Belgium introduces updated transfer pricing documentation requirements

The Belgian Master file in its current form is fully aligned with the OECD Master file standard as included in Chapter V of the OECD TPG. The form itself remained unchanged but the explanatory notes were updated and include extended information requirements which go beyond the OECD Master file standard. Specifically, the following information will need to be added to the OECD Master File to have a compliant “Belgian Master File”:

• “the nature of the business activities of the MNE Group” (Section II) – the sub-section on the group’s value drivers has been supplemented by requiring a description of the value chain and the functional analysis of the group following four steps:
  • Step 1: Identification of value drivers and their importance;
  • Step 2: identification of the contributions by each individual entity to the value creation (including functional analysis);
  • Step 3: Allocation of profits to each individual entity based on the value creation per each primary function; and
  • Step 4: Comparison and alignment with transfer pricing outcomes.

Steps 1 and 2 are in line with the OECD standard and come down to performing a functional and value chain analysis to determine the key value drivers that contribute to creating a competitive advantage and allowing an MNE to generate profits above market standards. Such analysis aims at distinguishing the primary activities from the support/routine activities and, therefore, ultimately identifying the relevant valuable activities that deserve a portion of the residual profit.

Steps 3 and 4 oblige taxpayers to perform a profit allocation exercise based on value creating functions. The latter exercise should then be compared with the outcome of the traditional transfer pricing model(s) in place.

We believe that careful consideration should be given to the interpretation and use of such analysis, particularly by tax authorities. Indeed, although a value chain analysis can be considered a useful tool in preparing a complete functional analysis, it should not be directly used to determine the arm’s length price or compensation of a transaction. It cannot replace the TP analysis to allocate income within a group which is based on two steps, namely the delineation of the actual transaction and the pricing based on the comparability analysis.

• “MNE’s intangibles” (Section III) – two new sub-sections were added, one related to DEMPE functions and the other regarding HTVI.
  
  A description should be included of the analytical framework of the DEMPE-functions (development, enhancement, maintenance, protection and exploitation) for the group intangibles following a six-steps approach. Completing these steps notably requires identifying the entities performing DEMPE functions and controlling economically relevant risks, as well as to delineate the actual controlled transactions related to the DEMPE in light of legal ownership, contractual arrangements and the conduct of the parties including their contributions of functions, assets and risks.
  
  The six steps DEMPE-analysis directly stems from the OECD TPG. The inclusion of this additional sub-section is not entirely surprising, given the BTA’s emphasis on key functions and control of relevant risks for allocating IP related returns, a trend also observed in other jurisdictions.
  
  In addition, the guidance requires to identify all transferred and used HTVI including the entities that own them and have contributed to their development. This step was presumably included to allow the BTA to better track any developments affecting HTVI which involve Belgian entities.
  
  Both requirements again go further than the OECD Master File requiring a review and update of the group Master File if the above items are insufficiently addressed.

• “MNE’s intercompany financial activities” (Section VI) – the guidance specifies that the description of the general TP policies applicable to financial transactions will need to contain at least the following:
  • a description of the application of the principles of identifying the commercial or financial relations to the financial transactions;
  • determination of the arm’s length conditions for treasury activities including intra-group loans, cash pooling and hedging;
  • examination of financial guarantees; and,
  • analysis of captive insurance companies.

The above bullets should be interpreted in light of the guidance included in chapter X of the OECD TPG. Again, a higher level of detail seems to be required as compared to the OECD TPG, and in certain circumstances the added value of these items may be questionable considering the additional compliance burden in Belgium. Indeed, the pricing of individual loans and guarantees is generally described in the entity TP documentation (e.g. OECD Local File) and is not necessarily relevant for all jurisdictions in which the group operates (e.g. if the Belgian entities are not concerned by these transactions).

Unlike the OECD Model Local File as included in Chapter V of the OECD TPG, the Belgian Local file mostly contains quantitative information regarding cross-border intercompany transactions but not the actual TP documentation (functional analysis, comparability analysis and benchmarks). In its current form, companies should merely indicate whether certain TP documentation is available without the obligation to file it. This will change as of FY2025 as the new form obliges in-scope companies to file available TP documentation along the Belgian Local File (including the full OECD Model Local file as referred to the explanatory notes). The same applies for available CCAs, ruling and in-house insurance policies.

This change brings us one step closer to mandatory entity TP documentation filing as certain other countries have already introduced. Strictly speaking the taxpayer can still indicate it does not avail of TP documentation (in which case obviously no filing obligation exists). The absence of documentation may however increase the probability of being subject to a TP audit. In addition, taxpayers should consider the strict timing to have their annual documentation ready as it should be filed at the due date of the CIT return (7 months after closing of the financial year, possibly extended with a few months).

Other changes relate to a requirement to further breakdown the amounts paid/received for each type of intercompany transaction per jurisdiction of the counterparty as well as the obligation to report the TIN of the competitors of the Belgian taxpayer and for the foreign PE of the Belgian entity.

No material changes have been introduced to the new form of the CbC Report Notification. However, in the new form the company will need to indicate if the respective Notification is:

• its first Notification; or
• a new Notification due to a change to a Notification filed in a previous reporting period; or
• a termination of its notification obligation.

The last scenario currently does not trigger a notification requirement. The main change is thus that it is now also required to file CbC Report Notification in case of a termination of the notification obligation.