Tax Advisers - Deloitte

Belgium
Belgium increases its scrutiny
of transfer-pricing issues
Patrick Cauwenbergh
Deloitte
Brussels
In the 2004 edition of this Guide, we described the Belgian
transfer-pricing regulations introduced on July 9 2004. The
2004 Act introduced the arm’s-length principle as the
domestic legal basis, as well as the concept of correlative
adjustments, which implied that the Belgian tax authorities
would accept a downward adjustment to the taxable results of
the Belgian taxpayer to the extent that it corresponded to a
correct upwards foreign transfer-pricing adjustment.
The 2004 Act overwrote Article 26 of the Belgian Income
Tax Code (BITC) in the case of cross-border transactions
between two companies that are part of a multinational
group of associated enterprises; or between two permanent
establishments (one being Belgian), a Belgian head office and
its foreign permanent establishment, or a foreign head office
and its Belgian permanent establishment. However, the domestic controlled
transactions and the cross-border transactions between a company and a physical
person are still covered by Article 26 of the BITC. The 2004 Act also introduced a
more flexible and pragmatic advance-pricing agreement regime, allowing taxpayers to
obtain advance security about all issues related to tax-aligned supply chain structures
(such as exit charges, permanent establishment, relationship between transfer pricing
and customs value, and so on).
In addition to the 2004 Act, in 2005 Belgium introduced a tax deduction for risk capital
(notional interest deduction). Both the 2004 Act and the notional interest deduction
are measures that have made Belgium especially attractive for foreign investments.
Indeed, under the new advance-pricing agreement regime of the 2004 Act, it is
possible to obtain a partial or even total tax exemption of the excess (operating) profit
resulting from restructuring a business, while still respecting the arm’s-length
principle. The second measure, the notional interest deduction, provides for a
deduction from the taxpayer’s taxable base equal to a percentage of the entity’s
(allocated) equity. In the right circumstances, the excessive profit ruling and the
notional interest deduction could be combined and thus provide an effective way to
substantially reduce the group’s effective tax rate. Furthermore, the absence of strict
thin capitalization rules, the relative ease of implementing hybrid financing structures
and the attractive holding company features further contribute to making the Belgian
tax climate similar to, or even more enticing than, those found in more traditional
conduit countries, such as Ireland, Luxembourg or Switzerland.
Along with creating these tax-planning opportunities, the Belgian tax authority
sharpened its focus on the in-depth transfer-pricing audits. In 2005, a special transferpricing
audit squad was established, consisting of specialists and focusing on the
transfer-pricing audits of companies belonging to a multinational group. The squad
uses a detailed customized questionnaire that is time-consuming and difficult to
answer if no transfer-pricing documentation is readily available.
Most recently, on November 20 2006, the Belgian tax administration issued a new
circular that provides the tax administration with general guidelines regarding the
transfer-pricing documentation in the case of an audit. Although the circular does not
impose any obligation to prepare transfer-pricing documentation in advance, it defines
the factors and situations which make the audit likely for certain Belgian taxpayers.
Among these are the following: the use of so-called tax haven countries when no
economic value is added as well as direct and indirect payments to entities in tax
havens; the use of back-to-back arrangements to hide the true nature of a transaction;
complex arrangements and circular structures that produce little or no additional
economic value; structural losses at a level of Belgian group entities; reorganization
and relocation of affiliated entities, particularly involving the valuation and payment
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