For the third year in a row, this coordinated audit effort is organised by the specialised audit team at the Belgian tax administration.
Downsized transfer pricing audit team
The transfer pricing audit cell is currently 24 employees strong, which is six less than the previous year, resulting in a decrease in the files selected (some 270 in 2014). The reduction in staff is on the one hand due to a halt in external hiring, and on the other hand due to an on-going internal reorganisation of the Belgian tax administration. This reorganisation has resulted in six experienced inspectors taking on other roles.
Only when this new internal structure is fully implemented later this year, will the specialist transfer pricing audit team be able to build its team internally, but they will need to be trained. The restructuring also included a change in leadership, whereby Dirk Vanderstappen, who has been part of the team since 2006, will now lead his first transfer pricing audit wave. We took the opportunity to talk with Vanderstappen and one of his team members Geert Stuer.
File selection
For the past three years the selection of taxpayers to be audited has been performed centrally using data-mining techniques on variables that could indicate that there are interesting transfer pricing aspects to be audited, such as the evolution of operating profit and staffing, low interest coverage, substantial extraordinary expenses, volatility in leverage, etcetera. Each variable is attributed a risk score and then a list with aggregated scores is compiled that is subsequently reviewed qualitatively by the audit team. The eventual list of audit targets that need to be addressed has to represent 80% of the team’s workload, leading to the selection of taxpayers to be audited.
Notwithstanding the downsizing of the team and the reduction in files selected, Vanderstappen said: “As our data-system is updated on the basis of our in-the-field experience, it should be performing better in selecting the interesting files for transfer pricing purposes notwithstanding that the annual accounts and tax returns do not contain a tremendous amount of transfer pricing specific or related data”.
The remaining 20% of the team’s workload is taken up running an internal centre of excellence where the team assists inspectors with transfer pricing issues in the run up to general tax audits, organises training and conducts self-initiated audits.
Stuer said: “When, for instance, business restructurings are announced in the media, we take note to monitor the further development of that taxpayer’s tax returns”.
Changes in 2015
The option to request a pre-audit meeting has been made a priority. “We were able to observe a significantly higher efficiency and efficacy in files where taxpayers requested for a pre-audit meeting to discuss the questions raised and present the company,” said Vanderstappen.
“Last year about half of the taxpayers chose to have such a meeting”, Stuer adds. The number of pre-audit meetings “has been growing consistently and we hope this ratio increases”.
Taxpayers are now given ten days to request a meeting and one month to provide the information. Generally, extensions of up to 3 months are accepted for providing information.
Although financial transactions have already been the focus of transfer pricing audits in 2014, in 2015 taxpayers are explicitly making requests from the outset to provide an overview and specific details on transactions. For most transfer pricing consultants this should not come as a surprise. Slightly more surprisingly, perhaps, is that the transfer pricing audit team requires taxpayers to provide an overview of captive insurance arrangements that may exist.
Vanderstappen said: “We have not applied any targeting on this subject, nor did we develop a specific strategy for tackling these arrangements. Our first objective is take stock of the scope and nature of this phenomenon within the selected files and take it from there”.
By Andy Neuteleers, Partner Transfer Pricing, Valuations & Business Modeling at bMoxie (andy.neuteleers@bmoxie.com | www.bmoxie.com)
