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Transfer Pricing Forum: March 2017

Transfer Pricing Forum: March 2017

Transfer Pricing Forum: March 2017

1. To what extent are multinational enterprise’s intra-group contracts respected for transfer pricing purposes?

Intercompany agreements can be considered as part of a multinational enterprise’s transfer pricing documentation. Intercompany agreements are often used as the primary source of information, where no traditional transfer pricing documentation reports are in place.

However, the Belgian tax authorities do regularly challenge the arm’s length character of the pricing clauses included in intercompany agreements (e.g., the lack of termination payments upon early termination by one of the parties).

If the economic reality is not properly reflected in the intercompany agreements, Belgian tax authorities will (or will try to) disregard the intercompany agreement in place. This approach is in line with the various reports published by the OECD in the context of its Base Erosion and Profit Shifting (BEPS) action plan.

Although in the context of a Belgian transfer pricing audit, the arm’s length character of the terms and conditions of intercompany agreements are often questioned, the approach taken in the context of a court case might be slightly different. Judges will typically, considering their legal background, be more reluctant to totally disregard intercompany contracts in place.

If contracts are set at arm’s length, intercompany agreements are valuable in determining comparability between controlled and uncontrolled transactions and delineating functions, risks, and assets of each party involved in the transaction.

Even for transactions between a parent company and its branch (so-called ‘dealings’), it is recommended that a ‘memorandum of understanding’ be drafted in order to formalize the allocation of functions, risks, and assets between parties.

Following the implementation of BEPS Action 13 local file requirement into Belgian Law1, Belgian Tax Authorities provide the option to attach relevant inter-company agreements to the local file form. This demonstrates the increased attention of the Belgian tax authorities in relation to intercompany agreements.


2. How much emphasis is placed on related party agreements as part of a taxpayer’s transfer pricing documentation, or as an important source of functional analysis information?

As referred to under point 1, there is an increased emphasis on the terms and conditions included in inter-company agreements. It is recommended that intercompany agreements be put in place, especially for audit defense, although having intercompany agreements in place is not compulsory.

In practice, the functional analysis will be more detailed in the transfer pricing policy or in the transfer pricing reports, compared to the related party agreements. The level of detail provided in the agreement can vary from contract to contact. Some groups prefer to outline specifics while others just state parties will apply an arm’s length pricing for the transaction covered by the agreement.

Whereas in the past the Belgian tax authorities were mainly reviewing the pricing clause of intercompany agreements, we are seeing a shift towards in-depth review of all relevant clauses, together with a comparison of such clauses with other similar third party contracts in place.


3. What content is expected to be found in related party agreement?

The more details provided in an intercompany agreement, the more it will be considered as reliable by Belgian tax authorities, as more in line with third party agreements. One-page intercompany agreements are therefore in practice more likely to be challenged.

Similar to third party agreements, related party agreements must be legally binding and enforceable.

The content expected in an agreement will vary de-pending on the type of related party agreement (e.g. debt agreements, license agreements). When drafting a related party agreement, the five OECD comparability factors listed below should be considered to evaluate the terms of the transaction:


  • Contractual terms
  • Functions performed with emphasis on assets used and risks assumed
  • The characteristics of property transferred or services provided
  • The economic circumstances of the parties and of the market in which the parties operate
  • The business strategies pursued by the parties


Pricing clauses of intercompany transactions are often slightly different compared to third party agreements, as the pricing clause should enable the proper implementation of the transfer pricing method selected. This will often result in the need to be able to make periodic or year-end adjustments to align budgeted figures with actual figures. The intercompany agreement will also have to properly define the qualification (e.g. service rendered or product price adjustment) of periodic or year-end adjustments, as this might also have implications for VAT or customs purposes.


4. To what extent can taxpayers be held to their related party agreements, even if they are not in line with normal commercial arrangements or economic reality?

Belgian Tax Authorities consider the economic substance of the transaction and do not rely solely on what is written in the contract. BEPS Actions 8-10 requires careful delineation of the actual transaction between the associated enterprises by analyzing the contractual relations between the parties in combination with the conduct of the parties. The conduct will take precedence over the contractual arrangements if the contracts are incomplete or are not supported by the conduct.2

For example Belgian Tax Authorities would expect an arm’s length termination clause to be included in a related party distribution agreement in the event that the principal unilaterally terminates the contract, even if the intercompany agreement does not foresee an early termination penalty.

However, if the related parties implement a pricing methodology that is different from the pricing methodology referred to in the intercompany agreement, one will have to put forward strong arguments towards the Belgian tax inspectors in order to convince them that the applied pricing was correct. A regular update of intercompany agreements is therefore recommended.


5. Is the situation different for certain transactions? For example, financial ones?

Especially in the context of intercompany financial transactions, more weight is accorded to the intercompany agreements in place. Reasons for this include the fact that (i) often no other transfer pricing documentation is available in relation to inter-company loans and (ii) that specific clauses such maturity, sub-ordination, convertibility, early repayment possibilities, etc. might have an important impact on the applied pricing.

Belgian Tax Authorities focus on intent, reasonableness and economic realities of financial related party agreements. It is therefore important to have detailed intercompany agreements in place in relation to intercompany financial transactions, which demonstrates that each clause corresponds to what third parties would have agreed upon in comparable circumstances.

If the agreement does not match the economic realities of the parties involved, Belgian Tax Authorities may attempt to re-qualify the terms and conditions of the agreement or the pricing reflected therein.

The inclusion of a subordination clause when no other debt has been contracted by the company might be questionable, especially in case the interest rate component has been increased in order to take into account this element.

As a second example, consider a related party agreement in which a short term loan is renewed each year with a short term rate applied. Belgian Tax Authorities may try to requalify the loan as a long term loan (if Belgium is the lender). They might be able to demonstrate that, from the inception of the loan, par-ties knew that the short term loan would be renewed annually.

In addition, if an agreement contains an early termination clause with no pre-payment penalty, Belgian Tax Authorities would expect the borrower to exercise the termination clause when market interest rates are significantly lower. In theory, Belgian Tax Authorities are not allowed to make opportunity management decisions, which makes it harder to requalify term agreements. In practice, Belgian Tax Authorities evaluate the facts and circumstances of the agreement, and the economic realities to assess whether an adjustment is necessary.


Jules Cherichel, Yves de Groote and Dirk Van Stappen

Original Source: Bloomberg Tax


1 Law of July 1, 2016 published in the Official Gazette of July 4, 2016.

2 BEPS Action 8-10, Aligning Transfer Pricing Outcomes With Creation, Final Report


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