The recent developments in the international tax world are clearly finding their way into the Belgian tax investigation practice. PwC observes a significant increase in tax audits in which the Belgian tax authorities are focusing on passive income flows (dividend, interest and royalty) and alleged tax abuse through the involvement of intermediary entities.
A number of anti-avoidance provisions have been introduced over the last years, such as the general anti-abuse rules of the EU Parent-Subsidiary Directive and the EU Anti-Tax Avoidance Directive (ATAD) as well as the incorporation of a Principal Purpose Test (PPT), as a minimum standard under the Multilateral Instrument, in many double tax treaties, including the Belgian ones. The European Court of Justice also issued important judgments on beneficial ownership in the so-called “Danish cases” on 26 February 2019, in which the Court took a broad approach to the beneficial ownership concept and mentioned lack of beneficial ownership as an indicator of tax abuse. Last but not least, the recent introduction of OECD transfer pricing guidelines for financial transactions significantly increases the threshold for substance and control over risk for both borrowing and lending entities engaging in financial transactions.
The Belgian tax authorities are clearly inspired by these developments as we have seen a recent increase in tax audits focusing on passive income streams, with the Belgian tax authorities trying to deny withholding tax benefits claimed by taxpayers. Also other cross-border topics, such as anti-hybrid, CFC rules and the arm’s length nature of transactions, are expected to pop up in these audits. The Belgian tax authorities are building up expertise in these areas with specialised and dedicated inspection teams focusing on these topics. The amounts at stake are often very material.
As part of these investigations, PwC observes more international exchange of information between tax authorities to obtain data on foreign enterprises of multinational groups to support their claims. We note in practice that the Belgian tax authorities are also increasingly initiating multilateral tax audits themselves in order to cooperate with foreign tax authorities on transfer pricing and other international tax matters. The exchange of information is often used as a means to extend the traditional investigation and assessment periods. In practice, managing international exchange of information and enquiries from multiple tax authorities at the same time is very complex and time-consuming for taxpayers.
Multinational groups that have or consider transactions involving both significant royalty, dividend and/or interest amounts with intermediate companies should be prepared to defend the compliance of their tax positions even where it concerns structures that are non-abusive in nature and which are commonly applied.
For many companies, the timing of these Belgian tax audits is unfortunate as most of them are in the middle of recovery (both financially and organisationally) from the COVID-19 pandemic and are bracing themselves for the economic backlash still to come. Intensive tax audits may result in a need to reshuffle – already scarce – resources. Taxpayers do however need to be vigilant for these developments. Reviewing the compliance and sustainability of the tax and legal model and carefully considering future transactions can avoid additional unpleasant cash surprises.
Please feel free to contact your regular contact person of PwC and/or PwC Legal for more insights and support.
- Base erosion and profit shifting (BEPS)
- Corporate income tax
- International taxation
- Tax controversy and dispute resolution (TCDR)
- Transfer pricing