Transfer pricing has been one of the Belgian tax authority's main areas of focus in recent years, and is increasingly important in Belgian tax practice. The tax authority has consistently ramped up its transfer pricing audit capacity and frequency. In 2024, the tax authority's transfer pricing unit has again initiated a wave of in-depth audits affecting hundreds of taxpayers, some of whom are still to be contacted.
Below we provide practical insights on what taxpayers can do to manage the process efficiently and mitigate exposure to adjustments.
Selection of Taxpayers
Companies are typically selected through internal data mining based on a risk assessment analysis. Although the indicators remain confidential, we understand the probability of becoming subject to an audit significantly increases in case of declining or volatile results, structural loss-making positions, high debt-to-equity ratios, presence of a permanent establishment, involvement in business restructurings, and payments to low-tax jurisdictions.
Noncompliance with transfer pricing documentation obligations is also considered in the selection process. Taxpayers are therefore strongly recommended to prepare and file all documentation requirements—local file, master file, country-by-country report, and/or CbC notification—on time and with accurate information aligned with other data sources such as tax returns, annual accounts, and reports.
Audit Kick-Off
A transfer pricing audit is generally initiated through a broad standardized questionnaire comprising over 30 questions.
Before answering the questionnaire, taxpayers often choose to organize a "pre-audit" meeting with the Belgian tax authority to present how the entity operates within the group and its applied transfer pricing policy. Such an informal meeting helps to delineate the parameters of the audit.
Topics Scrutinized
The tax authority investigates a broad range of topics, and tends to focus on the
- Reconciliation between the transfer pricing policy and annual accounts
- Origin of losses and the alignment with the entity's functional profile
- Allocation of synergies with respect to procurement activities
- Development, enhancement, maintenance, protection, and exploitation functions in relation to intellectual property
- Intragroup service fees (including cost base and allocation keys)
Financial transactions. There is particular focus on intragroup financial transactions. The tax authority carefully evaluates the applied interest rates and intragroup debt size and investigates the arm's-length character of cash pool arrangements—in particular, the appropriate allocation of cash pool benefits and the reclassification of a structural cash pool deposit or borrowing in a term loan.
Cash tax. A transfer pricing adjustment in Belgium can result in an unexpected effective tax cost or "cash tax," regardless of the taxpayer's tax situation in the year in which the adjustment occurs, for example a loss. An adjustment accompanied by a tax increase of at least 10% constitutes a minimum taxable base against which the taxpayer can't offset tax attributes.
As the tax authority may waive a tax increase in the absence of bad faith, the taxpayer has an interest in actively cooperating and demonstrating good faith in the context of a transfer pricing audit.
Taxpayers are also effectively taxable on received non-arm's-length benefits, the amount of which constitutes a minimum taxable base.
Hence, particular attention should be given to applying the correct pricing in respect of transactions involving Belgian taxpayers as transfer pricing adjustments can be made both ways—when the price the Belgian taxpayer charges is either too high or too low.
Preparing for Audit
Having solid supporting documentation not only makes the process more efficient through more focused information requests, but also reduces the risk of challenges by the tax authority.
In addition to standard transaction-based transfer pricing documentation and written agreements, it's recommended to appropriately document important business decisions and economic events impacting the profitability of the company, such as the business rationale for entering into a transaction although it may not be profitable.
Documentation should be drafted prior to a transaction taking place. Based on experience, the tax authority (and courts) seem more reluctant to rely on ex post documentation. Practical difficulties may also arise if relevant people have left the organization.
Next to this, taxpayers should be able to show the bridge between the transfer pricing policy and the financial statements. The tax authority expects to receive segmented profit and loss statements per business/transaction to assess profitability at the level of earnings before interest and taxes. Although not strictly mandatory, preparing an annual OECD local file helps to anticipate such demands.
The tax authority strongly focuses on the operating result of the audited company as well as foreign counterparties. This often triggers discussions on profitability if the taxpayer applies the comparable uncontrolled price or gross margin method, or a transactional method based on budgeted costs. Taxpayers applying such methods should be able to demonstrate their appropriateness in line with their functional profile—in particular, that local people have sufficient autonomy to manage risks leading to losses or deviations between budgeted and actual results.
Regarding financial transactions, attention should be given to broader economic characteristics, including debt capacity, loan conditions, and purpose and options realistically available, to accurately delineate the funding as a loan—and to avoiding structural cash pool positions exceeding 12 months by periodically monitoring outstanding positions.
For complex transactions, taxpayers can choose to apply for an advance ruling to gain legal certainty, which is frequently opted for in Belgium given the well-established ruling practice.
Managing Audit
If a taxpayer is selected for audit, consideration should be given to responding appropriately to information requests. A constructive and transparent attitude while keeping an eye on the legal boundaries of information requests, such as information on foreign group entities not at the taxpayer's disposal, and the burden of proof principles is the key to an effective audit process.
We recommend requesting a "pre-audit" meeting before sharing any documents or data. Experience shows that providing a clear overview of the business and intercompany transactions from the start helps the efficient and smooth running of the audit and may enable the scope of the questionnaire to be narrowed down.
Originally published by Bloomberg Tax.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.