Tax audits make proper transfer pricing documentation essential

Belgian group companies are obliged to provide transfer pricing documentation if their separate financial statements demonstrate:

• a turnover exceeding EUR 50 million;
• total assets exceeding EUR 1 billion, or;
• an average employment of over 100 FTE. 

To be able to present this documentation, a company must collect data from various reports and then reformat it to fit the required forms for transfer pricing documentation.

Transfer pricing documentation important to tax authorities

Since 2016, many companies have established processes that allow them to provide the required documentation as efficiently as possible. Their current approach focuses primarily on avoiding penalties (such as fines for non-submission) and ensuring that the documents are correct. However, it can be interesting to take things a step further. Recent judgements have revealed that during audits, the tax authorities mainly assess whether a company’s intragroup transfer pricing methods comply with the ‘arm’s length’ principle. In practical terms, this means transfers between companies within the group must always occur under the same conditions as would apply between non-affiliated companies in similar circumstances. Basically, they must be in line with the prevailing market.

Open to interpretation

We note that transfer pricing has been receiving increasing attention during tax audits. A transfer price adjustment can often impact the taxable base significantly. However, Belgian tax law does not have any binding rules that lay out precisely what is or is not permissible. Instead, the law refers to the OECD Guidelines for Multinational Enterprises, though these rules are not legally binding either. Moreover, they are stated up in very general terms, meaning they can be interpreted and applied in various ways. Auditors are happy to use this fact to support a wide range of proposed adjustments. In such cases, if you cannot rely on well-prepared transfer pricing documentation, it can be difficult to dispute an auditor’s proposals.

Preparation is half the battle

Conversely, proper documentation can be very useful in countering an over-enthusiastic auditor. When you employ consistent transfer pricing methods, it makes it much harder for the tax authorities to prove that the resulting prices are not in line with the market. It then becomes less likely that the taxpayer will bear the burden of proof. Also, in such cases, the tax authorities cannot simply propose an alternate pricing method of their own that would to higher taxable profits in Belgium. They will first need to demonstrate that the method used is faulty. That means taking the time to ensure proper transfer pricing documentation is an effective way to reduce your risk in the event of an audit. Besides, it also saves you having to spend time formulating objections to the tax authorities’ positions later on.