Starting from 2018, the Belgian tax authorities (hereinafter referred to as the “BTA”) decided to take the tax audits of multinational enterprises to the next level, focusing on transfer pricing and complex international tax issues (resulting from, among others, the implementation of the Anti-Tax Avoidance Directive, “ATAD”). This led to a significant reinforcement of the BTA personnel involved in transfer pricing audits (i.e., through the Special Transfer Pricing Audit Division), as well as to the increased overall cooperation within the Large Enterprises (“LE”) Department and the Special Investigation department (“BBI/ISI”) of the BTA to strengthen tax audits in these areas.
In 2019, the total fiscal and parafiscal revenue in Belgium amounted to EUR 204.625,3 million, equivalent to 43,2 percent of the gross domestic product (“GDP”) of the country.[i] Two thirds of this amount were generated by direct and indirect taxes.[ii]
Under the COVID-19 circumstances, the BTA have been taking a proactive approach in considering the tax and transfer pricing related impacts of the crisis, creating special internal workgroups and conducting “brainstorming” sessions on changes arising from the current economic situation. Going forward, the tax initiatives to support the economic recovery in the pandemic will be closely intertwined with the increase in tax transparency trends, as well as the BTA’s focus on tackling tax avoidance, evasion, and non-compliance.
With over 21.000 employees, the Federal Public Service (“FPS”) Finance is the largest federal department in Belgium.[iii] The General Administration of Taxes accounts for 38 percent of all personnel in FPS Finance:
The General Administration of Taxes is further divided into three departments, namely: (i) Private Individuals Department, (ii) Small and Medium-Sized Enterprises (“SME”) Department and (iii) Large Enterprises (“LE”) Department.[iv] It is the LE Department of the General Administration of Taxes that is in charge of receiving transfer pricing forms and reports, corporate income tax (“CIT”) returns, value-added tax (“VAT”) returns, withholding taxes (“WHT”) returns and other special taxes notifications of the multinational enterprises, analysing the tax positions of the latter, initiating tax audits and settling the tax disputes in Belgium.
The LE Department of the General Administration of Taxes also includes the Special Transfer Pricing Audit Division, among others:
In addition, there is also a separate Special Tax Inspectorate (“STI”) that accounts for 3 percent of all personnel in FPS Finance and is responsible for the fight against serious and organized tax evasion.[v]
The dynamics of the total tax revenues in Belgium over the years 2015-2019, as well as the segregation by type of revenue (i.e., direct taxes, indirect taxes, actual social contributions, and capital taxes)[vi] are depicted in the figure below.
As compared to the GDP of Belgium, the total tax-to-GDP ratio decreased by 1,0 percentage point from 44,2 percent in 2018 to 43,2 percent in 2019. The slight decline in fiscal and parafiscal revenues in 2019 was attributable mainly to the increase in advance payments by companies in 2017 and 2018 (due to the introduction of an increased penalty charged in the event of insufficient advance payments) – which resulted in a drop in the residual corporate income taxes in 2019[vii]:
The tax returns and transfer pricing forms provide a considerable amount of information to the BTA to facilitate formal enquiries and the initiation of tax audits and investigations. Therefore, it is crucial for taxpayers to perform a thorough self-assessment through the required filings in Belgium. This has become particularly important after Belgium’s adoption of the three-tiered approach to transfer pricing documentation in accordance with the OECD’s Base Erosion and Profit Shifting (“BEPS”) Project under Action 13 – where taxpayers meeting the prescribed thresholds in Belgium will need to file a Master File Form and a Local File Form annually. This is in addition to the requirements on the filing of Country-by-Country Reports and Notifications in Belgium.
To facilitate the tax audit process, the BTA had invested considerably in software and datamining tools to identify taxpayers at a higher risk of BEPS as audit targets, in addition to supplementing its manpower to review the filed documents and to conduct audits on the identified potential risk exposure areas. As an indicator, the number of transfer pricing inspectors in the Special Transfer Pricing Audit Division itself (under the LE Department of the General Administration of Taxes) was increased from 22 in 2016 to more than 40 in 2020.
In enhancing cooperation with the LE Department, the specialists of the Special Transfer Pricing Audit Division have organized transfer pricing trainings for other audit teams of the LE Department. There has been a Transfer Pricing centre of excellence created, with more than 200 people from the LE Department (of which more than 100 were inspectors) being trained in accordance with the elaborated educational program.[viii] Each of the 20 teams of the LE Department were assigned a number of (multinational) groups of companies, that were subject to thorough transfer pricing and international tax audits. During these audits, the teams of the LE Department were assisted and supported by the specialists of the Special Transfer Pricing Audit Division. Consequently, it can be seen that the various teams of the LE Department of the General Administration of Taxes are broadening the scope of their audits by also considering transfer pricing and international tax issues. Furthermore, the STI has concluded a protocol with the Special Transfer Pricing Audit Division on cooperation and coordination in the transfer pricing area.
Tax audits and tax investigations carried out by the BTA are usually conducted through exchanging information and correspondence with taxpayers. In some cases, when there is no agreement between the parties, an arbitration or litigation may be triggered.
The most common triggers for a tax audit, among others, include: (i) late submission of the tax returns, late tax payments, or errors being identified that need to be corrected; (ii) lack of consistency or substantial deviations between different returns, such as a large fall in income or an increase in costs; (iii) company costs being abnormally high for businesses in the particular industry, etc.
It should be noted that transfer pricing audits are (in most cases) conducted separate to general corporate tax audits. This means that while a taxpayer may have been subject to a corporate tax audit, this does not mean that the transfer pricing policies of the taxpayer had been assessed and accepted by the BTA. A separate transfer pricing audit may follow the general corporate tax audit – particularly where it has been observed that there has been greater collaboration between the respective audit teams of the BTA.
The tax investigation process starts from the general tax audit questionnaire (a so-called request for information or ‘Vraag om Inlichtingen’ or ‘Demande de Renseignements’) sent out by the tax inspector to the taxpayer, either in Dutch or in French language, with the list of requested information and due date for provision of such information. The due date for submitting the requested information is typically within 30 days upon request. Upon receipt of such questionnaires, taxpayers may decide to request for a pre-audit meeting, which allows the tax / transfer pricing inspectors to get familiar with the company. Requesting for a pre-audit meeting may also be favourable for taxpayers to potentially learn about the inspectors’ key areas / transactions of concern. Should the need arise, there may also be separate meetings requested by the BTA to interview specific financial and non-financial personnel of the company, or even, provided certain conditions are fulfilled and formal procedures are respected, to request for a view into the company’s folders / inboxes to verify certain information. The back-and-forth interactions and negotiations between the taxpayers and the inspectors continue, until a position is made by the inspectors. The inspectors are typically bound by the general statute of limitations, and are required to close the audits before the statute of limitations expire. The statute of limitations on tax assessment in Belgium is three years, starting from the closing of the accounting year. In case of fraud, the statute is seven years.
In case tax losses carried forward are available, the Belgian tax authorities could challenge the origin of these tax losses carried forward even if they would originate from financial years preceding the statute of limitations period. Belgian taxpayers should therefore always be able to substantiate and document the available tax losses carried forward. Interesting to also note is that as from assessment year 2019 (financial years starting as from January 1, 2018), if at the occasion of a tax audit, the Belgian tax authorities would impose an additional taxable base and would levy a tax increase of at least 10 percent, then the additional taxable base imposed by the Belgian tax authorities can no longer be neutralized with available carried forward tax attributes (e.g., tax losses carried forward available) and will therefore constitute the minimum taxable base of the taxpayer.
Occasionally, the tax inspectors may also try to negotiate and agree with the taxpayers on certain positions for future periods, beyond the fiscal years covered under the tax audit.
Due to the current COVID-19 outbreak, tax and transfer pricing audits are being held mostly virtually, which has not impeded the general tax audit process in Belgium. Needless to say, it is advisable for taxpayers to get the necessary support throughout the audit process, and to make an effort to be sufficiently prepared from the beginning of the tax / transfer pricing audit – to avoid the burden of proof falling on the taxpayer, potentially putting it in a disadvantaged position.
Following the corporate income tax reform in Belgium, additional tax assessments / tax adjustments imposed as a result of a tax audit, will result in an effective cash-out for the taxpayer for the financial years starting as of January 1, 2018, disallowing the use of the available tax attributes (e.g., losses carried forward, innovation and notional interest deduction, etc.) against the tax adjustments. Therefore, properly prepared underlying supporting documentation with respect to the tax and transfer pricing matters is crucial in ensuring that the company is well prepared for any tax audit that may be initiated.
Another strategy to reduce potential tax audit risks would be to obtain unilateral, bilateral, or multilateral rulings / advance pricing agreements (“APAs”) with the Belgian competent authorities covering the most critical arrangements or related-party transactions / transfer pricing policies of the company. Rulings and APAs provide tax certainty to taxpayers, and the Belgian ruling commission and competent authorities have demonstrated openness to such negotiations and discussions with companies to facilitate such certainty.
At the beginning of each year, the Special Transfer Pricing Audit Division tends to send out its standard transfer pricing questionnaire / request for information to a few hundred Belgian taxpayers who are part of multinational enterprises. Such standard questionnaires normally contain a list of more than 30 general questions which require information on the company’s overall business activities, intra-group transactions, functions, risks and assets, as well as existing transfer pricing policies and studies. In addition to the standard questions, some specific questions may be added by the particular tax inspector based on available information (e.g., information available through transfer pricing disclosure forms filed). For certain larger multinationals, bespoke questionnaires / requests for information have also been used by the Special Transfer Pricing Audit Division. In general, responses to these questionnaires will need to be provided within 30 days upon receipt. Incomplete or delayed responses can result in an ex officio tax assessment. As mentioned earlier, upon the request of the company, there may also be a pre-audit meeting arranged with the inspector. Should a taxpayer opt for such a pre-audit meeting, the tax authorities will need to be informed of the request within 10 days upon receipt of the questionnaire.
Transfer pricing audits are oftentimes triggered through the datamining performed by the BTA on the transfer pricing forms (i.e., Master File Form, Local File Form, or Country-by-Country Reports). For instance, companies that have indicated in their Local File Forms that they have undergone business restructurings, or that they have no transfer pricing studies (i.e., documentation in line with the OECD’s Action 13 requirements) may be identified for a transfer pricing audit. Furthermore, as the Local File Form requires a disclosure of the last three years’ of financial results, this makes it easy for the BTA to identify companies that have experienced fluctuations in their operating results – making these companies more susceptible to a transfer pricing audit. Needless to say, stark inconsistencies and differences between information filed through the forms between years may also be an audit trigger for the BTA. Other potential transfer audit triggers include transfers of (intangible) assets, large interest payments and cash pool positions, transactions with tax havens, etc.
The accurate delineation of transactions, procurement arrangements, transactions pertaining to intangibles (and particularly for hard-to-value intangibles), or captive arrangements may receive particular attention during a transfer pricing audit.
Following the three-tiered approach to transfer pricing documentation, it is expected that a considerable number of multinational enterprises will undergo a thorough transfer pricing and international tax (in particular, with respect to ATAD-topics) audit in the coming years.
Furthermore, the BTA has become increasingly involved in international collaboration and multilateral (joint) transfer pricing audits – particularly with the tax authorities in the Netherlands and Austria, with whom there appears to be regular interaction.[ix] In addition, similar to some other countries in Europe, it is expected that the BTA may start initiating Country-by-Country Reporting driven transfer pricing audits, as they further examine the Country-by-Country Reports both submitted by qualifying Groups in Belgium, and those received from foreign tax administrations through automatic exchange.
In the corporate income tax area, although the majority of the tax audits are of a general nature, the Belgian tax authorities do tend to have specific areas of focus. Identified areas of focus are often targeted by means of datamining. These areas of focus change over the years depending on the international, financial, political and legislative landscape. Hereafter, an overview is provided of the areas of focus in the recent past.
Correct application of tax incentives
Belgian tax law foresees a number of tax incentives: the innovation income deduction, the investment deductions for R&D investments and energy saving investments, the partial exemption from withholding tax on professional income for R&D personnel, etc. The correct application of these tax incentives and the related formalistic and administrative conditions is reviewed frequently and strictly by the Belgian tax authorities. It is therefore highly recommended to perform a detailed review on whether tax incentives could be applied, and if so, that all substantive and formal conditions are met, and the relevant required documentation is available.
The OECD, BEPS and Multilateral Instrument (“MLI”) continue to make the recognition of and the profit allocation to permanent establishments (“PE”) a hot topic. The Belgian tax authorities actively review the recognition of and the profit allocation to PEs. These PE tax audits generally focus on the (physical) presence in the jurisdiction, the duration of that presence, and the occurrence of contracting activities in the jurisdiction.
Formal rulings can be requested to obtain legal certainty on both the recognition of and the profit allocation to PEs.
In recent years, the Belgian corporate income tax authorities have, among others, focused on the following topics: tax deductibility of provisions (specific focus likely triggered by the gradual decrease of the statutory corporate income tax rate from 33,99 percent in assessment year 2018 to 25 percent in assessment year 2021), deductibility of interest expenses triggered by leveraged equity reductions, application and recapture of foreign branch losses (specific focus likely triggered by change in legislation with respect to this topic as from assessment year 2021), application of the foreign withholding tax credit and reporting of payments made to tax havens.
According to the 2020 Report of the European Commission on the VAT gap, although still extremely high, the overall VAT gap has declined marginally in recent years. Nevertheless, the Belgian VAT gap still amounts to approximately 10%, or EUR 3,6 billion. As a result, it goes without saying that VAT audits remain highly important for the Belgian authorities to ensure the correct payment of VAT to the national treasury.
Although there is no concrete checklist available with specific elements to predict a VAT audit, there are several situations which may attract the attention of the VAT authorities and consequently increase the risk of a VAT audit. In general, a VAT audit can in first instance, be triggered by some automated comparisons. Particularly, the VAT authorities centralize all yearly client listings and on this basis, create a supplier listing for each taxable person. The mismatch between the supplies on the list and the purchases reported by the taxable person may trigger a VAT audit. The same goes for mismatches between exempt intra-community supplies and taxable intra-community acquisitions, which can be distilled from the EC sales listings and the data-exchange between EU Member States. It is expected that, due to the increased electronic VAT compliance obligations, these analytical controls (i.e., data mining) will become even more important in the future.
In addition, certain events are also typical for triggering a VAT audit, such as the construction of a new building, a termination of the taxable activity or the request for refund of a substantial VAT credit. Finally, where the VAT authorities become aware of operations which are to be regarded as suspicious and where certain elements indicate a fraudulent intent (e.g., based on information retrieved from the STI), a targeted VAT audit can be performed.
The standard statute of limitations period is 3 years, as from 31 December of the year in which VAT becomes chargeable. Nevertheless, this period can be extended to 7 years in cases of fraudulent intent or where information from another EU Member State, evidentiary data or legal proceedings prove that taxable transactions have not been declared in Belgium, transactions were wrongly exempted or unlawful VAT deductions were applied.
In order to initiate a VAT audit, the competent tax authorities will send the taxpayer a notification to announce the VAT audit. The appointed inspectors may request information from any person enabling them to verify the accurate collection of the VAT. This information may relate to the taxpayer being questioned or pertaining to a third party. The VAT inspectors will have access to the books, accounts, invoices, copies of invoices and other documents a taxable person is legally required to store in order to ensure a correct collection of the VAT. In order to fulfil this obligation, a taxable person shall store invoices, copies of invoices, accounts and other legally required documents for a period of 7 years, either in paper format or electronically (provided that certain conditions for electronic storage are met).
In recent years, the focus of the Belgian VAT authorities during a VAT audit has mainly centred on the correct deduction of input VAT on costs with limited deductibility (e.g., car costs, staff benefits such as restaurant and catering costs, reception costs, IT equipment, etc). In addition, VAT revisions to be made in the framework of an alternative use of business assets (e.g., when donated for free or used for private purposes of the company owner or his personnel) or a change in the taxable person’s VAT deduction regime (e.g., due to VAT exempt financing or holding activities), are key considerations for the Belgian VAT authorities.
Once the audit has been completed and the VAT inspectors have effectively identified infringements, they will send a correction note to the taxpayer. With this notification, the Belgian VAT authorities will be able to impose a proportional or non-proportional fine for each VAT error, irrespective of the taxpayer’s “good faith”. Where traditionally the Belgian authorities have applied a strict penalty policy, a new, more flexible penalty regime was introduced in 2018. Based on this new policy, the taxpayer is able to request (without automatic relief) a full waiver from the VAT penalty, when certain conditions are cumulatively met. Notwithstanding that the new penalty policy entails a relaxation compared to the past, it should be noted that the Belgian penalty policy remains rather stringent compared to other EU Member States.
MAPs are generally available to Belgian taxpayers under the double tax treaties where Belgium is a party to – where there are options to apply the specific article (e.g., Article 25) of the double tax treaties, as well as the EU Arbitration Convention. In the event of double taxation, a Belgian taxpayer may file a formal MAP request to initiate the process aimed at eliminating double taxation through the negotiations between the respective competent authorities.
As at December 31, 2019, Belgium has a total of 563 active MAP applications, with 51 transfer pricing cases (i.e., relating to the attribution / allocation of profits between related parties) and 442 other cases started in 2019:[x]
As for rulings in Belgium, the Belgian Ruling Commission has indicated that the number of new ruling applications in 2019 totalled 1.216 (including 59 applications relating to transfer pricing issues), and the number of new ruling pre-filings totalled 2.317 (including 85 pre-filings relating to transfer pricing):[xi]
It should be noted that rulings concluded in Belgium are subject to the European Commission’s mandatory exchange between the respective EU tax authorities in countries where parties to the transaction are present. Such cross-border rulings are submitted to a central depository, where information such as the (i) identification of the taxpayer and group, (ii) content of the ruling / APA, (iii) criteria used for determining the transfer prices, and the (iv) identification of the Member States affected by the APA / ruling, are reported.
Further on the exchange of information, Belgium has 67 bilateral relationships in place (as at March 31, 2020) for the exchange of Country-by-Country Reports, including those activated under the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (“CbC MCAA”), under bilateral Competent Authority Agreement (“CAAs”) and under the EU Council Directive (2016/881/EU).[xii] Within the context of its international exchange of information agreements that allow automatic exchange of tax information, Belgium has taken steps to have qualifying competent authority agreements in effect with jurisdictions of the Inclusive Framework that currently meet the confidentiality, consistency, and appropriate use conditions. There are also mandatory disclosure rules under the Directive on Administrative Cooperation (“DAC”) 6 in force in Belgium, targeted at identifying potential tax-driven cross-border arrangements that may facilitate BEPS and harmful tax practices.
Although datamining is already applied by the Belgian tax authorities, it would be fair to assume that the Belgian tax authorities will continue to focus on the increased automatization of the identification and execution of tax audits. It is hence imperative that taxpayers maintain the necessary documentation supporting the positions taken in the respective returns and filings.
The relationship between Belgian taxpayers and the BTA is also expected to evolve towards a relationship of proactive communication and cooperation. Since 2018, a so-called “horizontal monitoring” pilot project has been initiated, where a small number of large Belgian taxpayers and the BTA meet on a regular basis to discuss tax matters proactively. It may also be interesting to note that Belgium is also participant to the second International Compliance Assurance Programme (“ICAP”) Pilot programme aimed at facilitating multilateral co-operative risk assessment and assurance.
Considering the impact of the COVID-19 pandemic, it may be that the Belgian tax authorities also pay close attention in the coming year on the application of certain Covid-19 relief measures by taxpayers (e.g., correct application of carry back of tax losses, application of Covid-19 subsidies, application of temporary unemployment, etc), as well as changes to transfer pricing policies or restructurings that the Groups have applied to cope with the pandemic.[xiii]
The BTA are also expected to support the ongoing efforts at the OECD and European levels to reform international taxation, such as in the fields of digital taxation and the tax aspects of the digitalization of the economy – and consequently give these areas the necessary attention in future audits.