Transfer pricing - Additional reporting obligations

In an international context, it is indeed possible that multinational companies maximise benefits in countries where lower tax rates are applied or where they can benefit from a special tax status.

The Programme Law of 1st July 2016 introduces a new section of seven articles (321/1 – 321/7) in the Belgian Income Tax Code (BITC) concerning additional reporting obligations regarding transfer pricing.

According to OECD, transfer pricing are “the prices at which an enterprise transfers physical goods and intangible property or provides services to associated enterprises”. In other words, it is the price of the transactions between enterprises of a same group and resident of different states.

The price of the transactions between enterprises of a same group and resident of different states

These new provisions aim to implement under Belgian law Action 13 of the OECD’s BEPS (Base Erosion and Profit Shifting) action plan which main objective is to combat tax fraud.

1. Reporting obligations

In order to allow the tax authorities to have a complete and accurate overview of companies’ activities and revenues and, on this basis, to carry out a well-founded analysis of the risks of the transfer pricing activities, the BITC contains from now on reporting obligations divided into three components.

1.1 A master file

The master file gives a global picture of a multinational group (nature of its activities, intangible assets, intra-group financial transactions, financial and fiscal consolidated situation, transfer pricing general policy and global distribution of its revenues and of its economic activities).

This file must be filed with the tax administration within 12 months after the last day of the declarable period of the multinational group.

All Belgian constituent entities of a multinational group that have reached during the previous financial year one of the three thresholds below, will have to file a master file:

• A total amount of operating and financial revenue of at least 50 million EUR;
• A balance sheet total of 1 billion EUR;
• An annual average payroll of 100 full-time employees.

1.2 A local file

The same thresholds determine the group entities that are required to attach a local file containing information focus on itself to their tax return.

In addition, each business unit of a Belgian constituent entity, whose cross-boarder transactions realised with other constituent entities reach more than 1.000.000 euros during the latest financial year must add to the local file a specific information memorandum on the analysis of transfer pricing of transactions between the local entity and the foreign entities of a multinational group.

1.3 A country-by-country reporting

This report must in principle be filed by the parent company of the multinational group. It allows the tax authority to assess the risks associated to the erosion of the tax base and to the profit shifting. Based on this information, the administration will be able to detect abuse.

2. Application

These new provisions take effect for the declarable periods of multinational groups or financial years beginning on 1st January 2016.

Therefore, entities falling under the scope of application defined above must file the master file and the country-by-country report before 31 December 2017. The local file will have to be enclosed with the tax return for the assessment year 2017.

Failure to comply with these new provisions, the delegated official can apply, with effect from the second offence, administrative fines ranging from 1.250 euros to 25.000 euros.

Finally, it should be noted that this new section of the BITC contains its own definitions that could differ from definitions of other articles of the BITC that may apply to transfer pricing.

3. Conclusion

These new obligations aim to improve the control of transfer pricing and intra-group transactions by the tax administration.

Transfer pricing is indeed a way of tax optimisation, even tax evasion, that lead to a considerable loss of potential tax revenue for the State, although it concerns a limited number of companies in Belgium. It comes therefore as no surprise that the OECD has included the control of these operations in its BEPS action plan.

Companies that are part of a group, do well to thoroughly document their transfer pricing to comply with these new obligations.