International Affairs Department of the Belgian Central Tax Authorities.
The number of rulings is on the rise in Belgium. Whereas in 2010 576 applications were filed and 866 pre-filing meetings were held, these numbers increased to 646 applications and 1.104 pre-filing meetings in 2013. Although definitely far from being all transfer pricing rulings, transfer pricing is clearly one of the more popular topics.
Being prepared pays off
Taxpayers in Belgium having cross-border transactions with related parties are, therefore, urged to operate as a prudent business manager is expected to. In practice, this means reflecting well beforehand on the acceptability of the group's transfer pricing policy and proactively preparing the necessary supporting transfer pricing documentation. These elements are key to survive a transfer pricing audit.