Transfer pricing documentation

Less than a month away from 17 October 2022, many companies in Belgium are gearing up for the upcoming filing deadline of the Local File forms (275LF). This applies to companies (and permanent establishments) that meet at least one of three thresholds: (i) operational and financial income of EUR 50 million, (ii) balance sheet total of EUR 1 billion, and/or (iii) over 100 full-time employees/equivalents.

While many companies generally see this as a compliance exercise involving an update of the relevant qualitative information and the extraction of transactional data, others mull over areas such as:

• Does a particular transaction that took place in the year fall under the definition of a business restructuring that will need to be reported?
• Does the company maintain sufficient documentation and analysis (i.e., functional analysis and economic analysis) to check off the box that declares that a “TP study” is available?  If not, how can this be gathered efficiently?
• Are data on the transactions and dealings of the permanent establishments of the Belgian head office readily available for reporting?
• Are there economic reasons supporting the fluctuating operating profitability over the three-year financial data reported in the Local File form?
• What to do when the company has no intercompany agreements in place, even though these are expected by the tax authorities?

Most certainly, the key question that companies have post-filing is whether the company will be selected for a transfer pricing audit, as the Local File form gets screened through the Belgian tax authorities’ data mining tool.  

The OECD Action 13 approach to transfer pricing documentation has been implemented in Belgium since financial year 2016. In addition to the Master File that is typically prepared by the headquarters (depending on a Group’s approach), companies often prepare a Local File report for each Belgian entity that meets the Local File form (275LF) requirements – to meet the expectations of the Belgian tax authorities. In a transfer pricing audit, the Local File report is often requested by the Belgian tax authorities, to be submitted within 30 days upon request.

Preparing transfer pricing documentation may oftentimes be viewed as yet another compliance burden. However, viewed differently, the preparation of transfer pricing documentation may help to highlight potential opportunities or risk exposure areas for a Group’s consideration and attention.  For example, the review of a company’s controlled transactions and the respective transfer pricing policies may bring to light incorrectly implemented pricing policies. A review of the interactions between related parties also provides an opportunity to assess whether a given transfer pricing policy is appropriate – for instance, the lack of interest charged on outstanding trade receivables may be assessed to deviate from arm’s length behavior. Furthermore, the compilation of documentation also often uncovers the lack of contractual agreements between related parties – which the tax authorities often use as an initial and quick means to assess whether related-party transactions approximate arm’s-length transactions.   

Ultimately, putting in place timely transfer pricing documentation enables a company to be well-prepared for a transfer pricing audit – having thoroughly assessed a company’s transfer prices and policies as a first line of defense.  

As the role of the Tax function grows within multinational groups, groups are increasingly looking to ease the compliance burden of the Tax function to free up their resources for areas that add most value. Consequently, more multinational groups now seek yet greater automation in their transfer pricing documentation process – starting from the extraction and classification of transfer pricing data, which is subsequently analyzed and fed into the documentation. With proper mapping of such data, coupled with the right technology and tools, multinational groups can put in place a process that transforms its raw data into meaningful transfer pricing data sets. When done right, this data-to-documentation process requires much less manual preparation from a group’s Tax function yet provides significantly superior and accurate data analytics when compared to the past.

For more information on how KPMG’s Transfer Pricing professionals can help you with the upcoming Belgian transfer pricing filings or with transfer pricing automation, please feel free to contact us.