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Belgium: Draft circular on transfer pricing, position of tax administration

Belgium: Transfer pricing, tax administration

The Belgian tax administration on 9 November 2018 published a draft “circular letter” on transfer pricing.


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The draft circular sets out the positions of the Belgian tax administration on multiple items stemming from ongoing base erosion and profit shifting (BEPS) developments. The draft circular is subject to public consultation until 12 December 2018.

Alignment with 2017 edition of OECD Transfer Pricing Guidelines

The draft circular generally appears to be aligned with the 2017 edition of the OECD Transfer Pricing Guidelines, and aims at adopting and addressing some of the recently introduced OECD concepts for purposes of the Belgian transfer pricing rules. The draft circular covers chapters 1 to 3 and chapters 6 to 9 of the OECD Transfer Pricing Guidelines. 

With regard to the determination of transfer prices, the draft circular formally clarifies that existing contracts are to be viewed as the “starting point.” However, if the functional analysis of the transaction deviates from the terms of the contract, the behavior of the parties involved in the transaction would predominate and take precedence over the contractual provisions which would be ignored by the Belgian tax administration. The importance of each risk-taking party having control over the risks, and having the financial capacity to bear these risks, has also been highlighted.

In discussing the transfer pricing methods, some points discussed in further detail include:

  • Potential rejection of benchmarking studies that show an arm's length range that is considered too broad
  • Use of budgeted costs versus actual costs
  • Calculation of the cost base and the treatment of pass-through costs (i.e., costs with an advance nature)
  • Use of Belgian accounting standards versus other accounting standards
  • Calculation of net margins and the impact of the non-recurring costs and revenues

The chapter discussing the comparability analysis emphasizes that local comparables in the country of the tested party would preferably be used, but an expansion to other markets could be made under certain conditions. An update of the original comparability analysis would need to be performed every three years—in line with OECD guidance.

When testing the arm’s length nature of the transaction, the Belgian tax administration would first refer to the interquartile range of the comparability analysis. The result of the tested party would be accepted when the result of the tested transaction falls within the interquartile range, and when the pricing was based, on an ex ante basis, on the median position. If the result of the tested transaction falls outside the interquartile range, the tax administration would, in principle, make adjustments towards the median of the range.

With regard to the hard-to-value intangibles, the draft circular confirms a number of positions that are aligned with the OECD report (published 21 June 2018). For example, it is assumed that there is always an information asymmetry between the taxpayer and the tax authorities. For this reason, the Belgian tax administration may consider ex post outcomes as presumptive evidence on the appropriateness of the ex-ante pricing arrangements. Note that this principle would only be applied by the Belgian tax administration on controlled transactions involving hard-to-value intangibles having taken place on or after 5 October 2015.

For low value-adding services, a simplified approach may be applied for the determination of arm’s length charges. If an activity does qualify for the simplified approach, a mark-up of 5% of the relevant cost base could be applied. 

On business restructurings, a number of principles with respect to the termination or substantial renegotiation of existing arrangements are discussed in the draft circular. In this respect, one question is whether the restructured entity would be entitled to a compensation under arm’s length conditions.

Finally, the draft circular refers to the “authorized OECD approach” with respect to the attribution of profits to permanent establishments. In this regard, a distinction is made between income tax treaties based on the OECD Model Conventions before 2010, and those from 2010 onwards.

Guidance on intercompany financing

The draft circular also includes additional guidance on intercompany financing, having adopted various concepts from the yet-to-be finalized OECD discussion draft on the transfer pricing aspects of intercompany financing.  

Specific positions related to intercompany financing include: 

  • A company of a multinational enterprise (MNE) group would not require any payment for “implicit support” (i.e., the benefit of a better credit rating that may arise from being part of an MNE group)
  • Preference for the “yield approach” when determining the compensation for the guarantees
  • Deposits or borrowings that remain for a six-month period or longer would be recharacterized as short-term loans
  • All cash pool participants would be considered to have the same credit rating
  • Cash pool leaders acting as administrators to the cash pool would not be remunerated at more than a market-based service fee, which would be typically determined based on a cost-based approach

KPMG observation

The draft circular provides some interesting insights on the Belgian tax administration’s positions on various transfer pricing topics—that are expected to form the basis for various discussions during transfer pricing audits.  In general, tax professionals believe it would be fair to state that the Belgian tax administration continues to be broadly aligned with the OECD transfer pricing guidance, which has been adapted to the Belgian context.

Nevertheless, taxpayers need to note that the suggestion to perform, under certain circumstances, adjustments towards the median of the arm’s length range (instead of adjustments to the interquartile range) is far-reaching and not in line with the OECD guidelines. Considering the substantial impact of this position, there is a question whether the proposed wording would be retained in the final version of the circular.


For more information, contact a tax professional in Belgium with KPMG’s Global Transfer Pricing Services group:

Dirk Van Stappen | +32 3 821 19 18 |

Yves de Groote | +32 2 708 44 34 |

Andres Delanoy | +32 9 241 88 20 |

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