The Belgian tax authorities have recently initiated a new wave of transfer pricing audits. Many taxpayers have already or will soon receive an in-depth questionnaire requesting bulk taxpayer information in relation to their transfer pricing arrangements.
This first request for information on intercompany transactions and the activities carried out by the Belgian company or branch marks the formal beginning of the audit process. In practice, the audit process takes place over several months, even years, depending on the complexity of the topic(s) (challenges in relation to the use of (carried-forward) tax losses might take longer for example). Once a request for information has been received, companies have one month to provide the requested information (typically, a one-month extension of this deadline can be granted but it needs to be requested in due time).
The information to be provided in this first round of questions will be extensive and will often exceed what is generally considered essential information for the Belgian tax authorities to validate a taxpayer’s taxable base. Recent experience shows that the questionnaire covers some ‘new’ non-tax topics such as internal audit procedures and ERP systems. Moreover, the requested information frequently aligns with what taxpayers have already disclosed to the Belgian tax authorities as a result of the submission of their transfer pricing documentation such as the Master File (form 275MF) and the Local File (form 275LF). In practice we see that this information is used by the tax authorities to perform risk assessments and can trigger audits. Consistency checks of the filed transfer pricing documentation with statutory figures may be performed and discrepancies will require justification.
Experience shows that the initial questionnaire is often followed by a request to share extensive information on the bookkeeping or other data systems. This may often look like a fishing expedition which is in principle not allowed.
Send a timely request for a ‘pre-audit’ meeting to avoid a fishing expedition
We would strongly recommend that you send a timely request for a ‘pre-audit’ meeting prior to sharing any documents or data to ensure the scope of the request and the overall inquiry of the Belgian tax authorities is clear. A more purpose-bound approach can also avoid burdensome processes to extract dumps from data systems. When an audited company is asked for information on other group entities which it does not have at its disposal, there is no obligation to provide this information (although draft legislation containing this obligation is in the pipeline) and no sanction can be applied. The Belgian tax authorities can rely on international legal instruments to request such information from foreign tax authorities. In practice we also see more coordination between the tax authorities of different territories and this will likely increase since DAC 7 enhanced international cooperation (see also PwC Legal’s previous newsflash regarding the implementation of DAC 7).
Since the 2022 tax reform, the tax authorities have been able to approach the judge to request that they apply a penalty payment in the event that the taxpayer does not cooperate with the tax audit. It is therefore important to explicitly agree on which information will be provided to avoid the application of this measure.
Key takeaways
- Regular risk assessments on submitted information: Companies are mostly selected on the basis of data-mining carried out by the Belgian tax authorities, using for example the filed TP documentation. Elements such as fluctuating or deviating profit margins, absence of TP documentation, absence of any underlying contracts, recent DAC6 filings, restructurings or a structurally loss-making activity make a transfer pricing investigation more likely. In this respect, we would recommend that you perform risk assessments on the basis of the documents shared with the Belgian tax authorities to mitigate potential risks effectively.
- Avoid ex post documentation: Appropriate supporting documentation should be drafted prior to a transaction taking place. Avoid relying on ex post documentation whenever possible.
- Keep a record of all relevant documentation: Although the current legal retention period for documents is 10 years, in some scenarios we would recommend that you retain documentation for an even longer period of time. For example, in the case of (carried-forward) tax losses or tax exempted provisions, taxpayers should always be able to substantiate the origin of the losses in the assessment year the losses are being used or how the conditions for the application of the exemption are fulfilled. A well-developed documentation system is key in these cases and must be updated according to changing legislation. Also in the event of changes in ERP systems, there must be a way to consult the data during this period.
How PwC can assist
PwC and PwC Legal have worked together in close collaboration on numerous tax audits and have developed a well-defined approach to help your company to reply appropriately to requests for information, whilst preserving your rights as a taxpayer. We are more than happy to assist you in the event of a tax audit and/or to prepare solid documentation/a defence file to serve as a starting point when addressing questions raised by Belgian tax authorities. We can also organise workshops on this topic to help you efficiently prepare for and proactively manage a tax audit.
Feel free to reach out to Carla Buyens or your designated contact person in the event of a transfer pricing audit.
