Since the beginning of 2024, many more Belgian companies have faced a specific transfer pricing (‘TP’) audit, and the number of audits is increasing all the time. Such audits are very thorough and labour-intensive and involve in-depth scrutiny of the company’s analytical figures. In this article we discuss recent developments relating to TP audits and share our experiences in this regard.
TP audits used to be carried out exclusively by TP experts who were part of the Transfer Pricing Unit. In recent years the work of this unit has been decentralised to the local tax offices. As a result, within the local Large Companies teams, inspectors have also been trained as TP experts, so that they too can conduct TP audits. Such an audit is often triggered by (or combined with) a standard corporate tax audit. In addition, TP experts are active within the Special Tax Inspectorate (STI).
The specific Transfer Pricing Unit still exists, of course, and is also very active in carrying out TP audits.
This increase in specialised TP inspectors within the various departments of the Belgian administration means that more such audits can be conducted.
Since the beginning of 2024, the administration’s TP audits no longer focus solely on multinationals: they now also affect SMEs that operate internationally. The aim is to audit these SMEs at the start of their international expansion, so that SMEs can know from the outset whether they are using a correct TP policy for their intra-group transactions.
The law of 20 November 2022 has significantly extended the audit and assessment periods for financial years starting on or after 1 January 2022 (assessment year 2023).
This period has now been extended from three to six years if the tax return contains certain international components, such as an obligation to submit Belgian transfer pricing forms (master file (275MF) / local file (275 LF) / country-by-country report (275CBC)).
As a result, the intra-group transactions of Belgian companies (which are subject to the Belgian TP documentation requirements) can be audited for six financial years.
Companies are selected via an internal data mining system in which the administration looks for certain warning signs. The specific triggers are kept secret by the administration.
However, it is clear that in recent years, in addition to the well-known triggers for a TP audit (e.g. consistent losses, restructuring, complex structures, significant TP corrections at the end of the financial year, etc.), the administration is increasingly using the following sources of information to select companies for TP audits:
In other words, there are numerous sources that the administration can use in order to select a company for a TP audit.
In the past, TP audits were more likely to challenge benchmarking and conduct an in-depth analysis of the selected comparables. As a result, the tax authorities often removed certain comparables from the final set of results, so that the market-based range changed and a correction had to be made in order to fall within the range.
In recent audits we have noticed that the auditors are increasingly challenging Belgian companies’ function and risk profile in order to check whether the TP methodology used is consistent with the economic reality of the activities. For example, if a company believes that it is the principal of the group (e.g. for production activities), it will have to demonstrate that it also performs all the functions expected of a principal and bears the related risks. If it turns out that the functions performed are limited and the risks borne are slight, the Belgian administration will change the company’s function and risk profile (for example to that of a contract manufacturer) and will therefore also adjust the TP method.
As a result, a trend can be seen of adjusting not only the level of compensation for intra-group transactions but also the entire TP model.
These factors mean that TP audits have a long completion time, lasting an average of 18 months.
One striking feature of recent audits is that the main TP corrections relate to – among other things – the following elements / transactions:
Every TP correction leads to a minimum taxable base, which means that the company cannot offset any tax deductions against it. The company will only be able to use its tax deductions if it is able to negotiate the non-application of the 10% tax surcharge. In practice, it seems to be increasingly difficult to persuade the administration to drop the 10% tax surcharge, as it has received an internal instruction that it must in principle always apply the surcharge, regardless of the amount of the correction.
As a TP correction automatically gives rise to economic double taxation, this can only (and sometimes only partially) be remedied through the formal MAP procedure (mutual agreement procedure) or the procedure based on the EU arbitrage amount (only between EU Member States). To avoid these procedures which can last years, we always advise companies to contact the foreign administration informally to see whether it can go some way towards addressing the economic double taxation.
My company has been selected for a TP audit. What now?
Being prepared for a TP audit is therefore essential, given the large amount of information that has to be provided in a short period of time. This goes for both large Belgian companies and, from now on, internationally active Belgian SMEs.
As well as having well-supported TP documentation for the relevant intra-group transactions, it is also essential for companies to be able to demonstrate that they have clear, consistent and economically accurate internal rules and processes to support the documentation.
Our Transfer Pricing team has already supported many Belgian companies during complex TP audits. With its experience and expertise, it can support your company with the following services:
Do not hesitate to get in touch with one of our experts if your company is subject to a TP audit.