Belgium launches pilot program on cooperative tax compliance

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1 from Tax Controversy and Dispute Resolution Transfer Pricing Belgium launches pilot program on cooperative tax compliance October 26, 2018 In brief The Large Enterprises Division of the Belgian tax administration (LE Division) has announced its launch of a two-year pilot project on cooperative tax compliance (Cooperative Tax Compliance Program CTCP ). The program seeks to transform the traditional approach of ex-post tax investigations into a system of proactive, real-time, and constructive dialogue on the tax affairs of corporations. Reducing tax uncertainty, enhancing compliance, and fostering mutual understanding are main goals of the initiative. The pilot program will be open for eligible large enterprises (defined below), with participation on a voluntary basis. A mandatory all-in or all-out principle will apply to the Belgian entities and branches of groups (referred to below as enterprise or enterprises ) based on consolidation rules. Enterprises that wish to enter the CTCP will need to demonstrate that a robust tax control framework (TCF) is in place and that tax compliance was met in the past. Participation in the program will be formalized through an agreement between enterprises and the LE Division with a two-year starting duration. Participation in the CTCP does not imply that taxpayers will obtain a more beneficial tax treatment. Although the intention is to reduce disputes, enterprises and the LE Division can agree to disagree. Even though in-depth tax audits remain possible, taxpayers can expect to receive a lower risk profile with a corresponding impact on the degree of audits when considered compliant under the program. The pilot will kick off at the end of Successful preliminary discussions with qualifying taxpayers will lead to a more formal intake process. The LE Division is in the process of contacting potential candidate taxpayers to test interest in joining the CTCP pilot. In detail Overview/scope With introduction of the CTCP pilot program, Belgium joins the list of countries adopting a more taxpayer-friendly approach inspired by tax governance and transparency. The LE Division aims at updating its audit framework from ex post audits to audits and assessments taking place in real time. The LE Division is in the process of contacting eligible taxpayers. No official communication of the LE Division containing the details has been published so far, so the information below is subject to change. The program is intended to contribute to increased tax certainty for both eligible taxpayers and the tax authorities. It will be based on mutual trust, transparency, and understanding, which are to be achieved through an open and pro-active dialogue with a single point of contact in real time.

2 The CTCP will cover corporate income taxes, VAT, taxes equated to income taxes, and miscellaneous taxes that fall under the authority of the LE Division. Eligibility To enter the CTCP, enterprises presumably must exceed the following thresholds: Revenue of EUR 750 million; Balance sheet total of EUR 1.5 billion; Staff of 1,000 employees. Another criterion would be based on taxes paid (no details known yet). At present, it is unclear whether the thresholds are cumulative or whether passing only one of the criteria gives access to the CTCP (when the other conditions are fulfilled). It is not yet sure on what date or period the thresholds would need to be met. Further, enterprises also: Must have filed timely tax returns in the past; May not have been engaged in tax evasion; May not have violated tax law or demonstrated major shortcomings during the last three years; Must have paid the taxes already due; and Must have a robust TCF in place. Observations: The CTCP provides an opportunity for enterprises to enter into a real-time time and pro-active dialogue with the LE Division as a means to reduce lengthy disputes at both sides. As this is the first pilot of this sort in Belgian tax practice, the LE Division will be called on to change the traditional mind-set from an ex post audit approach to a constructive dialogue in a climate of trust. Enterprises will need to continue transparency and tax governance efforts. CTCP principles Key fundamental principles of the CTCP are: Tax law and other relevant (international) legislations remain applicable; no rights and obligations other than those under the relevant laws in force can be granted to or imposed upon taxpayers entering the pilot; The CTCP applies to all Belgian entities and branches of a group; in that context an all-in/all-out principle is applied based on consolidation rules; The CTCP will be formalized through a written agreement between the enterprise and the LE Division; Corporations still need to undertake their own analysis on tax matters. The interaction with the LE Division will not serve as a substitute for tax advice; There is a commitment from both sides to execute the CTCP in a professional way and not to harm the trust relationship; Differences in points of view between the enterprise and the LE Division are possible (agree to disagree) with retention of all rights in this respect. Observations: The CTCP is not introduced through a legislative initiative, but as an administrative approach governed by a contractual framework. As such, it leaves considerable discretion to the LE Division, the coordinator, and the follow-up team. It equally puts pressure on the degree of legal certainty that can be granted under the CTCP. Basic concepts of the CTCP Each qualifying enterprise entering the CTCP will appoint a single point of contact or coordinator. The coordinator will refer and coordinate technical matters (in real time) to the specialists of the LE Division where needed (e.g., transfer pricing, withholding tax, VAT). The coordinator or specialist will deal with the matters taking into consideration corporate and business insights and will invest in developing industryspecific or company-specific knowledge. Another pillar of the CTCP is that the tax obligations must be adhered to (compliance). Enterprises entering the CTCP will be treated equally in tax matters compared to taxpayers not entering the CTCP. Tax planning is allowed within the legal boundaries. Enterprises that enter the program engage to inform proactively the LE Division and to communicate in a transparent way. Main benefits derived from entering the CTCP For taxpayers The LE Division has identified the following main benefits for an enterprise to enter the CTCP. First, the CTCP should lower the exposure to tax risk, and tax certainty would be available more promptly. A single point of contact or coordinator will be appointed to facilitate contacts between the enterprise and the LE Division. As another advantage, the LE Division indicates that entering the CTCP may have a favorable impact upon the image and perception of the 2 pwc

3 enterprise and reinforce its corporate governance, internal risk management, and risk control framework. Other reasons mentioned to enter the CTCP, according to the LE Division, are reinforcement of the corporate responsibility and an increase in corporate compliance. For the LE Division The following advantages for the LE Division have been identified. First, voluntary corporate compliance related to the fiscal obligations should increase and taxes due should be established correctly, avoiding reassessments. The LE Division also expects an improvement in the services rendered and a more efficient audit strategy adapting to the enterprise s risk profile. Through the CTCP, scarce resources could be used more efficiently, and targeted measures against new tax risks could be deployed more effectively. For both the taxpayers and the LE Division Creating an atmosphere of mutual trust, reducing disputes, and gaining better insight in the functioning of the LE Division by taxpayers and in the taxpayer s relevant activities by the LE Division have been cited as benefits. Observations: The CTCP does not indicate that the enterprise entering the pilot program and fulfilling all the necessary conditions on transparency and pro-active communication automatically will be labelled as a taxpayer with a lower tax risk (and treated as such). PwC believes that such label and transparent communication on tax-risk profile should be an integral part of the CTCP. The CTCP should have an actual impact on the degree of audit activity benefiting all relevant stakeholders. Process Preliminary discussion After the application, eligible enterprises will be invited for preliminary discussions. The main goal of the preliminary discussions which should be attended by the top management of the enterprise and the Administrator Large Enterprises is to discuss the potential opportunity of entering the CTCP. The following issues will be addressed: Aim of the CTCP, its place within the audit strategies, and explanation of the basic concepts of the CTCP; The importance of the tone at the top approach in the enterprise and the LE Division; elements to be discussed may be (for example) the strategic goals in general and in specific tax matters, attention for tax compliance within the enterprise, and internal management and control systems; Agreement on mutual responsibilities and expectations; Agreement on a follow-up of the preliminary meeting (e.g., intake discussion); and TCF at the level of the enterprise/group. Intake process Successful preliminary discussions will lead to a more formal intake process if both the enterprise and the LE Division consider that the CTCP will come to fruition. The period for the intake process is anticipated to vary from six months to one year. The most important part of the intake process will relate to the review of the TCF as well as the basic concepts of the CTCP. If the TCF does not offer sufficient guarantees to enter into the trust based relationship, the intake process will be halted. The analysis of the TCF will be carried out in different stages. During the intake process, the LE Division will appoint the coordinator (single point of contact) who will lead the further discussions. At the same time, a follow-up team will be put in place. During the intake, the LE Division will evaluate whether the enterprise complies with the CTCP conditions and possibly will draft an action plan to remedy any shortcomings. Old pending tax disputes are not a reason for rejecting the program. An overview of those disputes will be compiled and appended to the CTCP agreement. Observations: PwC believes that the intake process period of six months to one year is too long. The intake process should be shortened considerably. PwC welcomes the fact that the intake process is not a rigid decision and that issues can be discussed in a constructive way with a view to remediation. Acceptance and termination The CTCP formally starts with the signing of the agreement by both the enterprise and the LE Division. It is mandatory for all Belgian entities and branches of groups to participate in the CTCP (all-in or all-out) based on the consolidation rules. As soon as possible, the enterprise should communicate about relevant group members that enter or leave the group. Failure to communicate will be regarded as a breach of the CTCP basic principles. The agreement is expected to have an unlimited duration, but the enterprise can terminate the agreement after two years. A termination request has to be 3 pwc

4 motivated. The termination of the agreement by one group member results in terminating the agreement for the whole group. For serious reasons (e.g., insufficient TCF), the LE Division can terminate the agreement with immediate effect. Observation: In our view, the LE Division should define in a more exhaustive manner what would be considered to be serious reasons to revoke the CTCP agreement. Positions adhered to under the CTCP will be reassessed upon termination of the agreement or when a group member leaves the CTCP. Binding effect During the pilot phase, the CTCP would be binding upon the LE Division, but it is not automatically binding upon other divisions within the Federal Public Service Finance. The LE Division has to conclude agreements with such other parts of the Federal Public Service Finance in order to make the CTCP or certain positions binding upon those other departments. At present, it is unclear whether such agreement within the broader Federal Public Service Finance is only an administrative formality or whether more formal negotiations will be needed. The pilot CTCP is concluded for a period of two years. Agreements concluded with the LE Division under the pilot are expected to remain valid in principle. Other aspects This phase is the active phase of the CTCP. Pro-active and transparent communication from the enterprise is essential. Meetings between the enterprise and the coordinator and/or the follow-up team will be organized on a regular basis. As audits and differences of opinion remain possible within the CTCP, this should not have a negative impact on the cooperation between the enterprise and the LE Division. During this phase, the operation of the TCF will be evaluated. At least once a year, an assessment on the eligibility of enterprises participating in the CTCP will be made. The CTCP allows an enterprise and the LE Division to agree to disagree. In such a case, the enterprise can opt for all traditional domestic and international administrative or court procedures. Disagreement under the CTCP environment may lead to disputes. Indeed, apart from the audit risk in itself, taxpayers remain fully liable to tax reassessments, tax increases, penalties, and fines upon a tax audit. Observation: From a procedural point of view, it is not yet clear how the proactive and extensive information sharing by the enterprise will impact or interplay with international (automatic) exchange of information mechanisms and potential extension of typical statutes of limitation in Belgium or abroad. TCF requirement Having a robust TCF is mandatory in order to be admitted into the CTCP. The LE Division did not and will not define how a TCF should be designed nor what the content needs to be. The enterprise must evidence, as part of the mandatory intake process for CTCP, that there is a solid TCF in place for risk management and risk control, leading to reliable and compliant tax returns. In assessing the strength of the TCF, the LE Division may decide to review the enterprise resource planning (ERP) tools and tax processes as part of the intake process. The enterprise must be able to explain the tax strategy and operation of the TCF, the different business processes, the functioning of the ERP, and the internal risk analysis performed. The LE Division will expect that the enterprise will automatically correct errors and openly communicate tax risks. Documentation with regard to the applicable TCF must be submitted as part of the intake process, as well as any important changes to the TCF during the program. Level of certainty One main advantage put forward for the CTCP is the more prompt feedback on tax positions taken. With regard to the level of tax certainty, the CTCP differentiates between: Agreements related to interpretation of factual matters between the administration and the enterprise; the agreement is binding as long as it is not reviewed or revoked; Point of view with regard to the interpretation of the law; this can lead to legitimate expectations in the hands of the enterprise; Personal opinions on questions or facts or the application of the law, which do not have any probative or legal value for the enterprise. The position taken by the LE Division under CTCP no longer will be binding upon it if: The conditions subject to which the decision is rendered are not fulfilled; The situation or operations are described in an incorrect or incomplete way; Essential elements of the operations are not realized or disclosed; 4 pwc

5 There is no conformity with the provision of the treaties, (European) community law, or domestic law; The provisions of the treaties, community law or domestic law relevant to the operation have changed; or The main consequences of the operation have been modified by one or more consecutive elements directly or indirectly due to the taxpayer. fewer and smoother audits, although an in-depth investigation cannot be ruled out completely. The LE Division is in the process of contacting potential candidate taxpayers to test interest in joining the CTCP pilot. Interested taxpayers meeting the profile and criteria for CTCP can consider applying for the pilot program. Observation: At present, it is uncertain if the CTCP dialogue will grant the same level of legal certainty as a formal Advance Decision (ruling) or Advance Pricing Agreement (APA). Enterprises can continue to seek more formal certainty under such procedures as long as they are transparent under the CTCP on pending and intended requests. The takeaway PwC welcomes and encourages the pilot on CTCP. A cooperative approach, such as exists in other countries, should lead to more compliance and certainty for corporates. Only large enterprises will be eligible for the pilot. The Belgian Minister of Finance has suggested the option for potentially expanding the pilot program to SMEs next year. Additional guidance is needed on the current CTCP pilot since questions remain as regards practical application and consequences. A legislative initiative is recommended in order to guarantee the promises under the pilot. Also, the procedural interplay with international (automatic) exchange of information will need to be clarified. Compliant enterprises participating in the CTCP can expect receiving a lower risk profile, which should lead to 5 pwc

6 Let s talk For a deeper discussion of how this issue might affect your business, please contact: Transfer Pricing/Tax Controversy and Dispute Resolution Patrick Boone, Brussels patrick.boone@pwc.com Kris Smits, Antwerp kris.smits@pwc.com Bram Markey, Ghent bram.markey@pwc.com Stefaan De Baets, Brussels stefaan.de.baets@pwc.com Tax Controversy and Dispute Resolution Global Leader David Swenson, Washington DC david.swenson@pwc.com Transfer Pricing Global Leader Isabel Verlinden, Brussels isabel.verlinden@be.pwc.com Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at: pwc.com/us/subscriptions SOLICITATION 2018 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please seewww.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. At PwC, our purpose is to build trust in society and solve important problems. We're a network of firms in 158 countries with more than 250,000 people who are committed to delivering quality in assurance, advisory and tax services. Find out more and tell us what matters to you by visiting us at 6 pwc