New wave of TP audits started in Belgium
Since the beginning of February 2019, a large number of Belgian tax payers have received transfer pricing requests for information from the Belgian tax authorities. The number transfer pricing audits is expected to materially increase this year with more than 150 audits. As a result of the BEPS-initiative of the OECD, Belgian tax authorities have put increased focus on transfer pricing. Next to the introduction of formal Belgian TP documentation requirements in 2017, Belgium has continued to reinforce its Transfer Pricing Audit team in past years.
The Belgian tax authorities have a specialized Transfer Pricing Audit team with currently more than 30 transfer pricing specialists. Recently, the Special Tax Brigade (Bijzondere Belastinginspectie - BBI/Inspection Spéciale des Impôts – ISI) also added specialist transfer pricing resources, which were transferred from the Transfer Pricing Audit team. In recent days, we have seen that the BBI/ISI also issued similar transfer pricing questionnaires to various companies in Belgium.
‘Regular’ transfer pricing audits generally start with a request to complete a lengthy transfer pricing questionnaire (vraag om inlichtingen / demande de renseignements). The current questionnaires issued generally cover financial years 2016 and 2017 (tax assessment years 2017 and 2018). The information request contains a list of 31 questions which relate to the company’s overall business, intra-group transactions, functions, risks and assets (including intangible assets). In addition, detailed information regarding the existence of transfer pricing documentation and methodology is requested. In principle, the answers to these questionnaires need to be provided within 30 days. Incomplete or delayed responses can lead to ex officio tax assessment by the Belgian tax authorities. The taxpayer has the opportunity to have a pre-audit meeting to discuss the list of information prior to answering the questionnaire. The information gathered by the tax authorities in the initial meetings and requests forms the basis for often detailed and complex transfer pricing discussions in subsequent months. The overall audit process can last up to a year, sometimes longer. Taxpayers need to be well prepared when answering these questions.
The new TP questionnaires sent out are broadly similar to those sent in previous years. New questions include: (i) a request for descriptions of the intercompany flows with Belgian affiliates and thus no longer only cross-border transactions and (ii) in the case of a transfer of assets (tangible, intangible and financial), taxpayers have to provide relevant documents such as sales agreements and invoices, valuation report and details of capital gains/losses recognized.
The selection of companies targeted by a TP audit occurs via data mining in the majority of cases. Over the past years, we observed that especially companies incurring losses, undergoing business restructurings or having irregular financial results are being more systematically targeted. Given the introduction of the Belgian TP filing and documentation requirements (including Master File, Local File and Country-by-Country reporting), Belgian tax authorities have much more information available to perform more detailed data mining focusing on e.g. the availability of transfer pricing documentation, existence of restructurings, transfer of (intangible) assets, large interest payments and cash pool positions, etc.
Going forward - for financial years starting as of 1 January 2018 - tax adjustments imposed as a result of a tax audit will constitute a minimum taxable base against which no tax deductions other than the current-year participation exemption will be allowed. This will apply if a tax increase of at least 10% is imposed. As a consequence, tax adjustments will more often lead to a direct cash-out. Within this evolving transfer pricing environment, it is important for Belgian taxpayers with intercompany transactions to prepare themselves for transfer pricing audits by ensuring their transfer pricing policies are at arm’s length and that they have underlying supporting transfer pricing documentation available. Furthermore, taxpayers should monitor and comply with compulsory transfer pricing filing formalities, to avoid being identified as non-compliant via the data mining tools. A controversy strategy to reduce the risks upon audit can be to obtain a unilateral or multilateral advance pricing agreements for important transactions with the relevant competent authorities.