The first circular letter on transfer pricing published in Belgium is dated June 28 1999 (Version in Dutch nr AFZ/98-0003 – version in French nr. AAF/98-0003). This letter provided guidance to the local tax inspectors on when and how to perform a transfer pricing audit. It includes three different situations in which the local tax inspector is assumed to initiate a (thorough) transfer pricing audit, being:
(1)The absence of transfer pricing documentation or the presence of insufficient or incorrect transfer pricing documentation;
(2)Taxpayers with profit level indicators or financial ratios deviating from the standard profit level indicators or financial ratios of the taxpayer’s industry; or
(3)Companies being in a (long-lasting) loss situation.
Although the number of transfer pricing audits increased after the issuance of this circular letter, the implementation of this circular letter appeared to be rather difficult in practice. The impact of these audits in the period 2000 to 2002 was thus rather limited.
The setting-up of a knowledge group on transfer pricing (transfer pricing specialist team) at the end of 2003 and the introduction of a special transfer pricing audit centre, to perform transfer pricing audits at the end of 2004, resulted in more attention from the Belgian tax authorities on transfer pricing issues. Since 2005, numerous taxpayers have been confronted with lengthy requests for information regarding their organisation, intra-company transactions and pricing. Taxpayers have one month to reply to the questions raised. An extension of one or two months can be obtained. Since the reorganisation of the Belgian ruling practice in 2005 (officially called Office for Advance Decisions in tax matters), that made the ruling practice more time-efficient, business-minded and pro-active, transfer pricing rulings have become an important tool to obtain upfront certainty on the arm’s-length character of the taxpayer’s transfer pricing policy. In practice, the Belgian tax authorities show an open-minded and comprehensive attitude towards the taxpayers and envisage taking decisions on the ruling requests within an acceptable time frame (normally three to six months; however for difficult cases it may take more time).
No real prescriptions exist on how transfer pricing documentation in Belgium should look. A taxpayer that follows the principles laid down in the OECD transfer pricing guidelines or follows the EU Code of Conduct on transfer pricing documentation (either by following the format of the EU transfer pricing documentation or by making an EU TPD look-a-like) is most likely able to take the first stand during a transfer pricing investigation provided sufficient attention is paid to the particular situation of the Belgian group company. Disposing of general transfer pricing documentation may not be sufficient. It appears to be of crucial importance that the general principles (foreseen in the transfer pricing policy and documented in the global or regional transfer pricing documentation report) have been correctly implemented at the level of the Belgian group entities. Furthermore Belgian tax law does not include a provision foreseeing in specific sanctions with respect to transfer pricing documentation.
The publication of a new transfer pricing circular letter in November 2006 was aimed at avoiding general or lengthy requests for information and a pile of paper work for the taxpayer. It facilitates the taxpayer’s discussions with the Belgian tax authorities on its transfer pricing policy. Furthermore the EU TPD was introduced in Belgium by means of this 2006 transfer pricing circular letter.
Furthermore it should be noted that a Royal Decree, dated August 10 2009, instructs corporations in Belgium to report certain material non-arm’s length intercompany transactions and off-balance sheet arrangements in their annual accounts.
Finally, one should take into account that, following the Royal Decree dated May 7 2010, as from January 1 2010, certain payments to tax havens need to be reported in an enclosure to the tax return.
Transfer pricing circular letter on transfer pricing documentation
Belgium’s implementation of the European Code of Conduct
Following the approval of the Code of Conduct on Transfer Pricing Documentation in June 2006, each EU member state has to decide on whether and how to implement this code and its embedded EU TPD concept. Implementation can be achieved either through domestic legislation, guidance or administrative practices. Belgium has hereby opted for the issuance of an administrative circular letter.
The circular letter is dated November 14 2006 [referred to as Ci.RH.421/580.456 (AOIF 40/2006) in Dutch; Ci.RH. 421/580.456 (AFER 40/2006) in French]. Overall, the circular letter is aligned with the provisions of the 1995 OECD transfer pricing guidelines and the European Code of Conduct on Transfer Pricing Documentation. A Dutch and French translation of the code of conduct has been attached to the Belgian circular.
Transfer pricing audits
The circular letter enumerates a non-limitative list of situations in which tax inspectors are encouraged to carry out a transfer pricing audit:
· The use of tax havens when no or little economic value is added in these countries (for example, re-invoicing activities), and direct or indirect payments to entities located in tax havens (commissions, royalties, management fees);
· The use of back-to-back transactions disguising real transactions;
· Complex or circular structures that add little or no economic value;
· Belgian entities with structural losses;
· Reorganisation and transfer of entities (base shifting), especially with respect to the valuation and remuneration of intellectual property; and
· Management fees at the end of an accounting year.
Pre-audit meeting
The circular letter also provides guidance to the tax inspectors (and to the taxpayers) on how a transfer pricing audit should be performed. It clearly states that general or lengthy requests for information regarding the taxpayer’s transfer pricing policy should be avoided. Instead, the tax inspector should first discuss the taxpayer’s situation during a pre-audit meeting. Indeed, the Belgian tax authorities recognise that the information needed for a transfer pricing audit always depends on the specific facts and circumstances of the case. The circular letter refers several times to this principle.
The pre-audit meeting is not only useful in order to learn about the company’s structure and organisational matters, it should also enable the inspector to discuss the list of useful information and documentation with the taxpayer and retain only the relevant subjects. In this respect, an elaborated list of useful information has been added as an annex to the circular letter. This list refers to information with respect to the company’s group structure, intercompany transactions, functional and economic analysis, intellectual property, cost sharing arrangements, (transfer pricing) rulings and documentation regarding the transfer pricing policy.
In line with the provisions of the code of conduct, this pre-audit meeting aims to minimise compliance costs for the company under audit. The taxpayer will also know which supplementary information and documentation needs to be provided. In principle, answers to the questions raised and underlying documentation should be provided to the tax authorities within one month, but the tax inspector should grant an extension in cases where an acceptable request was submitted by the taxpayer.
Prudent business manager
A company that wishes to document its transfer prices in a pro-active way should be guided by the principles of a so-called prudent business manager. This means that a dedicated business manager should act according to standard economic principles and should adhere to the arm’s-length principle. The circular foresees a non-limited list of documentation that can be prepared in a pro-active way. The information and documentation is fully aligned with the principles as set out in the OECD transfer pricing guidelines and in the code of conduct on transfer pricing documentation requirements.
Furthermore, with respect to the language of the transfer pricing documentation, the Belgian tax authorities are of the opinion that, as stated in the European code of conduct, transfer pricing documentation in another language should be accepted as much as possible. In case the taxpayer is of the opinion that the translation of the documentation is too burdensome, he should discuss this with the tax authorities in order to ensure that the administrative burdens of the company are not unnecessarily high. Practice shows that the Belgian tax authorities accept transfer pricing documentation in another language (English, for example).
EU TPD-concept
The key concept of the Code of Conduct on Transfer Pricing Documentation is called EU Transfer Pricing Documentation (EU TPD). According to this concept, a multinational group’s transfer pricing documentation within the EU consists of two main parts: (1) a set of documentation containing common standardised information relevant for all EU group members (the master-file), and several sets of standardised documentation each containing country specific information (country-specific documentation).
The use of the EU TPD-concept to document a company’s transfer prices and related policy remains an option. Whether the EU TPD is the right option for a multinational group should be evaluated on a case by case basis. However, the Belgian circular letter stipulates that a group, which has opted for the EU TPD concept, should apply it on a consistent basis. The circular letter states that the EU TPD should be considered to represent a maximum level of basic documentation when starting to audit a multinational group, and does not prevent the tax authorities to send an additional request for information. Although most transfer pricing documentation reports or files prepared and/or provided in Belgium follow the EU TPD-concept in one way or another, attempts for a strict application of the EU TPD-concept are rarely seen and not yet encountered in practice.
Pan-European searches
As already mentioned in the first transfer pricing circular letter of 1999, the Belgian tax authorities are aware that is hard to find comparables on the (small) Belgian market. Therefore, they accep comparables located in foreign countries (for example, EU member states, pan-European searches), as long as the necessary adjustments could be made to ensure comparability. The circular of 2006 confirms that pan-European database searches should not be rejected automatically, nor that the use of pan-European comparables should lead to tax increases and/or penalties. Experience has shown that the Belgian tax authorities are willing to accept pan-European searches, as far as comparability can be demonstrated.
Documentation for small enterprises
In line with the code of conduct, the Belgian tax authorities also acknowledge that one should not expect the same level of detail and complexity within the transfer pricing documentation of a small company as within the transfer pricing documentation of a large and more complex company.
Again, the circular letter refers to the general rationale, namely that the information needed for a transfer pricing audit will depend on the specific facts and circumstances of the case. The code does not however, provide a definition of small companies. The Belgian tax authorities refer in their circular letter to the domestic definition of small companies and small groups embedded in Belgian company law and to the recommendations of the EU Commission regarding micro, small and medium-sized companies (Cfr. 2003/361/EU, Official Journal L124 of May 20 2003) of 2003.
However, it should still be viewed in the light of the specific circumstances: A small company as defined within Belgian Company Law could still form part of a larger multinational group. In that case one may still expect a rather detailed transfer pricing documentation file.
Reporting obligations for certain intercompany transactions and off-balance sheet arrangements in financial accounts
A Royal Decree dated August 10 2009 (published in the Belgian Official Gazette of August 24 2009) instructs corporations in Belgium to report certain material non-arm’s-length intercompany transactions in their annual accounts. No further guidance is provided on what results in a transaction being material. Related definitions are in IAS 24 paragraph 9 (as imposed by the EC Directive 2006/46).
Extensive reporting obligations apply to corporations listed on a stock exchange or traded on a multilateral trading facility and those that meet more than one of the criteria for being considered a large group (as defined in the Belgian Companies Code). These corporations should report for the qualifying transactions (the Royal Decree provides a reporting exemption for transactions between group members when the subsidiaries are wholly owned by a member of that group) the following information:
· The amounts involved in the transactions;
· The nature of the relationship with the related parties; and
· Any other information that is needed to obtain an accurate view on the financial situation of the corporation.
The other corporations only have to report direct and indirect transactions between the corporation and its major shareholders and its leadership (for example, the members of the board of directors).
The nature and business purpose of the material off-balance sheet arrangements of which the risks and benefits may influence (the assessment of) the financial situation of a corporation will also have to be reported in the financial accounts. In addition the corporations subject to the extensive reporting obligations for intercompany transactions will have to quantify the financial impact of the off-balance sheet arrangements on their financial situation.
These new reporting obligations, both for the intercompany transactions and for the off-balance sheet arrangements, apply to financial years starting on or after September 1 2008.
Documenting the arm’s-length character of the qualifying intercompany transactions and the nature and business purpose of off-balance sheet arrangements and meeting the related new reporting obligations will be of importance in order to protect the rights of the corporation’s executives responsible for (and involved in the drafting of) the financial accounts.
Reporting obligations for payments to tax havens in the corporate income tax return
As from January 1 2010, all direct and indirect payments to tax havens need to be reported in an annex (form 275 F) to the corporate income tax return, insofar as they amount to at least €100,000 and are made to persons located in tax havens as defined in Royal Decree of May 7 2010 and Administrative Circular of November 30 2010.
Payments to tax havens that have not been reported or, if they have been reported, for which the taxpayer does not prove that they are made in the context of genuine and bona-fide transactions and outside of artificial constructions, are non-deductible business expenses. Genuine and bona-fide transactions are transactions that really satisfy an industrial, commercial or financial need and that normally find, or must find, compensation in the whole of the activity of the company. An artificial construction has no link with economic reality (development of a real activity) and is meant to evade tax due in Belgium.
In the context of an investigation of the payments concerned, a transfer pricing investigation by the Belgian tax authorities is always possible and the general conditions for the deduction of expenses (mentioned in article 49 and 54 of the Belgian Income Tax Code) remain applicable.
The simultaneous application of the tax on secret commissions (309 percent) is also possible, but only if the conditions of article 219 of the Belgian Income Tax Code are met. However in case the 309 percent is levied, the costs that have not been justified by individual statements will be considered as deductible business expenses.
Practice reveals that taxpayers in Belgium should operate as a prudent business manager is expected to. Reflecting well in advance on the acceptability of the transfer pricing system being applied and collecting, pro-actively, the necessary supporting transfer pricing documentation is a must when surviving a transfer pricing audit.
Dirk Van Stappen, partner of KPMG Tax and Legal Advisers and heads the Belgian Global Transfer Pricing Services (GTPS) practice (dvanstappen@kpmg.com)
