Transfer Pricing audits

[Music] Hello everyone, welcome to PWC TaxBite Podcast series. My name is Peter, I'm your host today, as in the previous episodes of course, and I'm very happy to welcome three colleagues in my virtual recording studio. We have here Brecht and on our Transpressing experts with a focus on TCR. And Vironik is part of our legal firm and is a legal expert, but also the focus on TCR. I invited Brecht and Vironik to talk about the topic of today, which is the Belgian Transpressing Audit Landscape. So, this is a podcast which continues the series of podcasts we are doing on tax audits. So we're focusing on a number of topics specifically relevant for audits. And today we focus on the Transpressing Audits in Belgium. We're going to talk about what is changing in the Belgian Landscape, what the focuses of these audits, what the struggles are of tax payers to deal with Transpressing Audits in Belgium. Now, to set the scene, my first question is for you Brecht, because PWC and PWC Legal published a news alert at the end of February, stating that the traditional large scale tax audit waif in February was over. Why did you publish this news alert? Well, Peter, we wanted to share an update on three very important developments in the TPRD Landscape. So the first development indeed, it's that we no longer see that TPRDs are launched all at once in one single big wave at the beginning of the year. Because as you know in the past, it was a well known practice that at the beginning of the year, most in February, the big TPRD wave was launched. And sometimes there would even be a formal announcement of the waif, and which specific topics would be focused on as part of this wave. And so over the years, we saw a decline of this practice. And recently, we also received informal confirmation that this is no longer an established practice. We do still see an increase in audit activity in February and March, but this is mainly linked to the way in which files are being selected and allocated within the tax administration. We'll get back to that one later. The second development is that TPRDs are no longer only driven by the transfer pricing sell or squats. So other inspection units that are not specialized in TPRDs are increasingly also picking up transfer pricing topics too. Often as part of a broader corporate income tax, VAT or special tax inspectorate audits. The third development is that the debt of what is being requested has changed significantly too. In a transfer pricing audit, it's no longer just a matter of submitting your TPR documentation to the tax inspector or answering the general TPRD questionnaire. No, TPRDs they go much further now. Taxpayers, they really need to provide detailed reconciliations with accounting data, information from group entities abroad. And in general, information that goes well beyond what you typically expect in a transfer pricing audit. Thanks, Brett, for setting the scene. So, yeah, in summary, you say that you see TPRDs are launched much more gradually and no longer the big splash, the big wave that starts at the beginning of the year covers a broader range of topics and then to go much deeper as well. So interesting starting point for our discussion. Before we dive further into topic, Vironique, what is your perspective from a legal perspective to these developments? Yeah, well, Peter, from a legal perspective that broader scope that the tax authorities are taking now may raise an issue taking into account the purpose-bound character of the investigation powers of the tax authorities. In principle, questions raised by the tax authorities must be necessary to assess the fiscal situation of the specific taxpayer. So, phishing expeditions are normally not allowed. However, we see in practice that the tax authorities are not always transparent with regard to the purpose of the investigation, which is of course very important for the taxpayer, because it all so determines the legal boundaries of what inspectors can actually ask or request or not. But, Peter, that is something that will come back to later in the podcast. Well, thanks, Vironique. So, let's start with diving a bit deeper. And I must say the single most frequent question I get in terms of tax audits is, yeah, what triggers a tax audit? How is a company a taxpayer selected in Belgium? Am with your experience, if you are a multinational operating Belgium, what are the things that trigger an audit in the first place? Yes, Peter. Well, in general, what we see is that the Belgian tax authorities select cases for audits to risk profiling analysis. So, this means that the higher the risk score of a company, the higher also your chance that you will be audited. So, the selected cases are then grouped in baskets according to the risk profile that they get, sometimes specific audit teams or the region they are located in. And then these cases are allocated to the field inspectors based on their expertise or the region. And then the inspectors review these files, they decide if they will send a Tp questionnaire or can also be a request for a pre-audit meeting or sometimes they send a more general audit announcement. And like Brecht already mentioned, this is an annual process that takes place many in the period between January through March. And this is why we typically see more audit announcement during this time of the year, but so no longer in really a wave. And what the exact selection criteria are, we do not know, but based on our experience, we see that a number of recurring red flags tend to trigger an audit like structural losses, also highly depth leverage financing structures. And we also see attention for profit levels that are volatile or that clearly deviate from what you would expect in the industry. And then of course we have the more classic triggers like business restructuring dealings with low texturistications or material management fees. And also another important point I want to mention is the lack of being compliant. So if you do not have proper transorprising documentation or if it is not filed in time or if it is incomplete, that in itself also is a red flag. Thanks, I'm indeed logical red flags. I would say now I always wonder if a tax audit starts. Yeah, do you then actually know the reason that in your particular case tax audit was started? Vironique based on your experience, do the field inspector actually tell you why we have been selected? No, Peter, as a matter of fact, they don't tell you why you've been selected, because in fact, the parameters for a risk based selection, they are not disclosed by the Belgian tax authorities. So the effect is highly secret even because it would allow taxpayers to predict all this but that is a case law of the state council stating that the tax authorities can not in general refuse to communicate to a specific taxpayer, why and on which basis that this taxpayer in concretely was selected for an audit. But it's also worth adding that the Minister of Finance recently confirmed the Parliament that the Belgian tax authorities are also preparing to use artificial intelligence next to already the tools and algorithms they are already using to detect errors and potential fraud in tax returns. It will become more genuinely data driven approach that they will take and it's going to be very interesting to see how this plays out in practice and how the tax authorities will be able to balance their powers with respect for data protection legislation and with the AI act. Okay, thanks, Unique. Yeah, we also see, of course, that topics tend to vary from year to year. So I'm also a little bit curious to see what are the hot topics nowadays in tax holdings. If you work with tax pay, what are the hot topics right now? Yes, Peter, what we see is that financial transactions today are still very much from the center. So cash pooling is a good example and the tax inspectors they ask detailed questions about your cash pool positions about their term and how the debit and the credit rates were actually determined in the company loans also. are another clear focus of the tax authorities. So you have to make sure to really property support and document your internal interest rates. Then beyond financing, we have also seen quite some activity on IP and intangibles. So questions about royalty payments, about the value chain, about the so-called DEMP analysis. And DEMP stands for development, enhancement, maintenance, protection and the exploitation of the intangibles. And the question here is, who is actually performing those functions related to the intangibles? And where is the control over the risk taking place? And does the profit allocation within the group follow that? So the tax authorities really want to have a clear view on this. Another topic is the beneficial ownership in the withholding tax context, especially after the so-called Danish cases. And you already covered this in one of your previous episodes of the podcast. So we can refer the listeners to that one. And then a broader development word mentioning that we are also seeing is the increased focus really on the alignment between the TPP documentation really of the company and the actual underlying business reality. So I also refer to it already that the tax authorities really ask you to reconcile what is in your TPP documentation against other data that is available. And what we see is that the taxpayers often struggle to do this reconciliation and that it can take a lot of time and also a lot of effort to get clarity about this if it needs to be done during the audit process itself. OK, thanks, Ann. Now, probably in the audience, Vyrnick, we still have a few taxpayers, of course, that have not yet been all of it. So maybe it's also interesting to explain a little bit how the audit process itself is working. How does the TPP audits look like in practice? Traditionally, a TPP audit always started with a TPP questionnaire. This is a general request for information of approximately 30-some questions on the company structure, on intercompany transactions, the pricing methods, and all kinds of documentation. But we see more and more alternative approaches, like audit teams that first visit the company for an unofficial exploration conversation, a kind of pre-audit meeting. And on the other hand, we also see questionnaires on one specific topic, for instance, as well. But the big change compared to before is the volume and the nature of being requested, the information being requested alongside questionnaires. And as I'm also already touched upon, inspectors are for detailed reconciliations between such a charity financial statements and other information. We can also refer to previous podcasts on the importance of data readiness for tax audits. And increasingly, the tax authorities also request information about foreign group entities. I like also personal lists of entities abroad and functional analysis of foreign affiliates. So the scope is generally very far reaching. And as mentioned, there are legal boundaries to what Belgian inspectors are entitled to request particularly when it comes to information about foreign entities that are falling outside of their jurisdiction. So companies need to be aware of those boundaries and strategize on how to address those questions. Because not every request is legally founded. But if you don't provide the requested information, this can have a downside. And tax authorities that request information from foreign entities can also request this information from the foreign authorities based on international instruments that provide for exchange of information. And we know that, for instance, between European countries, the exchange of information between tax authorities is very, very efficient. So such exchange of information can then also have an impact on the domestic statutes of limitation. So this kind of considerations is a critical part of managing an audit. So this complexity is also one of the main reasons, in fact, why companies, tax teams, are struggling currently. OK, thanks, Nick. Not an easy process indeed. A lot of considerations when an audit kicks in. You say this is one of the main reasons why taxpayers struggle. The audit process is becoming more demanding. Brecht, which you work with a lot of taxpayers that have confronted with audits, can you elaborate a little bit more? What does it actually mean for the companies that go through it? But two things, Peter. First of all, it definitely makes tax audits harder to manage and retours intensive. So as the audits go broader in terms of the different fields of taxation, it means that the tax responsible also needs to have a very broad skill set and high level of expertise. And then also more time and/or resources to effectively manage the audits. As the audits go deeper also in terms of the information that is being requested, it also means that the tax responsible needs to collect and review more data, which, again, takes more time and resources. So that's a first point. Second, next to the increased strain on the people that manage the tax audit within a company, we also see an increased risk of inconsistencies. As we have already touched upon a couple of times, you can no longer just present your perfectly prepared DP file and expect the tax inspector to be content. And you need to be able to back everything up. And that's where we see a lot of inconsistencies. Yes, President, I can add to that that this creates a lot of burden for the companies that next to the complexity that exists. And also the procedural complexity, because over the recent years, there have been quite some changes to the procedural rules. New provisions on investigation and assessment periods, exchange of information, all these ads, layers of complexity that require careful management. And this comes on top of the administrative burden, if requests are too broad or require very detailed information gathering. So in that regard, the proportionality of some of the requests could be challenged. And you could propose to provide, for instance, a selective sample instead of a dump of data for an entire period. But, of course, there, you need to make sure that the tax on authorities confirms their agreement with your proposed alternative approach, because if you don't get their agreement to respond with a data sample, they could consider that you responded incompletely to a request and you risk an exoficial assessment with a reverse burden of proof. So if the tax authorities then issue a notice of amendment, the burden of proof will shift towards the taxpayer while in tax-- in the interest surprising matters, the burden of proof in principle lies with the tax authorities. And that is very important with regard to transfer pricing, because we've already been successful in descending clients in court based on the principle of burden of proof. So companies also need legal guidance, not just on substance, but better managing all these procedural risks. OK, thanks for adding that. I think we already got a lot of ground in this podcast. We talked about what triggers in all of it, the topics of in all of it, the procedural complexity of all the procedures. So we're almost at the end of the podcast, but before we close, I want to put you on the spot. And I'm going to ask each of you from your perspective and your background to the topic, what would be your key takeaway for the audience? I'm going to start with brecht. You get 30 seconds from your brecht. All right, thanks, Peter. Managing a tax audit, even without an additional assessment, is a very costly and time intensive exercise. And when you do get an assessment in a transfer pricing context there will likely be double taxation, which can then easily take one to three years to resolve. And so for me, the message is very clear. Prevention is still better than the cure. I know it's a cliche, but the best way to deal with an audit is by preventing it. So the best investment a company can make is preventative work. And I know the reality, tax teams, they are tindy spread, transfer pricing isn't the only thing on their plate. But there are some very practical things you can do. To name just three, one, start by assessing which of your intercompany transactions carry the highest risk and should be covered by a unilateral or bilateral ruling. Two, for other key transactions that are sensitive, make sure you have a solid defense file so that you are able to defend your position three, four years after the facts. Three, regularly review your intercompany agreements, benchmarks and other information because we see so many audits go wrong simply because information is outdated or doesn't match reality anymore. Thanks, Brett. I like very much like those takeaways. It was a bit more than 30 seconds, but it was interesting. Um, what's your takeaway? Thank you, Peter. In 30 seconds, I will try. I think what I want to add is really that good and reliable fact finding is absolutely critical. So when the audit is announced, a very pragmatic advice for the companies is to spend some time to identify which information, which documentation is actually already available to take a look how reliable and how complete is this. And then also to think what is the best way to present it to the tax authorities and to make sure that the tax authorities get a clear and an understandable picture of the actual activities of the company and of the transfer pricing profile. Because what we see is that many audits are also one or less on the facts and not only on the legal or the technical issues. All right, thanks, Anne-Fiedernick. Last but not least, what's your takeaway? Well, Peter, my takeaway is that it's important to already early in the process to think about audit strategy. What are the consequences of providing certain information or not providing this information? Who has the burden of proof, etc., etc. Also think ahead about dispute strategy. For instance, if you anticipate a risk of double taxation, think about in view of access to mutual agreement procedure, think about having a discussion on the arms linked character, then a discussion on the deductibility principle of an expense based on domestic legislation. So think also about minimizing penalties. Therefore, I refer also to a previous podcast about the new penalty regime. And also think about how to position the company's defense. So these are legal and strategic considerations as much as there are TP technical ones. Peter, that's it for me. Thank you very much, Fiedernick. Very interesting, very interesting. Yeah, this is the end of the podcast, right? I want to thank Brecht, Anne-Fiedernick, for the interesting discussion on transpricing audits, the insights, shares. And I hope it was interesting for the audience as well. Very much want to thank our audience here today and invite you all to stay tuned. tune in for the next Thanks Byte podcast. We much more about the developments that will come. And Fiedernick, you start to be a regular visitor of the podcast. So I'm sure I will hear you a lot more in the future as well. Thank you all. Bye. (upbeat music)