In a recently published decision dd. 8 June 2021 of the Court of Appeal of Ghent relating to transfer pricing (nr. 2016/AR/455), the Court decided in favor of the taxpayer. The case originated from an audit initiated by the Special Investigation Squad (BBI/ISI) in 2009.
Considering transfer pricing cases in Belgium are scarce, it is interesting to see the Court’s point of view on certain transfer pricing matters, in particular as judges in Belgium are not specialized in transfer pricing matters. Furthermore, the number of transfer pricing audits in Belgium has only increased in recent years, a trend that may be reflected in court cases going forward. On an international level, an increase in the number of court cases relating to transfer pricing can also be observed. In this article, we summarize the key elements of the case and present our key takeaways that may be relevant for companies dealing with or would like to prepare for transfer pricing audits.
An important element from this decision concerns the legal discussion on the application of the appropriate version of the OECD Transfer Pricing Guidelines (“OECD TPG”). In the case at hand, the tax administration based certain argumentation on the 2017 OECD TPG. However, this version of the guidelines was not yet available in the relevant tax years under audit. Therefore, the Court correctly states that the 1995 OECD TPG should have been considered, and later versions of the OECD TPG should only be used to the extent that they relate to clarifications of these guidelines, and do not impact in any way, even implicitly, whatsoever the content thereof. It was decided by the Court that the tax administration should not have based its argumentation on newly introduced elements in the 2017 OECD TPG, in casu DEMPE (Development, Enhancement, Maintenance, Protection and Exploitation relating to intangible assets) and ex-post price adjustments for hard-to-value intangibles. Reference is also made by the Court to the Transfer Pricing Circular Letter 2020/C/35 (25 February 2020) in which it is explicitly stated by the tax administration that the content is only applicable for transactions occurring as of 1 January 2018. In this respect it should be emphasized that a circular letter is only considered binding for the tax authorities, not for the taxpayer, nor for a judge. It should be noted that the Court made this statement relating to the use of the DEMPE concept in view of using the relevant OECD TPG version, whereas - further in the decision - it states that the (regular) functional analysis is relevant for assessing transfer pricing matters (which was already included in the 1995 OECD TPG).
Furthermore, the decision of the Court highlights some other interesting elements.
In practice, we often observe similar elements during transfer pricing audits. It is therefore key to consider transfer pricing and all procedural aspects during all phases of the audit. In our experience, many topics and specifically the rejection of losses can be tackled in an earlier stage in the audit process to prevent them from going to Court.
From this Court case, our key takeaways are:
For more information on the process of transfer pricing audits in Belgium and more recommendations on how you can prepare for them, we refer to our new website dedicated to the topic: https://www.tpaudit.com.
Ben Plessers - Senior Manager
Heleen Van Baelen - Senior Manager (email@example.com)