During recent years, TP has been one of the main areas of focus of the BTA and of increased importance in Belgian tax practice. The BTA has consistently ramped up its TP audit capacity and frequency. In 2024, the TP cell has again initiated a wave of TP audits affecting hundreds of taxpayers (some of them are still to be contacted).

Selection of taxpayers

Companies are typically selected through internal data mining based on a risk assessment analysis, the indicators of which remain confidential. Nevertheless, we understand the probability of becoming subject to an audit notably increases in case of declining or volatile results, structural loss-making positions, high debt to equity ratios, the presence of a permanent establishment, the involvement in business restructurings, and payments to low-tax jurisdictions.

Next to this, noncompliance with TP documentation obligations is considered in the selection process. Hence, taxpayers are strongly recommended to prepare and file all documentation requirements (i.e., local file, master file, country-by-country (CbC) report, and/or CbC notification) timely and with accurate information aligned with other data sources (tax returns, annual accounts and reports).

Audit kick-off

A TP audit is generally initiated through a standardized broad questionnaire with over 30 questions.
Before answering the questionnaire, taxpayers often choose to organize a “pre-audit” meeting with the BTA to present how the entity operates within the group and its applied TP policy. Such informal meeting allows to delineate the parameters of the audit.

Topics scrutinized

The BTA investigates a broad range of topics, and notably tends to focus on the reconciliation between the TP policy and annual accounts, the origin of losses & the alignment with the entity’s functional profile, the allocation of synergies with respect to procurement activities, the DEMPE functions in relation to IP, and intragroup service fees (including cost base and allocation keys).

Financial transactions

In addition, particular focus is given to intragroup financial transactions. The BTA carefully evaluates both the applied interest rates and intragroup debt size, and further investigates the arm’s length character of cash pool arrangements; in particular, the appropriate allocation of cash pool benefits and the reclassification of a structural cash pool deposit or borrowing in a term loan.

Cash tax

A TP adjustment in Belgium can result in an unexpected effective tax cost or "cash tax", regardless of the taxpayer's tax situation in the year in which the adjustment occurs (e.g., loss). Indeed, an adjustment accompanied by a tax increase of at least 10% constitutes a minimum taxable base against which the taxpayer cannot offset tax attributes.
As the BTA may waive a tax increase in the absence of bad faith, the taxpayer has an interest in actively cooperating and demonstrating good faith in the context of a TP audit.
Taxpayers are also effectively taxable on the amount of received non-arm’s length benefits, the amount of which constitutes a minimum taxable base.

Hence, particular attention should be given to applying the correct pricing with respect to transactions involving Belgian taxpayers as TP adjustments can be made in both ways (when the price the Belgian taxpayer charges is either too high or too low).

How to prepare?

Availing of solid supportive documentation proves not only to make the process more efficient through more purposeful information requests but also lowers the risk of challenges by the BTA.

In addition to standard transaction-based TP documentation and written agreements, it is recommended to appropriately document important business decisions and economic events impacting the (profitability of the) company (e.g. business rationale of entering into a transaction although it may not be profitable). Documentation should be drafted prior to a transaction taking place. Based on experience, the BTA (and courts) seem more reluctant to rely on ex post documentation. Practical difficulties may also arise if relevant people have left the organisation.

Next to this, taxpayers should be able to make the bridge between the TP policy and the financial statements. The BTA expects to receive segmented P&Ls per business/transaction to assess profitability at EBIT-level. Although not strictly mandatory, preparing an annual OECD local file is helpful to anticipate such demands.

The BTA strongly focus on the operating result of the audited company as well as foreign counterparties. This often triggers discussions on profitability in case the taxpayer applies the CUP or gross margin method, as well as a transactional method based on budgeted costs. Taxpayers applying such methods should be able to demonstrate the appropriateness thereof in line with its functional profile (in particular, that local people have sufficient autonomy to manage risks leading to losses/deviations based on actuals).

As regards financial transactions, attention should be given to broader economic characteristics (including debt capacity, loan conditions & purpose and options realistically available) to accurately delineate the funding as a loan and avoiding structural cash pool positions exceeding 12 months by periodically monitoring outstanding positions.

For complex transactions, taxpayers can opt to apply for an advance ruling to gain legal certainty (which is frequently opted for in Belgium given the well-established ruling practice).

How to manage?

Should a taxpayer be selected for an audit, due consideration should be given to appropriately responding to the information requests. A constructive and transparent attitude while keeping an eye on the legal boundaries of information requests (e.g. information regarding foreign group entities not at the disposal of the taxpayer) and the burden of proof principles is the key to an effective audit process.

We strongly recommend requesting a ‘pre-audit’ meeting prior to sharing any documents or data. Experience learns that providing a clear overview of the business and intercompany transactions from the start is beneficial to the efficient and smooth running of the audit and may enable the scope of the questionnaire to be narrowed down.

This article was first published by Bloomberg Tax.