Belgian tax administration publishes two circular letters on transfer pricing
On 25 February 2020, the Belgian tax administration published the final version of the transfer pricing circular letter (i.e. circular letter 2020/C/35) that provides guidance on the Belgian tax administration’s position regarding certain transfer pricing items in the context of ongoing base erosion and profit shifting developments (BEPS). Moreover, at the end of June 2020, an additional circular letter was published (i.e. circular letter 2020/C/88) reflecting the tax administration’s commentaries on selected frequently asked questions (FAQs) with regard to required transfer pricing reports. Both circular letters will be discussed briefly in this article.
Transfer pricing circular letter (Circular Letter 2020/C/35)
The circular letter on transfer pricing as published in February 2020 adheres mostly to the principles included in the 2017 version of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, but also provides insights on the interpretations and preferences of the Belgian tax administration.
The letter details the considerable work carried out by the OECD with respect to transfer pricing matters following BEPS Actions 8-10 – “Aligning Transfer Pricing outcomes with value creation” and the “Transfer Pricing guidance on financial transactions”, released on 11 February 2020.
The majority of the provisions in the Circular Letter will apply retroactively to related-party transactions undertaken on or after 1 January 2018. Only a limited number of provisions will be applicable for related-party transactions undertaken on or after January 2020. For related-party transactions before 1 January 2018, the Belgian tax administration will follow the regulations in force in that period.
The Letter also confirms that the rulings that have been granted by the Service for Advance Decisions before the issue of the letter are not subject to review in retrospect following the viewpoints stated in the Letter.
While the Letter is broadly aligned with the 2017 OECD Transfer Pricing Guidelines, some elements are interesting and worth highlighting.
A first point of attention is the calculation of the net profit level indicator when applying the Transactional Net Margin Method. In principle, the Belgian accounting standards should be used as a reference to determine which costs to include in the cost basis. As a result of amendments introduced by the Royal Decree of 18 December 2015, transposing Directive 2013/34/EU, the presentation of the financial statements (in this case the income statements) was changed for financial years beginning after 31 December 2015. The main difference concerns the disappearance of the exceptional results and the appearance of the non-recurring results, i.e. non-recurring operating income (code 76A), non-recurring operating costs (code 66A), non-recurring financial income (code 76B) and non-recurring financial costs (code 66B).
When calculating the net profit level indicator, taxpayers will need to take into account the recording of these non-recurring results in the annual accounts. Therefore, in the absence of any link between the non-recurring results and the activity concerned, adjustments should be made when calculating the margins of both the Belgian taxpayers as well as the comparable companies (if such information is available for the latter companies).
The Circular letter also includes some additional guidance of the Belgian tax administration on comparability analyses, recommending amongst others an annual update of the financial results of the companies included in the final set of comparable companies in the original comparability analysis. Moreover, the Belgian tax administration is of the opinion that a full revision of the original TP study is preferable every three years, unless the facts and circumstances necessitate a faster revision. The latter has also proven to have an impact on the duration of rulings granted by the Service for Advance Decisions, as the latter is more likely to grant rulings only for a period of 3 years now instead of a period of 5 years, which has been common practice in recent years.
In order to increase the reliability of the comparability analysis, the Belgian tax administration has indicated a preference for the interquartile range (IQR) approach to the selected comparison points without excluding other statistical methods that minimise the risk and the margin of error regarding unknown or difficult to quantify comparability flaws. The administration will accept the result of the tested batch when the result of the tested transaction falls into the IQR. However, if the result of the tested party falls outside the range, the Belgian tax administration has pointed out that it prefers to adjust to the median of the range unless the taxpayer is able to provide good arguments to substantiate an adjustment to a different point within the range.
The Circular Letter also includes guidance on the transfer pricing aspects of financial transactions and indications of the preferences of the Belgian tax administration when dealing with such transactions. In the context of financial transactions, the Belgian tax administration takes more explicit positions compared to the OECD:
- The Belgian tax administration claims that individual group companies cannot have higher credit ratings than the credit rating of the group as a whole, while the OECD does not take such a strong position in the “Transfer Pricing guidance on financial transactions”, released on 11 February 2020;
- Moreover, the Belgian tax administration is of the opinion that a cash pool is a short-term transaction, and hence positive or negative cash pool balances that are maintained for a period of 12 months can be recharacterised as long term loans, a position that is not explicitly mentioned by the OECD.
Finally, the Belgian tax administration also acknowledges the existence of commercial tools available on the market to determine credit ratings and accepts the use of such tools, while the OECD Guidelines rather emphasise the limitations and downsides of the use of these commercial credit rating tools.
Publication of the FAQ (Circular letter 2020/C/88)
In the context of the OECD initiative to tackle Base Erosion and Profit Shifting (‘BEPS’), Action 13 focuses on increasing transparency through the provision of adequate information in a consistent manner for the performance of (transfer pricing) risk assessments. In this respect, the OECD has introduced a three-tiered approach to transfer pricing documentation which requires multinational enterprises to compile (1) a Country-by-Country report (CbCr); (2) a Master file; and (3) a Local file.
Like many other countries, Belgium has also developed new measures to implement BEPS Action 13 into Belgian law (Programme law of 1 July 2016) by introducing a transfer pricing documentation approach consisting of the following four forms: Country-by-Country Reporting (Form 275-CBC), the notification on CbCR (Form 275-CBC NOT), the Master file Form (Form 275-MF) and the Local Form (275-LF).
However, it is especially striking that the Belgian Local Form (Form 275-LF) differs significantly from the concept of a local file as described by the OECD Guidelines. Where the local file is a detailed and qualitative written report, the Local Form as referred to by the Belgian tax authorities is a quantitative, numerical form consisting of two parts: a Part A containing general information, and a more detailed Part B containing information on the cross-border intercompany transactions between the Belgian entity and its affiliated foreign group companies.
During an extensive period following the publication of the forms, only limited guidance was available on the correct interpretation and completion of the forms. Hence, with the publication of Circular Letter 2020/C/88 on 30 June 2020, the Belgian Tax Authorities have tried to take away uncertainties with an update of the Frequently Asked Questions (FAQs) on the Belgian transfer pricing documentation requirements in the context of BEPS13.
This circular provides an updated list of commentaries which were previously published by the Belgian tax administration in May 2018, and provides further useful insight and clarity on selected topics. Amongst others, reporting obligations for specific types of companies such as consortiums, joint ventures, partnerships, non-profit organisations, permanent establishments, etc, were addressed. In addition, specific guidance on the content, details and format of the information to be presented in the forms is included.
The circular can be seen as the next step of the Belgian tax administration in providing more clarity on the compliance process and helping taxpayers in meeting their BEPS 13 compliance obligations. While the circular confirms general approaches followed by professionals in tax practices and the Organisation for Economic Cooperation and Development (OECD) Guidance, the additional guidance provided by the Belgian Tax Authorities on the Belgian transfer pricing documentation requirements is only provided for specific selected topics, thereby leaving a lot of room for ambiguity and interpretation on other aspects.
For more information regarding this topic, please contact one of the transfer pricing colleagues of BDO Belgium.