To help companies thrive in the complex international tax system, obtaining tax and transfer pricing certainty on specific transactions which they engage in has shown to be a useful tool over the years. Such certainty can be obtained by requesting an Advance Pricing Arrangement (APA) from the respective competent tax authorities. In Belgium, such APAs are also available to taxpayers doing business in the country.
An APA, oftentimes referred to as a ‘ruling’ in a unilateral context, is a decision by which the Federal Public Service (FPS) Finance determines how Belgian tax law will be applied to a particular situation or a particular transaction that has not yet taken place from a tax point of view. The ‘advance’ character of a unilateral APA refers to obtaining tax certainty before the envisaged situation or transaction impacts an applicants’ tax return.
In Belgium, APAs can be unilateral, bilateral, or multilateral depending on the counterparties and national tax authorities involved. Under a unilateral APA, the taxpayer, and the Belgian Office for Advance Decisions in Tax Matters (Belgian ruling commission) agree on the tax implications of a specific transaction in advance, from a Belgian tax perspective – and which does not bind the counterparty jurisdiction to the extent the transaction/arrangement involves a party in another country. A greater level of certainty is rendered under a bilateral APA, where the taxpayer seeks the upfront agreement of the Belgian competent authorities as well as the national competent authorities of the counterparty country which the arrangement/transaction involves. For more complex arrangements, multilateral APAs allow taxpayers to seek tax certainty and protection on APA-covered transactions that involve multiple jurisdictions, seeking agreement between the Belgian competent authorities and two or more other competent tax authorities. With the increased level of tax certainty, bilateral and multilateral APAs provide the greatest transfer pricing comfort as the agreement involves multiple jurisdictions, which lessens the likelihood of double taxation – albeit potentially being a long-drawn and costly process. Having said that, it is noteworthy that unlike certain countries, there is no application fee charged in Belgium to apply for a ruling or APA.
The Belgian APA system
As of 2003, Belgium has implemented a comprehensive system of APAs, with the main purpose of ensuring tax certainty for a taxpayer. In various cases it has proven to be a powerful risk management tool for tax planning purposes.
An APA is binding for the Belgian tax authorities, except in cases where:
- the conditions to which the APA is subject were not satisfied;
- the situation or transaction was described incompletely or incorrectly, or where critical elements were not implemented as the applicant had presented them;
- a treaty, EU legislation, national legislation, or current case law applicable to the situation or transaction changes; or
- the APA conflicts with a tax treaty, EU legislation, or national legislation.
An APA ceases to be binding on the Belgian tax authorities if the most important aspects of the situation or transaction change i.e. the critical assumptions are no longer met. In other words, the certainty rendered by an APA depends on the good faith of the applicant at the time of the request and the adherence to the agreed conditions/assumptions in the execution of the APA.
APA statistics in Belgium
The annual report published by the Belgian ruling commission indicates that 1,142 unilateral applications were filed in 2022. Of these, 1,042 decisions and agreements were attained. In 2022, tax ruling applications in Belgium pertained mostly to employer costs, innovation income deduction/transfer pricing, copyrights, restructurings, and movable income.
Most unilateral tax rulings in Belgium are valid for a period of five years. However, in cases where the object of the application justifies it (such as a longer depreciation period), the APA could be valid for a longer period of time. However, it should be noted that APAs relating to the innovation income deduction as well as transfer pricing rulings for which a benchmark is performed, only apply for a period of three years. Particularly for the latter, this approach has been introduced to be in line with the OECD guidance of performing new benchmarks every three years.
At the end of 2021, 18 bilateral and multilateral APAs came into force in Belgium, compared to 17 in 2020 and 29 in 2019. The fall in bilateral and multilateral APAs in 2020 and 2021 may have been a result of the slowdown in competent authority negotiations during COVID-19. Given the growth of the Belgian competent authority team, it is expected that the number of bilateral and multilateral APAs is likely to stabilize.
From a timing perspective, it should be noted that taxpayers will need to inform the Belgian competent authorities of the intention to file a bilateral/multilateral APA before the end of the first year of the covered period. On the other hand for unilateral APAs, the ruling commission has requested for ruling applications to be filed at the latest by November (for financial years ending 31 December). This is to ensure that the APA can be granted before the filing date of the corporate tax return, thus ensuring the advance character of the APA.
Increased exchange of information on APAs
In recent years, both the OECD and the EU have introduced initiatives on the mandatory exchange of APAs for tax transparency. This measure is expected ‘to target preferential tax regimes and harmful tax competition that could be promoted through non-transparent ruling regimes, including APAs’. In the Peer Review Reports on the Exchange of Information on Tax Rulings in 2021, Belgium received peer input from five jurisdictions on its exchange of information on rulings. The input was generally positive, where the information provided by Belgium was considered to be complete and timely.
Belgium has the necessary domestic legal basis to exchange information spontaneously. Besides, Belgium has international agreements permitting spontaneous exchange of information as Belgium is a party to (i) Multilateral Convention on Mutual Administrative Assistance in Tax Matters: Amended by the 2010 Protocol (OECD/Council of Europe, 2011) (the Convention), (ii) the Directive 2011/16/EU with all other European Union Member States and (iii) bilateral agreements in force with 77 jurisdictions.
Groups applying for APAs should be aware that the application of such an agreement is likely to render their arrangements to be more visible to the various EU tax authorities.
Challenges to APAs
In recent years, the European Commission has initiated investigations on certain APAs that were considered to have constituted State Aid. Multinational companies operating in the EU should assess their own tax APAs to ensure compliance with EU law, as well as to evaluate the potential risk of a State Aid challenge.
In Belgium, it has been observed that tax/transfer pricing audits in certain occasions have been conducted on companies’ arrangements despite the fact that these companies have in place APAs agreed with the Belgian ruling commission or competent authorities. In certain rulings, the Belgian ruling commission have also included a number of reservations/exclusions in their ruling decisions, which may consequently attract the attention of local tax inspectors. This has caused a growing sentiment of doubt among multinational groups operating in Belgium on the effectiveness of APAs – particularly unilateral APAs. While unilateral APAs are expected to continue to provide some level of certainty, this will require prudent and thorough analysis to anticipate potential challenges. To this end, bilateral and multilateral APAs are expected to be the better avenue for multinational groups seeking transfer pricing certainty on their arrangements.
How the OECD’s Two-Pillar solution might impact APAs
The changes that are being introduced by the Two-Pillar solution of the OECD to address the tax challenges arising from the digitalization of the economy may also change the way companies view and consider APAs. For example, under Pillar One, Amount B aims at providing a ‘fixed return’ for baseline marketing and distribution activities, hereby simplifying the determination of the arm’s length price of such transactions between associated companies. The intended advantage of Amount B is to reduce the number of disputes over the application of the arm’s length remuneration of intercompany transactions pertaining to such baseline marketing and distribution activities. However, given the expected discussions and potentially differing views around applying the scoping criteria for Amount B, APAs may still prove to be useful in helping groups attain certainty on their distribution returns – as Amount B will not apply to companies that have concluded a bilateral or multilateral APA covering these marketing and distribution activities.
The Pillar Two rules (the GloBE rules), introducing a global minimum (effective) tax of 15 percent on a jurisdictional basis, are also part of the two-pillar solution as introduced by the OECD. While the GloBE rules are intended to render tax incentives ineffective to the extent that they reduce the effective tax rate on in-scope entities below 15%, Pillar Two is not expected to entirely cancel out, but rather reduce the impact of R&D tax incentives for in-scope entities.
As mentioned earlier, a substantial number of unilateral APAs that are requested in Belgium relate to the innovation income deduction regime. To this extent, it is assumed that unilateral APAs in Belgium relating to the innovation income deduction regime will still be beneficial – in the context of allowing Belgian companies to be subject to a reduced corporate tax rate of up to 15 percent (compared to the headline rate of 25 percent in Belgium). These unilateral APAs will also continue to benefit Belgian companies which are not in scope of the GloBE rules.
It is our understanding that it is unlikely that the Belgian ruling commission will address matters relating to Pillar Two, considering the complexity of these new rules across the different jurisdictions of a multinational group beyond Belgium.
APAs in Belgium continue to be an effective mechanism for taxpayers to obtain a level of certainty on their transactions. However, recent trends show that the Belgian tax authorities do not always refrain from starting an investigation/audit even if a taxpayer may have concluded an APA – as well as the fact that there has been an increased exchange of APAs, rendering potential visibility of companies’ APA arrangements. Nevertheless, it would be fair to conclude that APAs – especially bilateral and multilateral APAs – will continue to provide tax certainty to taxpayers in Belgium with expected benefits outweighing potential risks, albeit with a nuanced view towards tax planning given the ongoing changes to the international tax system.