Belgian court rules against retroactive application of transfer pricing guidelines

By Moïse Gnakouri, Doctoral researcher, Catholic University of Louvain, Brussels

The Court of Appeal of Ghent, Belgium, on June 8 released its decision in a dispute between the Belgian tax authorities and a taxpayer regarding the application of the arm’s length principle to transfer pricing in a case involving the use of a concept introduced in OECD transfer pricing guidelines in a tax year prior to their issuance.

In this case, the Belgian tax authorities partly applied the concept of DEMPE (development, enhancement, maintenance, protection, and exploitation) from the 2017 version of the OECD transfer pricing guidelines in assessing the taxpayer’s transfer pricing for tax year 2009. The taxpayer argued that this was a retroactive application of the DEMPE concept.

Indeed, the DEMPE concept was introduced for the first time in the OECD Action 8-10 final report on the transfer pricing aspects of intangibles. This report was published in 2015 by the OECD, and in 2017 a new version of the transfer pricing guidelines was published containing guidance on the DEMPE concept.

The Court of Appeal of Ghent ruled in favor of the taxpayer based on two main arguments.

Firstly, a circular from the Belgian tax administration containing the transfer pricing guidelines of 2017 states that the provisions of the circular shall apply to intercompany transactions from January 1, 2018. Consequently, with regard to intercompany transactions carried out before January 1, 2018, the tax administration and the taxpayers should refer to the documents and rule in force at the time that these transactions took place. By ruling so, the Ghent Court of Appeal applies the principle of legitimate expectations in the tax administration acts. Indeed, the Belgian Court of Cassation ruled in 1992 that:

The right to legal certainty implies that the citizen must be able to trust what he cannot conceive otherwise than as a fixed rule of conduct and administration; it follows that, in principle, the public services are obliged to honor the justified expectations that they have raised in the citizen.

Secondly, the Ghent Court of Appeal relied on the principle of legal certainty through the decision of the European General Court which, in the Amazon case, found that the European Commission had disregarded this principle by applying the rules contained in the 2010 version of the transfer pricing guidelines to a situation which took place in 2003. For the European General Court, the 2010 transfer pricing guidelines can be applied to a situation prior to its publication only when they provide a useful clarification, without further specification, of the guidelines already set out in previous years.

Based on these arguments, the Ghent Court of Appeal refused the retroactive application of the transfer pricing guidelines.

Even though we are dealing here with non-binding texts, it should nevertheless be recalled that, in Belgian law, article 2 of the Civil Code provides for the principle of non-retroactivity of the law and that the Belgian courts have on several occasions ruled, with some exceptions, in favour of the non-retroactivity of tax law.