Since December 2004, transfer pricing audits of Belgian companies have been conducted by inspectors of the special transfer pricing department of the Belgian tax administration. The magnitude of the transfer pricing adjustments made by this specialized transfer pricing department is considerable, making the transfer pricing department one of the more “profitable” (based on adjustments per capita) departments of the Belgian tax administration.
At the end of January 2015, a new wave of transfer pricing audits was launched, and hundreds of companies in Belgium have received or will receive a detailed request for information on their transfer pricing policy.
In November 2013, the original central team based in Brussels was expanded, with the addition of transfer pricing inspectors located in regional audit centers.
As of January 2014, 15 inspectors composed the Brussels team, with 15 others being located in the provinces (Antwerp, Bruges, Charleroi, Ghent, Leuven/Louvain and Liège). With this increased task force, the number of audit files handled per agent during financial year 2014 was estimated by the transfer pricing department to be 12—i.e., approximately 360 audits per year.
In the early days of the transfer pricing department, audited companies were hand-picked by the tax inspectors based on any publicly available information (e.g., financial statements, websites, databases, FIN-48 disclosures, sector studies, and information disclosed by the media).
Since 2013, file selection decreasingly has been left to the discretion of the tax inspectors because selection is driven by a new data mining tool based on risks analysis—the “mantra data warehouse” software. In setting its goals for 2015, the tax administration now requires that at least 80% of audit files are selected using the data mining tool.
Major risks analyzed by the software include:
In addition, when transfer pricing questions arise during the course of a general corporate tax audit, the tax inspector in charge is strongly encouraged to request the assistance of the inspectors from the transfer pricing department, potentially leading to an in-depth transfer pricing audit.
While small and medium enterprises historically were rarely audited by the transfer pricing department, the new file selection methodology led in 2014 to an increased number of audits for these taxpayers.
In line with the European code of conduct for transfer pricing documentation (27 June 2006) taxpayers qualifying as small and medium enterprise are not required to provide transfer pricing documentation that is as extensive and detailed than the documentation that may be demanded of a larger or more complex company.
Following the selection of a taxpayer for a transfer pricing audit, the sending of a standard request for information by the tax authorities triggers the audit process. In January 2013, the already lengthy list of questions presented at this point was further broadened, and a new update has been included in the 2015 wave of transfer pricing audits.
Among the more recent additions made to the questionnaire, there is a new item requesting a more detailed definition of the role of the Belgian entity in the overall supply chain. The role of Belgian entities must now be explicitly categorized. For a manufacturing entity, for instance, this means indicating whether the company operates as a toll manufacturer, a contract manufacturer, or a fully-fledged manufacturer.
The tax authorities’ expectations in terms of functional and risk profile and of profitability for the Belgian entities will be directly related to the functional category selected by the taxpayer. An accurate understanding of the tax authorities’ expectations for each category therefore, will be necessary in order to avoid lengthy discussions during the tax audit.
For example, recurring losses of a company categorized as toll manufacturer (i.e., bearing very limited risks and taking no title to the goods manufactured) could very likely be challenged by the tax inspectors because these losses may indicate a transfer pricing policy that is not in line with the arm’s length principle. Furthermore, the level of detail that must be provided (financial information) increases. The Belgian tax authorities now request information per business unit.
While the official amount of time afforded the taxpayer to provide the requested information is one month, additional time may still be granted on a case-by-case basis. The addition time granted rarely exceeds a total of three months.
The possibility to solicit a pre-audit meeting is still available, and may be encouraged. As introduced by a 14 November 2006 circular letter, the pre-audit meeting has been specifically mentioned in the request for information since January 2013. Although it is a useful way of minimizing compliance costs for the audited company, practice shows that companies and their advisors do not sufficiently make use of this possibility. When intra-group transactions are limited and follow a straight-forward transfer pricing policy that is in line with the arm’s length principle, starting the audit with a pre-audit meeting significantly shortens the process.
Once the request for information is received by the Belgian company or permanent establishment of the group, it is important that the internal tax department and local transfer pricing adviser are involved early in the process in order to make sure that correct answers are being given to the questions raised in the request for information and to monitor the exchange of information with the tax authorities.
For more information, contact a tax professional in Belgium with KPMG’s Global Transfer Pricing Services group:
Dirk Van Stappen | +32 3 821 19 18 | email@example.com