Taxing authority and tax law

The taxing authority responsible for transfer pricing in Belgium is the Belgian Administration of Direct Taxes, which is part of the Federal Public Service Finance. While transfer pricing issues can be raised in the course of an ordinary tax audit, a specific transfer pricing audit team has been created within the Belgian Tax Authority. This highly specialized team, which has nation-wide authority, operates autonomously and selects its audit targets, but also provides support to other field inspectors if requested.

While no specific transfer pricing legislation exists in Belgium, the arm’s length principle was formally introduced into the Belgian tax law by the law of 21 June 2004, introducing Article 185, §2 of the Belgian Income Tax Code (ITC) (entered into force on 19 July 2004). This article’s content is equivalent to Article 9, §§1 and 2 of the OECD Model Tax Convention.

In addition, the ITC contains various provisions which directly or indirectly relate to transfer pricing. These provisions can be found in Articles 26, 49, 54, 55, 79, 207, 344 and 345 of the Belgian ITC. These articles deal with the notion of abnormal and gratuitous benefits (indirectly embodying the arm’s length principle), the deductibility of expenses and avoidance of the shifting of profits.

The general provisions of the Belgian ITC, e.g., regarding penalties, late interest payments, etc., also apply in transfer pricing matters.

A general advance ruling (or APA) regime was introduced through the law of 24 December 2002 and became effective as of 1 January 2003.

The Royal Decree of 10 August 2009, obliges Belgian companies to provide in their statutory annual accounts certain additional information linked to transfer pricing in the notes/annexes of their annual accounts

The Budget Law of 23 December 2009 introduced a new reporting obligation (Article 307, §1, s. 3 ITC) and a related tax deduction denial for unreported or payments lacking underlying bona fide business purposes (new Article 198, 10° ITC). Many important practical aspects still need to be detailed and illustrated by the Belgian tax authority by means of Administrative Guidelines, but the main characteristics of the new requirements, can be summarized as follows.

For reference, this reporting obligation applies as from tax year 2010 for payments made as from 1 January 2010 onwards made directly or indirectly to persons established in tax havens by resident or non-resident entities (Belgian permanent establishments) liable to Belgian corporate income tax, other than privately owned business, totaling more than EUR 100,000 per taxable period.

Tax havens have been defined with reference to the ‘black list’ determined by the Royal Decree dated 6 May 2010 published in the Belgian Official Gazette of 12 May 2010; it currently contains 30 jurisdictions that either do not levy corporate income tax or where the nominal corporate income tax rate is lower than 10% (e.g., Cayman Islands, the Channel Islands, the United Arab Emirates, Monaco, Moldavia, etc.). Whether or not the OECD ‘grey-listed’ jurisdictions are also to be taken into account is still unclear.

A Royal Decree dated 7 May 2010 determining the model form (n° 275 F) for reporting direct or indirect payments to persons established in tax havens has been published in the Belgian Official Gazette of 25 May 2010. This new reporting obligation is Irrespective of the forms to be filed according to Article 57 ITC (‘secret commissions’).

Failure to report is sanctioned by non-deductibility of expenses relating to such payments. In addition, expenses relating to reported payments will nonetheless only be deductible upon proof by the Belgian payer that these payments relate to actual and bona fide at arm’s length transactions and with persons other than artificial constructions.

Relevant regulations and rulings

The tax administration has issued various guidelines on transfer pricing:

• Administrative guidelines on the offensive aspects of transfer pricing, issued in 1999
• Administrative guidelines on the defensive aspects of transfer pricing, issued in 2000 and 2003
• Administrative guidelines providing the tax authority’s view on the interpretation of Article 185, §2 ITC, which introduced the arm’s length principle into Belgian tax law, issued in July 2006
• Administrative guidelines regarding the formal creation of a transfer pricing audit team within the tax authority, issued in July 2006Administrative guidelines on transfer pricing documentation, the transfer pricing code of conduct and transfer pricing audits, issued in November 2006

Rulings are provided on the basis of a general ruling practice (see APA opportunity, below). APAs are provided on an individual basis, taking into account the specifics of each case. The Belgian government has furthermore implemented a regime which provides, for tax purposes, a deduction on risk capital (i.e., qualifying equity), also known as a Notional Interest Deduction.

In addition, the government also introduced a special tax deduction for income derived from the use of patents. As a result of this deduction, income that is patent-related is subject to an effective tax rate of 6.8% or less.

OECD guidelines treatment

The tax authority indicates several times in its administrative guidelines that taxpayers should generally follow the guidance mentioned in the OECD Transfer Pricing Guidelines.

Priorities/pricing methods

Although taxpayers are in principle free to choose any OECD transfer pricing method as long as the method chosen results in arm’s length pricing for the transaction, conceptually, transaction-based methods are preferred over profit-based methods.

Taxpayers are not required to use more than one method, although they should be able to support their decision to apply a particular method.

Transfer pricing penalties

The general tax penalty framework applies to transfer pricing adjustments. These penalties vary from 10% up to (in very exceptional cases) 200% of the additional tax; the rate depends on the degree of intent to avoid tax or the degree of the company’s gross negligence.

Furthermore, interest for late payments is due on additional tax assessments (including assessments resulting from a transfer pricing adjustment).

Penalty relief

Since additional tax assessments depend on the degree of intent to avoid taxes or on the company’s gross negligence, penalties can be reduced or eliminated if the taxpayer can demonstrate its intent to establish transfer prices in accordance with the arm’s length principle (e.g., through its documentation efforts).

Documentation requirements

No legislative guidance regarding the nature and content of proper transfer pricing documentation exists. However, the 1999 administrative guidelines state that documentation should demonstrate that the taxpayer’s pricing complies with the arm’s length principle to avoid an in-depth transfer pricing audit. These 1999 guidelines recommend that documentation include, at a minimum:

• Activities of the group (including competitive position, level of market, economic circumstances, business strategies, etc.)
• Identification and characterization of intercompany transactions and contractual relationships among affiliates
• Functional analysis (including an overview of the functions, risks and intangibles)
• Transfer pricing methods used=Economic analysis

The 2006 administrative guidelines on transfer pricing confirm Belgium’s agreement with the principles outlined in the EU Code of Conduct. Therefore, the information expectation contained in this Code of Conduct should also be considered from a Belgian transfer pricing documentation perspective. These administrative guidelines also refer to the concept of a prudent business manager in order to encourage companies to ensure that transfer pricing documentation is available.

Although the burden of proof lies with the tax authority, the taxpayer needs to provide information on its transfer pricing policies applied to allow the tax authority to verify the company’s tax position.

Documentation deadlines

Given the absence of any formal transfer pricing documentation requirements, there is no statutory deadline for the preparation of transfer pricing documentation. However, upon a tax audit, a taxpayer has a one-month period to provide all information requested (including all information that allows verification of its taxable income and thus, the arm’s length nature of the transfer prices), it is recommended that each transaction be documented at the time it is executed. This one month-period can be prolonged if valid reasons exist.

Additionally, the 1999 guidelines provide that if the taxpayer can demonstrate upon a tax audit that it has made sufficient efforts to prepare transfer pricing documentation, the tax inspector does not need to carry out an in-depth tax audit.

Statute of limitations on transfer pricing assessments

The general rules regarding the statute of limitations apply to transfer pricing assessments. Therefore, generally speaking, the tax authority is entitled to make additional assessments during a period of three years starting from the closing of the accounting year.

However, in the case of fraud, the tax authority has the right to adjust the income during a five-year period, provided that the taxpayer receives prior notice of serious indications of fraud. In case of tax losses, the statutes of limitations do not run until these tax losses are effectively used to offset taxable income. Some other, exceptional statutes of limitations also exist for specific situations.

Return disclosures/related-party disclosures

No specific disclosure requirements exist for filing the tax return. However, the accounting rules introduced through the Royal Decree of 10 August 2009 oblige companies to provide in their statutory annual accounts in Belgium certain additional information linked to transfer pricing in the notes/annexes of their annual accounts:

• Companies must provide information as regards the nature and business purpose of their relevant off-balance sheet arrangements, if underlying risks and benefits are considered material and when the disclosure is necessary to assess the financial position of the company correctly (e.g., intra-group guarantees, pledges, factoring liabilities; and especially relations with special-purpose entities, whether transparent or not, and offshore entities).
• Companies must disclose their material transactions with affiliated parties that can be considered as not at arm’s length. Depending on the type of company a different scope of information is to be provided, ranging from a mere listing of such transactions to the mentioning of the amounts involved as well as all other information necessary to provide a correct view of the financial position of the company.

While this new rule is as such not included in the Belgian tax code, it creates an obligation for the relevant entities to review (and document) the arm’s length nature of their intercompany transactions. Non-compliance may potentially result in, amongst others, director liability. In addition, any such information disclosed will provide an excellent source of information for a tax inspector to initiate a (targeted) transfer pricing audit.

Audit risk/transfer pricing scrutiny

The transfer pricing audit risk may be regarded as medium-high.

The tax authority has demonstrated an increased interest in transfer pricing since the first circular letter on transfer pricing, introduced in 1999. Thereafter, the introduction of the arm’s length principle in the Belgian legislation in 2004 and the organization of a special transfer pricing team in 2006 increased the focus on transfer pricing. This transfer pricing audit team is expected to be informed of every transfer pricing investigation performed by the local tax audit teams to ensure a consistent and experienced approach.

The transfer pricing audit team is also involved in cross-border transfer pricing audits (e.g., in case of a restructuring), which are held jointly with the tax authorities of neighboring countries. In addition to this special team’s increased audit activity, field tax inspectors are also increasing their focus on transfer pricing during general tax audits.

The 2006 administrative guidelines contain a list of events that could trigger a high transfer pricing risk and lead to increased audit scrutiny:

• Structural losses
• Business reorganizations
• Migration of businesses
• The use of tax havens or low-tax rate countries
• Back-to-back operations
• Circular structures
• Invoices for services sent at the end of the year (i.e., management services)

The tax authority indicated in its November 2006 circular that transfer pricing cases associated with business restructurings will be among the priorities in their audit efforts.

These developments will further increase the focus on transfer pricing, especially considering the evolution of the Belgian transfer pricing audit relationship with other tax authorities. Transfer pricing audits have become more aggressive. They are being approached from an economic perspective and are focused on such specific issues as business conversions and restructurings.

In our experience with the Belgian tax authority, the recent developments will result in more focus on transfer pricing, especially considering the evolution that the Belgian transfer pricing audit cell is working closely together with other tax authorities.

APA opportunity

The 2003 corporate tax reform introduced a general ruling practice under Belgian tax law. Additional guidance in this respect is provided through various Royal Decrees.

As a result of the law of 21 June 2004, the Service for Advance Decisions became an autonomous department as of 1 January 2005. More than 100 specialists in various domains of taxation, including transfer pricing, assist the committee. This service has increased flexibility in the ruling process and shortened the decision period (usually less than three months from the filing date for unilateral APAs). This committee is also able to rule prospectively on corresponding downward profit adjustments under Article 185, §2, thus offering significant transfer pricing planning opportunities.

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