Belgium: Draft Circular Letter on Transfer Pricing
Alignment with 2017 edition of the OECD Transfer Pricing Guidelines
The draft circular appears to be generally aligned with the 2017 edition of the OECD Transfer Pricing Guidelines, and aims at adopting and addressing some of the recently introduced OECD concepts for the Belgian context. This draft Circular letter covers chapters 1 to 3 and chapters 6 to 9 of the OECD Transfer Pricing Guidelines.
With regard to the determination of transfer prices, it is formally clarified that existing contracts should be seen as the starting point. However, if the functional analysis of the transaction deviates from the terms of the contract, the behavior of the parties involved in the transaction predominates / takes precedence over the contractual provisions which will be ignored by the Belgian tax administration. The importance of each risk-taking party having control over those risks, and having the financial capacity to bear these risks, has also been highlighted.
In discussing the transfer pricing methods, some points of concern are discussed in further detail, including:
- Potential rejection of benchmarking studies that show an arm's length range that is considered too wide;
- The use of budgeted costs versus actual costs;
- The calculation of the cost base and the treatment of pass-through costs (i.e., costs with an advance nature);
- The use of Belgian accounting standards versus other accounting standards; and
- The calculation of net margins and the impact of the non-recurring costs and revenues.
The chapter discussing the comparability analysis emphasizes that local comparables in the country of the tested party should preferably be used, but an expansion to other markets may be made under certain conditions. An update of the original comparability analysis should be performed every three years – in line with OECD guidance.
When testing the arm’s length nature of the transaction, the Belgian tax administration will first refer to the interquartile range of the comparability analysis. The result of the tested party will be accepted when the result of the tested transaction falls within the interquartile range, and when the pricing was based, on an ex ante basis, on the median position. If the result of the tested transaction falls outside the interquartile range, the tax administration will, in principle, make adjustments towards the median of the range.
With regard to the hard-to-value intangibles (“HTVI”), the draft Circular letter confirms a number of positions which are aligned with the OECD report published on June 21, 2018. For example, it is assumed that there is always an information asymmetry between the taxpayer and the tax authorities. For this reason, the Belgian tax administration may consider ex post outcomes as presumptive evidence on the appropriateness of the ex-ante pricing arrangements. Please note that this principle will only be applied by the Belgian tax administration on controlled transactions involving HTVI which have taken place on or after October 5, 2015.
For low value-adding services, a simplified approach may be applied for the determination of arm’s length charges. If an activity does qualify for the simplified approach, a mark-up of 5 percent of the relevant cost base may be applied.
On business restructurings, a number of principles with respect to the termination or substantial renegotiation of existing arrangements are being discussed in the draft Circular letter. In this respect, the question arises whether the restructured entity would be entitled to a compensation under arm’s length conditions.
Finally, the Draft Circular letter refers to the Authorized OECD Approach with respect to the attribution of profits to permanent establishments. In this respect, a distinction is made between double tax treaties based on the OECD Model Conventions before 2010, and from 2010 onwards.
Guidance on intercompany financing
The draft circular also includes additional guidance on intercompany financing, having adopted various concepts from the yet-to-be finalized OECD discussion draft on the transfer pricing aspects of intercompany financing. Specific positions related to intercompany financing are discussed, such as the following:
- A company of a MNE group would not require any payment for ‘implicit support’ (i.e. the benefit of a better credit rating that may arise from being part of an MNE group);
- Preference for the 'yield approach' when determining the compensation for the guarantees;
- Deposits or borrowings that remain for a six-month period or longer will be recharacterized as short-term loans;
- All cash pool participants are considered to have the same credit rating;
- Cash pool leaders acting as administrators to the cash pool should not be remunerated more than a market-based service fee, which would be typically determined based on a cost-based approach.
The draft Circular letter provides some interesting insights on the Belgian tax administration’s positions on various transfer pricing topics, which are expected to form the basis for various discussions during transfer pricing audits. In general, it would be fair to state that the Belgian tax administration continues to be broadly aligned with the OECD transfer pricing guidance, which has been adapted to the Belgian context.
Nevertheless, one should note that the suggestion to perform under certain circumstances adjustments towards the median of the arm’s length range (instead of adjustments to the interquartile range) is far reaching and not in line with the OECD guidelines. Considering the substantial impact of this position, one could question whether the proposed wording will be retained in the final version of the Circular