A number of recent developments in the international tax world are clearly finding their way into the Belgian tax investigation practice. We have observed a significant increase in domestic and multilateral tax audits, including field inspectors increasingly having recourse to means of international exchange of information and anti-abuse legislation to build their claims. On top of the annual wave of transfer pricing investigations, Belgian tax audits focus more and more on passive income flows (dividend, interest and royalty), beneficial ownership issues and alleged tax abuse through the involvement of intermediary entities. Entities that have significant carry-forward tax losses or high debt leverage are also facing a lot of scrutiny in Belgium.
In this article, we will go into some of these developments observed by us as part of tax audits and case law.
Application of anti-abuse rules in Belgian tax audits
A number of anti-avoidance provisions have been introduced over the last years, such as the anti-abuse rules of the EU Parent-Subsidiary Directive 2003/49/EU and the EU Anti-Tax Avoidance Directive 2016/1164/EU (ATAD). Those anti-abuse rules have been implemented into Belgian domestic provisions related to the dividends-received deduction (also referred to as participation exemption), withholding tax exemptions, interest deductions, etc.
The general anti-tax avoidance provision of the ATAD (ATAD GAAR) has not been implemented in Belgium since, according to the Belgian Minister of Finance, the existing domestic general anti-abuse rule (domestic GAAR) is sufficient to guarantee the result envisaged by the ATAD. Legal scholars have nevertheless pointed to the more limited scope of the domestic GAAR versus the ATAD GAAR.
The application of the domestic GAAR by the Belgian tax authorities is gaining in frequency, even though it has yielded only limited success in Belgian case law so far. Certain Belgian Courts defend a very strict interpretation of the domestic GAAR, requiring the tax authorities to demonstrate that the taxpayer's legal acts have frustrated the objectives of a tax provision, taking into account the legislator's intention upon such provision's entry into force. It is therefore important to monitor how the ATAD GAAR and the case law of the Court of Justice of the European Union (ECJ) in this respect will influence the debate on a national level going forward.
With respect to the application of a specific anti-abuse rule regarding the Belgian notional interest deduction (NID) regime, a milestone case was recently decided in favour of the taxpayer. The Belgian tax authorities challenged the NID applied by a Belgian company on the basis of specific anti-abuse rules (SAAR), disallowing a set-off of income derived from "abnormal or gratuitous advantages" received from a group company against specific tax attributes, among which was the NID. The tax authorities argued that the company was artificially interposed with the sole purpose to benefit from the NID tax regime. Using a factual analysis of the transactions conducted by the company, the Court of Appeal of Antwerp concluded that there was no sufficient proof of tax abuse and that the conditions to apply the NID were fulfilled. The appeal of the tax authorities was granted by the Belgian Supreme Court that ruled principally that any interpretation of the SAAR should consider the broader economic context. In a judgment of June 16, 2020, the Court of Ghent (when re-examining the case) ruled in favour of the taxpayer, considering there was no abuse due to the presence of other (economic/business) drivers warranting the interposition of the company. The argument of the tax authorities (among other things) that the company managed only one loan and immediately transferred the income were set aside as the intervention in the financing of the acquisition could be substantiated on the basis of economic objectives and the interest was not received in abnormal circumstances (as the group was already present in Belgium with financing activities and had the necessary knowhow and personnel; the interest payment and other conditions were at arm's length; etc.). On the other hand, the transactions in this case law date from 2012, so it will be interesting to see how similar structures would hold up in courts in light of the updated OECD transfer pricing guidelines, the viral spread of newer anti-abuse rules, interest limitation rules, etc.
Beneficial ownership challenges
The ECJ issued important judgments in the so-called "Danish cases" on February 26, 2019 relating to (among other things) questions whether non-residents deriving dividend and interest income originating from profits of Danish companies through EU intermediate companies are entitled to the withholding tax exemptions provided for in the EU Parent Subsidiary Directive 2003/49/EU (cases C-115/16, C-118/16, C-119/16 and C-229/16) on the one hand, and in the EU Interest Royalty Directive 2011/96 (cases C-116/16 and C-117/16) on the other. In these cases, the ECJ took a broad approach to the beneficial ownership concept and mentioned lack of beneficial ownership as an indicator of tax abuse.
Whereas in a Belgian withholding tax context, a strictly legal approach to the concept of 'beneficiary' has traditionally been adopted, even by the Minister of Finance and the tax authorities, recent comments made in legal doctrine by certain officials of the Belgian tax authorities on the Danish cases and our practical experience leave no doubt that a shift towards an economic approach is to be expected.
The judgments rendered by the ECJ are being fiercely criticised in doctrine and give rise to divergent opinions regarding their scope and interpretation, leading to remaining legal uncertainty for taxpayers. Ultimately, further clarification by the ECJ will be required.
The Belgian tax authorities are clearly inspired by these developments as we have seen a recent increase in tax audits focusing on passive income streams, with the Belgian tax authorities trying to deny withholding tax benefits claimed by taxpayers. Also, other cross-border topics such as anti-hybrid and CFC rules and the arm's length nature of transactions come up in these audits. The Belgian tax authorities are building up expertise in these areas with specialised and dedicated inspection teams focusing on these topics. The amounts at stake are often very material. Multinational groups should be prepared to defend the compliance of their tax positions even where it concerns structures that are non-abusive in nature and which are commonly applied.
Exchange of information
As part of the tax audits, mechanisms for international exchange of information between tax authorities are used to obtain data on foreign enterprises of multinational groups to support the claims. Administrative cooperation between Belgian and foreign authorities is increasingly happening nowadays, particularly where it concerns transfer pricing or international tax disputes.
Within a European context, the Directive on Administrative Cooperation (Directive 2011/16/EU) (so-called "DAC") has been amended six times since its adoption on February 15, 2011, with a view to enhancing tax transparency. DAC6 introduced mandatory reporting requirements in the EU for intermediaries involved in aggressive cross-border tax planning arrangements. On July 15, 2020, a (seventh) amendment was proposed (DAC7) by the EU Commission, extending the tax transparency rules to digital platforms. The proposal also contains certain provisions on exchange of information and strengthens the legal framework for multilateral audits. If adopted, the new amendment should be transposed into the domestic legislation of the Member States by December 31, 2021 and apply as from January 1, 2022.
DAC7 will be another catalyst in international cooperation, relieving Belgian tax authorities of a considerable amount of red tape in requesting information from other EU countries. Under the proposal, the requesting authorities are for example no longer required to motivate the foreseeable relevance of the requested information, if this request is sent as a follow-up to an automatically exchanged cross-border ruling or advance pricing agreement.
Statute of limitations in direct tax
As it is the case in many other jurisdictions, exchange of information has an impact on the statute of limitations applicable under the Belgian domestic legislation for conducting investigations and for assessing additional taxes. This needs to be monitored very carefully by taxpayers as it is often overlooked. If a foreign tax authority requests information from the Belgian tax authorities and the latter have to exercise their investigation powers in order to obtain the requested information, an investigation period of seven years applies, even if the standard investigation and assessment period is three years.
When receiving such information, whether it is exchanged automatically or spontaneously or at request, the Belgian tax authorities are entitled to investigate and assess taxes during a period of 24 months as from the receipt of this information. This investigation or assessment can relate to a period of five assessment years (seven assessment years in the case of fraud) preceding the year in which the authorities received the information. This exceptional investigation and assessment period also applies, notwithstanding the standard three-year investigation and assessment period.
If the case relates to withholding taxes, yet another exceptional provision regarding the statute of limitations applies. In this respect the date when the tax authorities establish an infringement of the Income Tax Code determines the start of a 12-month investigation period. This investigation can cover a period of five years preceding the year in which the infringement was established.
Finally, where the use of carry-forward tax losses is involved, both the Supreme Court and the Constitutional Court confirmed that the Belgian tax authorities can investigate the origin and the amount of carry-forward tax losses during the assessment years in which these losses are set off against taxable income (even if the audit period for the year in which the losses arose already expired).
Taking into account the above, a taxpayer can find themselves in a very complex situation when facing audits combining several exceptional statute of limitations provisions. This requires careful consideration, including mapping and managing information flows, since the Belgian tax authorities do have a tendency to request more information than allowed in view of the statute of limitations.
OECD transfer pricing guidelines for financial transactions
The recent introduction of OECD transfer pricing guidelines for financial transactions significantly ups the threshold for substance and control over risk for both borrowing and lending entities engaging in financial transactions. These principles are embedded in the new transfer pricing circular letter (administrative guidelines) published on February 25, 2020 by the Belgian tax authorities. In audits, we have seen a high focus on the transfer pricing treatment of financial transactions for a number of years already. This is expected to increase even further with the new guidance, particularly given the introduction of new and rather complex interest limitation rules.
Even though Belgian tax authorities loyally adhere to the principles of the OECD transfer pricing guidelines, it is to be seen how these guidelines will be enforced where a dispute would be brought before a national Court. Belgian courts do not always recognise the legally binding value of the OECD transfer pricing guidelines. The Court of Appeal of Antwerp stated this as part of a judgment of March 5, 2019. In that case, the Court furthermore ruled that the tax authorities did not meet their burden of proof when adjusting the taxpayer's transfer pricing method. We expect a lot more cases to be challenged in court on grounds of an insufficiently met burden of proof on the part of the tax authorities. The fact that tax authorities are increasingly trying to reverse the burden of proof or having recourse to GAAR and SAAR in Belgian tax investigations will be a trigger for court proceedings.
Experience has taught us that the Belgian tax authorities are also increasingly initiating multilateral tax audits themselves, in order to cooperate with foreign tax authorities on transfer pricing and other international tax matters. Exchange of information often entails an extension of traditional investigation and assessment periods, as mentioned above. In practice, managing international exchange of information and enquiries from multiple tax authorities at the same time is very complex and time-consuming for taxpayers.
Stimulated by the EU Fiscalis programme, and by the OECD's Forum on Tax Administrations platform, coordinated audits between tax authorities of two or more countries have significantly increased. When asked, Belgium is typically participating in a multilateral audit. This cooperation in practice mostly takes the form of thr presence of officials during an investigation on another territory or simultaneous controls. Such simultaneous controls (i.e. when two or more tax authorities agree to conduct simultaneous and independent, each on their own territory, audits of the tax situation of taxpayers in which they have a common or related interest) can be very burdensome for taxpayers in terms of administrative follow-up and resources. Very often, such controls lead to double or multiple taxation, as the tax authorities participating in such simultaneous controls are not obliged to reach a joint conclusion. Taxpayers often need to resort to Mutual Agreement Procedures (MAP) under multiple double tax treaties to resolve double taxation arising from multilateral audits.
Under Belgian domestic legislation, it is not currently possible for foreign tax officials who are present during investigations performed on Belgian territory to actively participate. It is even explicitly prohibited for foreign officials to interview people and to examine documents while on Belgian territory. However, in a limited number of cases, the Belgian tax authorities participated in joint audits and requested the upfront agreement of the taxpayer to allow a more-or-less active presence of foreign officials during investigations. This lacks legal certainty for the taxpayer, as well as for the participating authorities, but can be beneficial in terms of managing information and communication with multiple tax authorities.
The new EU DAC7 proposal provides for a stricter legal framework for joint audits. Joint audits are defined as administrative inquiries conducted jointly by the authorities of two or more EU Member States who proceed in a pre-agreed and coordinated manner, acting as one audit team. If adopted, not only can the authority of an EU Member State can request to conduct a joint audit, but also the taxpayer themselves can request the authorities to carry out a joint audit. Seeking to reduce the administrative burden and to mitigate the risk of double or multiple taxation, the taxpayer can indeed have an interest to ask for a joint audit. In this respect, the DAC7 proposal contains an obligation for the participating authorities to agree on the facts and circumstances of the case, and to lay down their conclusion of the joint in a final report.
Moreover, the new DAC7 proposal urges all Member States to provide for a legal framework that allows them to perform corresponding adjustments. As such, cross-border cooperation between tax authorities is expected to continue to surge and will become part of the new normal with regard to Belgian tax audits.
Multinational groups should be prepared to defend the compliance of their tax positions, even where it concerns structures that are non-abusive in nature and that are commonly applied. There is a notable surge of Belgian tax audits focusing on anti-tax abuse rules, transfer pricing, beneficial ownership and other international tax matters. Due to recent developments in terms of transparency and administrative cooperation, taxpayers will need to deal more frequently with multilateral tax audits and exchange of information, as this is becoming thr new normal as part of Belgian tax audits on international tax and transfer pricing matters.
In order to get upfront certainty and help prevent disputes, taxpayers can consider applying for advance tax rulings on these topics with the Belgian Rulings Office. Where it concerns transfer pricing, they can also consider bilateral or multilateral advance pricing agreements.
The timing of these Belgian tax audits is challenging, as many companies are in the middle of recovery (both financially and structurally) from the COVID-19 pandemic and are bracing themselves for difficult economic conditions. Intensive tax audits may result in a need to reshuffle already scarce resources. Taxpayers need to be vigilant in light of these developments.
Reviewing the compliance and sustainability of the tax and legal models upfront and carefully considering future transactions may help taxpayers avoid additional unpleasant cash surprises following any audits.