Upcoming transfer pricing deadline: also for your company?
Since the introduction of transfer pricing documentation requirements in 2016, numerous Belgian companies are required to make their transfer pricing documentation available to the Belgian tax authorities on a yearly basis. More specifically, companies that exceed certain thresholds must prepare and submit a Master File and a Local File each year. In some cases, a Country-by-Country report or a CBC notification must also be submitted.
In addition, new transfer pricing guidelines on specific topics are rapidly being introduced, such as the remuneration for the use of intellectual property and financial transactions within business groups. These guidelines can have a far-reaching impact on your transfer pricing policy and documentation.
This year, transfer pricing is once again high on the priority list of the Belgian tax authorities. In practice, we notice a sharp increase in the number of transfer pricing audits, with companies that fail to (correctly) comply with the documentation requirements increasingly being scrutinized by tax authorities. Please refer to our previous newsletter for more information on this subject.
It should be clear that the importance of complying in a correct and timely manner with all relevant transfer pricing documentation requirements and associated compliance obligations should not be underestimated. But what exactly do these documentation requirements entail? In this newsletter, we list the most important elements and conditions that should be taken into account.
Belgian companies which are part of an international group and that, on the basis of the individual statutory annual accounts, exceed at least one of the thresholds listed below in the financial year immediately preceding the last closed financial year, have the obligation to submit a Master File and a Local File:
- Combined operating and financial income of 50 million euros (excluding nonrecurring income); or
- An annual average workforce of 100 full-time equivalents (FTE); or
- A balance sheet total of 1 billion euros.
In other words, if your company exceeded one of these thresholds in financial year 2019, it will be required to submit a Master File and a Local File for financial year 2020.
- The Master File must be submitted using form “275 MF” within a period of 12 months from the last day of the group’s reporting period. For financial years closing on 31 December 2020, this means that the submission deadline has been set at 31 December 2021.
- The deadline for submitting the Local File follows that of the Belgian corporate income tax return. For the financial year 2020, this means that the Local File must be filed using form “275 LF” by 28 October 2021 at the latest.
- The Master File provides a general overview of the international group. It describes, among other things, how the group is structured, how the worldwide distribution of income is set up, with which entity(ies) the important intangible assets are located, how the group is financed, etc.
- The Local File is aimed at the local Belgian entity. It contains information on the company’s activities and its business and management structure. In addition, if your company conducted more than 1 million euros in cross-border transactions with foreign group entities in the last closed financial year, a detailed section of the form 275 LF must be completed. In this detailed section, a numerical summary should be provided of each intra-group transaction by type of activity (e.g. services, production, sales, etc.) including the transfer pricing methodology
The third part of the transfer pricing documentation is the so-called Country-by-Country report. The Country-by-Country report provides an overview per country of the main activities, distribution of total income, profits, income taxes paid and owed and other economic indicators.
The obligation to file a Country-by-Country report is reserved for large multinational groups that achieve consolidated gross group revenue of at least 750 million euros in the reporting period immediately preceding the last closed reporting period. Generally, the ultimate parent entity of the group is responsible for submitting the Country-by-Country report.
Although there are relatively few multinational groups with a Belgian head office that exceed the aforementioned threshold of 750 million euros consolidated gross group revenue, every Belgian (subsidiary) entity or branch of a large multinational group still has to keep in mind the so-called CBC notification obligation. In fact, the Belgian legislator has introduced a notification obligation (in line with other OECD countries) whereby each Belgian company of such a qualifying international group must, in principle, submit an annual notification form (form 275CBCNOT) with the authorised Belgian tax authorities. However, the annual filing of the notification form should only be done if there is a change in the information to be reported.
The deadline for submitting the notification form coincides with that of the Master File, i.e. within 12 months of the last day of the group’s reporting period.
RISKS OF NON-COMPLIANCE
Contacts with the tax authorities have revealed that audits are increasingly being based on non-compliant transfer pricing forms. Failure to fill in the relevant documentation, or filling it in incorrectly, late, incompletely or without due consideration, can result in administrative fines (ranging from 1.250 euros to 25.000 euros), as well as significantly increase the risk of a time-consuming transfer pricing audit.
In practice, we further notice increased attention from the Belgian tax authorities regarding specific transfer pricing issues, more specifically:
- So-called ‘low risk’ entities (e.g. contract manufacturing or distribution), whereby a correct transfer pricing rationale for the applied remuneration method is requested by means of a benchmark study. In principle, such a study must be renewed every three years.
- Increasing attention is also being paid to transfer pricing and intangible assets (e.g. brand names, patents, specific know-how, etc.), whereby, using the “DEMPE” framework of the OECD transfer pricing guidelines, it must be determined to which entity the income from the exploitation of the intangible asset should accrue. Within the organisation, one will have to highlight which persons are actually responsible for the ‘Development, Enhancement, Maintenance, Protection & Exploitation’ of the intellectual property.
- In addition, we notice that, in the context of tax audits, more and more attention is paid to financial transactions and whether or not the associated fees comply with the “arm’s length” principle. Think, for example, of the use of short-term vs. long-term interest rates, fixed or variable interest rates, costs or revenues from currency risks, guarantee fees, etc.
- Your transfer pricing policy should be sufficiently substantiated based on intra-group agreements. In addition, an annual (and preferably monthly or quarterly) reconciliation of the target transfer pricing result with your actual figures should be made.
- The impact of your transfer pricing policy on the overall global tax cost within the group is also increasingly being examined, especially when certain tax incentives (innovation deduction, etc.) are used.
- Finally, strict ‘substance’ requirements are applied in the case of (sub) holding companies, so that withholding tax on intra-group payments cannot be avoided. Such substance requirements also entail the risk of non-deductibility of management fees in certain cases.
SUBSTANTIATED TRANSFER PRICING DOCUMENTATION IS “THE WAY FORWARD”.
In view of the upcoming deadline for the Local File, companies that meet the aforementioned thresholds must take action quickly. In doing so, care must be taken to compile a consistent file, both legally (intra-group agreements), financially (reporting) and fiscally (withholding taxes, VAT, import duties).
Our experts at Van Havermaet will of course be pleased to assist you in drawing up and implementing a well-founded and well thought-out transfer pricing policy within your group, as well as in drafting the necessary documentation and legal contracts.