The establishment of a special transfer pricing audit department was formalised in the administrative circular letter of July 4, 20061. Although established officially on July 1, 2006, the special transfer pricing audit department was already operational as from late 2004.
This special department within the Belgian tax administration only consists of a small number of highly specialised tax inspectors, who deal with approximately 60 to 70 files per year. Whereas in 2007, their transfer pricing investigations resulted in €85 million being added to the taxable base and €12 million of additional taxes being collected, the figures increased to €330 million (taxable base) and €67 million of taxes in 2011. Besides carrying out own transfer pricing audits (hereby making use of a special data mining tool to select its files), the transfer pricing inspectors also advise their colleagues of the local audit offices on transfer pricing matters and assist the international department when negotiating bilateral or multilateral APAs or carrying out MAPs.
In the current economic tough times, business restructuring issues in particular are getting increased attention from the special transfer pricing audit department. When restructuring expenses (or the provision thereof) are retraced in the financial statements and corporate income tax returns or business restructurings are mentioned in the reports of the Belgian company or anywhere else (e.g. internet, industry websites or reports), the inspectors will challenge the deductibility of the resulting restructuring expenses (e.g. cost of laying off staff, depreciations of assets, etc) in the hands of the Belgian tax payer and will try to have (part of) the restructuring expenses recharged to the foreign group entity, which has taken the decision to restructure and/or the foreign group entities which have benefited from the transfer of functions following the business restructuring.
Furthermore given the continuing need for funds of the Belgian government, the number of transfer pricing audits will significantly increase as from 2013 onwards. The number of files is expected to double. In this respect a number of selected and trained tax inspectors of regional tax offices will assist the specialised transfer pricing inspectors in carrying out transfer pricing audits. The increased focus on transfer pricing matters and the rising number of transfer pricing audits is supported by the high number of companies in Belgium who did receive the rather lengthy standard transfer pricing questionnaire in January 2013.
Instead of just answering all questions raised in this questionnaire within the one month period foreseen by law, the companies (and their adviser) should start with asking for an extension and solicit a so-called pre-audit meeting with the Belgian tax authorities.
Indeed the circular letter of November 14, 20062, providing guidance to the tax inspectors (and to the tax payers) on how a transfer pricing audit should be performed, clearly states that general or lengthy requests for information regarding the tax payer’s transfer pricing policy should be avoided. Instead, the tax inspector should first discuss the tax payer’s situation during a pre-audit meeting. Herewith the Belgian tax authorities recognise that the information needed for a transfer pricing audit always depends on the specific facts and circumstances of the case. The circular letter refers several times to this principle.
The pre-audit meeting is not only useful in order to learn about the company’s structure and organisational matters. It should also enable the inspector to discuss the list of useful information and documentation with the tax payer and as such to retain only the relevant subjects. In this respect, an elaborated list of useful information has been added as an annex to the circular letter. This list refers to information with respect to the company’s group structure, intercompany transactions, functional and economic analysis, intellectual property, cost sharing arrangements, (transfer pricing) rulings and documentation regarding the transfer pricing policy.
The same list of issues can be found back in the request for information that will be sent by the special transfer pricing audit department to tax payers that will be subjected to an audit. It is this request for information (in a slightly updated format) that has been received by a significant number of tax payers in Belgium during January 2013 (and that will be received by other tax payers in the months to come).
In line with the provisions of the Code of Conduct, this pre-audit meeting aims at minimising compliance costs for the company being under audit. The tax payer will also know which supplementary information and documentation needs to be provided. In principle, answers to the questions raised and underlying documentation should be provided to the tax authorities within one month, but the tax inspector should grant an extension in cases where an acceptable request was submitted by the tax payer.
Practice shows that companies and their advisers do not always make use of the possibility to solicit a pre-audit meeting. Nevertheless this should be envisaged. Indeed just bluntly answering the standard questions of the request for information is quite often not the best approach.
As KPMG has been advising already for a very long time, in Belgium, despite the absence of contemporaneous transfer pricing documentation requirements and special transfer pricing fines, tax payers should operate as a prudent business manager is expected to. Reflecting well beforehand on the acceptability of the transfer pricing system being applied and collecting pro-actively the necessary supporting transfer pricing documentation is a must when one wants to survive a transfer pricing audit. The current significant increase of transfer pricing audit activity only makes this warning more relevant than ever before and increases the likelihood that as a tax payer you will be subjected to a transfer pricing audit in Belgium.
1 Cp.221.4/A/601.321 (AOIF 26/2006) in Dutch; Cp.221.4/A/601.321 (AFER 26/2006) in French.
2 Ci.RH.421/580.456 (AOIF 40/2006) in Dutch; Ci.RH. 421/580.456 (AFER 40/2006) in French.