Monday, 10 July 2023

2022 annual report of the Belgian ruling commission

The Belgian ruling commission published its annual report for 2022 on 12 June 2023. It can be consulted here in Dutch and French. A couple of notable decisions in relation to transfer pricing and the innovation income deduction are discussed below.


Transfer pricing consequences of a VAT refund for limited risk distributors

Company X and Y are limited risk distributors (LRDs) within a group. Both companies are subject to pharmaceutical contributions on their turnover, paid to the Rijksinstituut voor Ziekte en Invaliditeitsverzekering (RIZIV). The RIZIV uses these contributions to grant discounts to the consumers when they purchase the pharmaceutical products. X and Y reached an agreement with the Belgian VAT administration that these levies result in a reduction of the taxable amount for VAT purposes. Consequently, both companies are entitled to a refund of the VAT that is included in the contributions paid to the RIZIV.

X and Y wish to obtain confirmation from the ruling commission that the VAT refunds that they receive can be included in the calculation of the remuneration (operating margin) that both companies have to realize for their intercompany routine distribution. Given that the costs for the contributions to the RIZIV and the VAT are included in the determination of the operating result, the applicants state that the refund should also be included for the determination of the operating result of X and Y.

The ruling commission does not agree and states that the VAT refund on the RIZIV contribution should not be included for the purpose of calculating the operating margin of X and Y. Following the transfer pricing circular 2020/C/35 (par.17), subsidies are only deducted from the cost basis/turnover if there is a direct correlation between the subsidy and the production/turnover of the goods or the supply of the services. In this case however, the RIZIV subsidies benefit the consumers of pharmaceutical products and are not directly paid by the RIZIV to the LRDs and cannot be deducted from the turnover realized by the LRD in order to determine the operating margin. The ruling commission furthermore states that the VAT refund cannot benefit the principal (as this would lead to the granting of an abnormal or benevolent advantage by the LRDs)

Innovation income deduction: application for innovation income deduction during tax audit

A company which carried out its own manufacturing and manufacturing activities for other group entities (contract or toll manufacturing), submitted two patent applications for which it wanted to apply the innovation income deduction. The company refers to the consideration received for the manufacturing to determine the income attributable to the patented manufacturing process and proposes to apply the residual profit method.

During the examination of the ruling request, the ruling commission was informed that an audit had been ongoing for several months and that this audit related to the transfer pricing policy applicable within the group and, in particular, to the consideration received for the intercompany manufacturing activities. Since the ruling request was related to the validation of a transfer pricing methodology for determining the gross innovation income based on the payment for the intercompany manufacturing, a ruling would have affected the ongoing audit. Consequently, the ruling commission stated that it was impossible to provide a ruling.

Innovation income deduction: indemnity payment for software

A Belgian software company X is part of an international group that develops software solutions for the transport industry. X provides software support services as an R&D contractor for a foreign affiliated company Y. Y owns the software IP and licenses this IP to third-party customers.

During the financial year, the R&D activities of Y would be moved to X, in order to centralise all software know-how in Belgium. However, the software developed before this changed operational structure ("old software") would remain the property of Y while only the further developments of this software ("new software") after the know-how transfer would become the property of X. In the financial year following the transfer, X would start invoicing to customers.

X would compensate Y for a number of years by means of a percentage on the realised turnover. However, this compensation (called an indemnity payment) does not relate to the transfer of the IP on the old software but rather as compensation for the past efforts of Y. As a result, the compensation would not qualify as an R&D expense and would not be included in the global expenses and, consequently, not in the nexus ratio. X requested the ruling commission to qualify the software income as innovation income.

The ruling commission states that the indemnity payment would not have occurred between independent parties and that this payment (which relates to old software) is an expense that negatively impacts the nexus ratio of X. It was also unclear for the ruling commission whether Y, a foreign company, was the owner of the "old software" prior to the changed operational structure, given that under the new operational structure virtually nothing had changed. Hence, the impression was created that the development of the "old" software was already largely done in Belgium. Consequently, the fees paid in the past to Y should rather have been included in the result of X. Following the prefiling meeting, the applicant canceled its ruling request.

In case you have any questions with regard to transfer pricing or the innovation income deduction, please do not hesitate to reach out.

Tine Slaedts – Partner, Tiberghien Economics
Wouter Strijckers, Senior Associate, Tiberghien