Transfer pricing

What are the rules governing transfer pricing?

The concept of transfer pricing is based on the rule that companies in the same business group must perform their business transactions “at arm’s length.” This means that a company must be able to demonstrate that the prices at which it trades with affiliated companies are comparable to the prices and terms that would prevail in similar transactions between unrelated parties.

What are the tax implications of not adhering to the arm’s length principle?

If a Belgian tax-resident company or a Belgian branch is found not to have transacted business “at arm’s length,” the Belgian tax authorities can, subject to conditions:

• add to its tax base the advantage granted to an affiliated company (although such permanent tax differences can be offset by, e.g., tax losses)
• challenge the deductibility of tax losses (or other deductions) up to the amount of abnormal or gratuitous benefits received from an affiliated company

In practice, whether a company has engaged in improper transfer pricing depends on the facts and circumstances of the transaction in question.

How can a company ensure that its transfer pricing practices are acceptable?

The Belgian tax authorities recommend that taxpayers maintain documentation supporting their transfer pricing policy. This documentation must be relevant, comprehensive and reliable.

Furthermore, taxpayers and prospective investors can apply for a unilateral or bi- or multilateral advance transfer pricing agreement or ruling (See: Belgium's Advance Ruling Practice) from the federal tax authorities respecting the arm’s length nature of a pricing arrangement.

What factors do the federal tax authorities consider when determining whether the documentation evidencing an arm’s length transaction is relevant, comprehensive and reliable?

The federal tax authorities have adopted the transfer pricing guidelines published by the OECD. These guidelines indicate that taxpayers should prepare and retain documentation identifying:

• the legal structure and activities of the group
• the nature, terms (including prices) and quantities of the relevant transactions
• the arm’s length nature of the prices charged. The company must be able to demonstrate that the prices at which it trades with related parties are comparable to those at which it trades with independent parties