Overview of national and international transfer pricing regulations.

OECD Guidelines

To avoid double taxation, reduce conflict between tax authorities, and promote international trade and investment, the Organisation for Economic Co-operation and Development (OECD) member countries adopted the arm’s-length principle, which provides that individual group members should be taxed on the basis that they act at arm’s length in their dealings with each other.


In applying the arm’s-length principle, the difficulty lies in determining the arm’s-length price. The OECD’s "Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations" contain guidance for establishing the arm’s-length price. They deal with or govern the resolution of transfer pricing disputes between the tax authorities of OECD member countries.


OECD member countries draft their legislation to incorporate the guidelines, and they are encouraged to follow them in their domestic transfer pricing law and practice.


The OECD guidelines provide for a comparison of the conditions in a controlled transaction (a transaction between related parties) with the conditions in an uncontrolled transaction (a transaction between unrelated parties). For such comparisons to be useful, the economically relevant characteristics of the transactions being compared must be sufficiently similar.


In dealings between two unrelated parties, compensation will usually reflect the functions that each performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or entities are comparable, a comparison of the functions performed and the risks assumed by each party is necessary.


An understanding of a company’s functions and assumed risks allows a determination of the appropriate method to use to examine the transfer price.
The guidelines set out a number of methods that can be used to determine whether the conditions imposed in the commercial or financial relations between related parties are consistent with the arm’s-length principle.


Traditional Transaction Methods

  • Comparable uncontrolled price (CUP) method
  • Resale price method
  • Cost-plus method


Transactional Profit Methods


  • Profit split method
  • Transactional net margin method


The Belgian tax authorities increased their focus on transfer pricing issues following the issuance of an administrative circular in June 1999 that contained general guidelines on transfer pricing and a summary of the Organisation for Economic Co-operation and Development (OECD) guidelines. In November 2006, the tax authorities issued a new transfer pricing circular regarding transfer pricing documentation, where they have alligned themselves with the principles as laid down in the EU Code of Conduct as approved in June 2006. The circular urges tax payers to pro-actively document their transfer prices.


There are no specific transfer pricing rules, but Belgian tax law includes various provisions that can be used by the Belgian tax authorities to challenge the transfer pricing of a Belgian taxpayer. These include provisions dealing with abnormal or benevolent advantages granted to non-residents by Belgian companies and general rules governing the deductibility of business expenditures. The Belgian courts have not dealt extensively with transfer pricing issues, although certain court cases demonstrate the willingness of the Belgian courts to accept that companies belonging to the same group may interact with each other in ways other than independent parties would interact (e.g. providing financial support below market conditions, in some specific circumstances).


Comparison with OECD Guidelines
Although the Belgian tax authorities have not yet published Belgium-specific guidance with respect to transfer pricing methodologies, they accept the pricing methods as set out in the OECD guidelines (chapters II and III). There is no “best method” stipulated, although transaction-based methods are preferred over profit-based methods.

Taxpayer Considerations
Although there are no specific transfer pricing documentation requirements under Belgian tax law, the Belgian tax authorities do expect taxpayers to maintain appropriate documentation in support of their transfer pricing policies. The Belgian tax authorities have not yet provided guidance as to what constitutes appropriate transfer pricing documentation. However, the administrative circular issued in June 1999 included the OECD guidelines as an attachment (including guidance on documentation); therefore, it is likely that the OECD guidelines will form the basis for an additional administrative circular detailing the documentation requirements for Belgian taxpayers.

Potential Penalties
No specific penalties are imposed under Belgian tax law in the case of transfer pricing adjustments. However, general tax penalties may be levied ranging from 10 percent to 200 percent, depending on the level of bad faith and repeated infringement (Article 444 of the Belgian Income Tax Code). No penalty will be levied if the taxpayer proves that the incorrect reporting was due to circumstances beyond its control and that it has operated in good faith.

Advance Pricing Agreements
The Belgian tax authorities will enter into advance pricing agreements. In addition, a new general ruling system was introduced as of January 1, 2003 (Article 20-28 of the Law of December 24, 2002, published in the Belgian official Gazette of December 31, 2002). Taxpayers already present in Belgium and foreign investors willing to start a business in Belgium will be able to obtain from the Belgian tax authorities an advance ruling on a wide range of tax issues covering both direct and indirect taxes. Particularly in the field of inter-company pricing, the Belgian tax authorities have already shown their willingness and capability to act in a proactive and cooperative way with the taxpayer.

Arbitration Convention
By the law of February 27, 2003, Belgium ratified the protocol of May 25, 1999 extending the EU Arbitration Convention. This protocol is due to enter into force when all of the EU Member States have ratified the Arbitration Convention.

In addition, the Belgian tax authorities stated via an administrative circular (March 15, 2003) that in case of a request on the basis of EU Arbitration Convention, one would automatically rely on the mutual agreement procedure (article 25 OECD Model Treaty). As such, the Belgian tax authorities follow, contrary to the past, the Commentary on the OECD Model Tax Treaty.


* Adm. Circular of June 28, 1999 N° AFZ/98-0003 (Dutch version) or N° AAF/98-0003 (French version)

Global Transfer Pricing Review

Transfer pricing audit activity is increasing globally as many governments gain further experience in analyzing intercompany transactions and look to protect their respective tax bases.