The first (hopefully not last) draft “anti-fraud plan” of the Belgian Minister of Finance, Johan Van Overtveldt, of 4 December 2015 appears to be an anthology of measures to stop attracting investments into Belgium, or even to encourage disinvestments (whilst currently still being affordable).

Since the release of the minister’s anti-fraud plan, there have been plenty of discussions going on whether the plan does or does not provide the Belgian tax administration with powers that are overly profound. On the tax technical and strategic side of matters, on the other hand, there is hardly any voicing of concerns observable. Perhaps this is true, since there would not be anything wrong with the plan, perhaps since all practitioners are tired of voicing their concerns on a plan that has been put forth with such a degree of political clumsiness that it is bound, or perhaps since the media is not interested in hearing a voice that doesn’t fit their strategy to ride the populistic waves of ‘fairness’. The first reason, as we will demonstrate, cannot be it; In respect of the second reason, we are not sure; As regards the latter reason, we can only ascertain that the media did not felt our concerns were noteworthy enough to publish, and instead restricted themselves to publishing the general principles of fair taxation the plan envisages to achieve, as we, the people, demand today… (next to jobs, I guess).

In what follows, we provide with a few tax technical and strategic highlights why the anti-fraud plan, if executed as-is, will discourage investments into Belgium, and even may encourage rapid disinvestments.

Exit Belgium: Now please

The anti-fraud plan puts forth that it can be useful to consider the guidance contained in the OECD Transfer Pricing Guidelines’ chapter on Business Restructurings to evaluate the size of exit taxes due by companies leaving (fully or partially) Belgium, and at the same time refers to the German (“Funktionsverlagerung”) legislation to arrange for the conditions, valuation measures and documentation of such exit tax.

In our view, it does not require substantial tax-technical knowledge (using google should suffice) to understand that the OECD Transfer Pricing Guidelines on Business Restructurings and the German ‘Funktionsverlagerung’ legislation are not quite compatible.

The OECD principles only tax the transfer of ‘something of value’

The key difference lies in the valuation subject matter and valuation method. According to the OECD Transfer Pricing Guidelines, it first needs to be assessed whether there has been a transfer of ‘something of value’ (where in arm’s length conditions a third party would be willing to pay for) or a right to indemnification exists for the redeployment. ‘Something of value’ can take the form of tangibles, intangibles (likely with a limited economic useful remaining life at the moment of the transfer, and generally further developed, enhanced, maintained, protected and exploited for the risk and account of the purchaser) or even in certain cases of an ‘ongoing concern’ – i.e. “a functioning, economically integrated business unit”, “assets, bundled with the ability to perform certain functions and bear certain risks”. The valuation method then follows the appropriate appreciation of exactly what has been transferred, if ‘something of value’. The mere relocation of ‘profit potential’ according to the OECD Transfer Pricing Guidelines is not a sufficient ground to justify a (taxable) compensation. Also, in the pricing of ‘something of value’ transferred, notwithstanding both the seller and purchaser perspective may be important (e.g. for assessing relative bargaining power) should be noted, generally it should be respected that for instance the intangibles transferred may be enhanced and exploited by the purchaser in a different manner that increases the intangibles’ profit potential, without the seller having a necessary and direct claim to such new profit potential. It should be noted, however, that since the new BEPS (Base Erosion & Profit Shifting) guidance has been issued as per 5 October 2015, that also the OECD has (re-)introduced fog around the valuation of intangibles, including basically hindsight measures (not in the least, thanks to the efforts of the German and other big country representatives).

Germany also taxes the transfer of merely existing and newly to be developed profit potential

In accordance with the German ‘Funktionsverlagerung’ legislation taxation can already take place with the mere reduction of functions (without the need to appropriately assess whether and which assets have exactly been transferred). The German rules make on the contrary a quite direct assumption of the existence and relocation of a so-called ‘Transfer Package’, which contains ‘economic goods and other advantages, as well as chances and risks’. In essence, Germany targets to come to a valuation of the merely existing profit potential (in general under a going concern assumption), as well as of the newly to be developed profit potential. Indeed synergies and other advantages that the purchaser of the ‘Transfer Package’ would be able to realize (at its own risk, and as a result of its own strategic and commercial efforts) are to be taken into account (de facto for 50%) when pricing the ‘Transfer Package’.

Germany’s exit regulations in practice form a significant hurdle for attracting investments

The referred to German exit regulations in consulting world forms – next to a general high tax burden – one of the most important criteria why not to invest in Germany, to avoid a lock-up beyond the point of no return… As a consequence of the regulation, double taxation also almost is inevitable considering that the jurisdiction that is up for compensating Germany probably follows the OECD principles and generally would not compensate the mere transfer of profit potential. Off course, this does not mean that Germany is not able to attract new investments – most definitely it does on the basis of other investment criteria, such as its vast market size, flexible labor regulations, access to raw materials and energy, etc. And what about Belgium’s competitive edge?

Moreover, one should be thoughtful before introducing German-like exit rules in Belgium for corporations that certain investments may opt for ‘exiting’, i.e. disinvesting, before such rules become effective, at the time when this still can be done under the (more reasonable) OECD principles. An example, which may be typical, is the allocation of the fabrication license of a next generation model in car assembly to another country. Whereas under the OECD principles this does not automatically lead to a compensation and exit taxation required (it depends, but in most instances it would be very unlikely that the forgone profit potential is to be taxed), under the German exit tax rules it is very likely that there will be an exit taxation on the basis of forgone profit potential.

We sincerely hope that the impact of such legislation will still be analyzed (and the suggestion withdrawn) since we do not believe it can be the intention of the Minister of Finance of a small, and (normally) open economy to introduce new legislation that goes beyond what our neighboring countries (except for Germany) apply. This would discourage new investments, and maybe encourage divestments…

An inconvenient truth?

The anti-fraud plan seems to assume a blind trust in the “fairness” that the large EU member states put forth in their joint battle against harmful tax practices. A fine example is the statement that Belgium is awaiting a coordinated initiative at EU level to introduce an interest/EBITDA ratio to limit the deductibility of so-called excessive interest payments – a measure which has a real economic impact, and may hamper Belgian’s position as location of preference for intra-group finance. At least, we might say that Belgium in this respect is following, and not trying (for the moment) to go beyond what would become general EU practice (unlike the exit taxation issue discussed above).

Strikingly, however, is also the big countries relentless effort to come to a European tax harmonization, to kill every competitive edge in respect of that matter – which is a real, genuine business expense. Indeed, in the ECOFIN conclusions (no. 20) of 8 December 2015, it is stated (on the proposition of the larger members) that further discussion is required on the concept of minimum effective taxation (http://www.consilium.europa.eu/en/press/press-releases/2015/12/08-ecofin-conclusions-corporate-taxation/).

In an earlier Tivalor analysis (http://www.tivalor.com/news/2015/10/12/beps-it-is-politics-stupid/) we already demonstrated that notwithstanding at first sight it may be considered a noble act to battle undesired tax avoidance, at least the relative competitiveness of the larger economies versus the smaller, open economies would not be hurt either. These big states do not have the need to be attractive in the field of taxation to lure new investments, whereas for other countries sometimes (in certain niches) it is the only decisive argument.

In first instance, it may therefore be the simplest of solutions – moreover fully in line with the public opinion that has been kneaded by the media, and therefore from a political point of view probably even lucrative – to follow mainstream ideas on taxation and fairness and implement blindly what the big countries dictate. In the longer run, however, we remain skeptical whether this is the right path to follow by Belgium. In this sense, Minister Van Overtveldt in the past (rightfully) took the position several times that we should consider further fiscal harmonization with great caution (read a.o., in Dutch: https://www.voka.be/public-flippingbooks/6617cfa5-d112-4e6b-befb-99d3c1ebcb9b/index.html#16), whereas the anti-fraud plan which is currently on the table seems to fully accept supranational initiatives steered in that direction.

Which benchmark should Belgium follow for introducing a transfer pricing documentation requirement?

As with the apparent general intention of the anti-fraud plan to be best in class of the major jurisdictions, also in view of statutory transfer pricing documentation requirements, also reference is made to France. Indeed, the proposal includes a requirement for drafting transfer pricing documentation for cross-border, intra-group transactions as from EUR 500.000. In France, as referred to the threshold would lie at EUR 100.000. As far as known to us today, we believe that indeed the French current transfer pricing regulation contains such provision, but also that this does not relate to transfer pricing documentation under the OECD Transfer Pricing Guidelines, rather to an obligation for large tax payers (generally with a turnover as from EUR 400 million) to file a specific, abridged/”light” transfer pricing form, no later than 6 months after the filing of the tax return, including the nature and aggregate amount of transaction exceeding this threshold – not a full transfer pricing documentation report (Masterfile & Local File under OECD format).

Not only the base assumption as if France would have a materiality threshold of EUR 100.000 to provide contemporaneous transfer pricing documentation seems in correct to us, merely trying to compare with France in our view is not appropriate. It would be better in our view to synchronize our efforts with for instance the Netherlands, who have announced to require OECD-based (Masterfile/Local File) documentation for companies with a consolidated turnover of EUR 50 million.

Finally, it is also incorrect in our opinion, to assume that introducing the requirement for drafting transfer pricing documentation following the OECD’s Masterfile and Local File would not mean an additional administrative burden for multinationals. The OECD’s index for these files goes beyond what traditionally has been good practice in many countries to draft transfer pricing documentation. This clarifies for instance that the Netherlands announced to follow these formats for companies larger than EUR 50 million, and maintains its current transfer pricing documentation obligation (general practice and proportionate) for companies below that threshold, enabling these companies also to avoid the reversal of the burden of proof.

Belgium should retain its focus on its own fiscal context

As discussed above, it is in our view, not useful that Belgium blindly follows the developments steered by the G20/OECD/EU (e.g. in respect of interest deduction limitation, whereby we note that we also do not have a system of corporate income tax consolidation in place to potentially offset certain disadvantages). In our opinion, many of these developments are strongly advocated for by the big economies that seek far-reaching fiscal harmonization (without political harmonization and representation). For small, open economies – like we like to think of Belgium is – many of these developments could have adverse consequences. It is furthermore no secret that France and Germany (as well as the OECD) are against the use of Belgium’s patent box regime (and that of other countries such as the Netherlands and Luxembourg) and Belgium’s notional interest deduction.

We think it is therefore regretful that the OECD BEPS initiatives, including strengthening the guidance on transfer pricing, have found their application in what is called an anti-fraud plan. Many of the ideas have nothing to do with fraud…

Awaiting a more correct technical analysis (not mixing up OECD’s business restructuring guidance with German exit taxation rules, putting transfer pricing documentation thresholds in their correct context, and understanding why the new OECD transfer pricing documentation formats go further than prior standard practice and therefore will mean an additional administrative burden for tax payers), we can only hope that the Minister of Finance thinks further than mainstream “fairness” and also considers our competitive position to attract investments as a small and open economy.

 

Andy Neuteleers,

partner Tivalor,

specialist in transfer pricing, business restructurings and valuations