In a recently published decision of the Court of Appeal of Ghent relating to TP (no. 2016/ AR/455), the Court decided in favour of the taxpayer. The case originated from an audit initiated by the Special Investigation Squad (BBI/ISI) in 2009. Considering TP cases in Belgium are scarce, it is interesting to see the court’s point of view.
An important element from this decision concerns, amongst others, the legal discussion on the application of the appropriate version of the OECD Guidelines 2017. In the case at hand, the Belgian Tax Administration based certain argumentation on the OECD Guidelines 2017. However, this version of the OECD Guidelines was not yet available in the relevant tax years. Therefore, the court correctly states that the OECD Guidelines 1995 should have been considered, and later versions should only be used to the extent that they relate to clarifications, and do not impact in any way, even implicitly, whatsoever the content thereof. It was decided by the court that the Belgian Tax Administration should not have based its argumentation on elements that were introduced only by the 2017 version, in case DEMPE and ex-post price adjustments for hard-to-value intangibles. It should be noted that the Court made this statement relating to the use of the DEMPE concept in view of implementing the relevant OECD Guidelines version, whereas - further in the decision – it states that a functional analysis is relevant for assessing TP matters (as it was already included in the OECD Guidelines from 1995).
Additionally, the decision highlights other interesting elements. Relating to the burden of proof, as the Belgian Tax Administration invoked Article 26 ITC92, the burden of proof rested with the Belgian Tax Administration. The court decided that the Belgian Tax Administration did not provide sufficient proof to justify its position, i.e. that the main functions were performed/key risks were incurred by the Belgian entity, and no results were presented of a comparability analysis. Furthermore, the case demonstrates the importance of internal documents, as the lack of proof of the Belgian Tax Administration was countered by documents of the taxpayer, such as intercompany agreements, invoicing, contracting of sub-contractors and board of directors’ meeting notes. The court ruled that the content of certain documents demonstrated that relevant functions were performed by the foreign entity. The value of written documents should hence not be underestimated. A last interesting element relates to the rejection of tax losses. The Belgian Tax Administration rejected the deduction of carried forward tax losses by arguing that the losses must have originated from the Belgian company being under-remunerated in view of its functionality. In the case at hand, the losses originated from a financial year after the period challenged by the Belgian Tax Administration, as demonstrated by the taxpayer. Also, the Belgian Tax Administration cannot reject carried forward tax losses on the grounds of additional income that would have been earned at arm’s length in previous tax years, as it must be assessed on a year-by-year basis. Therefore, the court rejected the position of the Belgian Tax Administration and labelled it arbitrary. This last element is frequently used by the Belgian Tax Administration in practice and therefore it is crucial to address the relevant procedural aspects to prevent the Belgian Tax Administration (unlawfully) attempting to reject carried forward tax losses in one go without an in-depth analysis of the losses.
A key takeaway for Belgian TP audits is that, in practice, it is crucial to raise procedural and TP argumentation together during all phases of the audit to decrease the chance of the case going to court.
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