At almost 34 percent, Belgium has the third-highest statutory corporate income tax rate in the eurozone after France and Malta, according to Eurostat.
The effective average tax rate is actually lower, somewhere between 26 and 27 per cent, but the overall idea is to give companies more breathing space.
But – and this is the big problem – this will require extra cash to be found elsewhere.
The tax cutting plans were inspired by the European Commission’s decision in January to outlaw some Belgian rulings that gave large companies with operations abroad overly generous tax breaks and by concerns that smaller enterprises lose out due to the complexity of Belgium’s taxation system.
But the proposals have been met with a mixed response with Kris Peeters, the federal economy minister, saying there is no other source of alternative financing.
“I’m concerned,” said the Flemish politician, “that the lowering of tax on corporations may not be able to be organised in a way that is budget-neutral. The question is: how you go down to 20 per cent when you know that the tax base has to grow by €30bn.”
A tax cut to 20 per cent would leave a €4.5bn hole in the federal budget. Some argue that to make up the deficit, a tax could be imposed on excess profits. In this way, a new tax shift could take place.
Corporate income taxes brought in €13.9 bn for the federal government in 2015, according to the National Bank of Belgium. To put things in perspective, that’s less than a quarter of social security contributions paid by both employers and employees and compares with total government revenue of €210.3 bn.
Wouter Van Gulck, general manager of the Federation of Belgian Chambers of Commerce, backs Van Overtveldt’s proposal, saying, “We believe it is a good thing, as it will enable Belgium to attract FDI (Foreign Direct Investment) with competitive tax rates. Also it is an incentive for companies already established in Belgium.
“Since the purpose is not only to lower the tax rate, but also to do away with a number of tax deductions, so that the taxable base widens, the whole operation should not cost money to the government. As it is not so much SMEs that make use of these tax deductions, our overall evaluation is that the decision will benefit SMEs.”
Dirk Van Stappen, a partner at KPMG tax advisers and head of KPMGs corporate tax practice in Belgium, also favours the plan, albeit with reservations.
He said, “A reduction of our nominal corporate income tax rate (currently 33.99%) is a must to enable Belgium to attract foreign investments and to retain the business community that has already invested in Belgium. Our neighbouring countries already have lower nominal corporate income tax rates and the current trend is clearly to reduce these rates even further.”
He points out that in the UK there are plans to reduce the corporate income tax rate to less than 15%, adding, “As such the Belgian government needs to take action quickly if it wants Belgium to be shortlisted when foreign investors are selecting a place to invest.”
Prior studies, for example those carried out by the UK HM Revenue & Customs and HM Treasury, “clearly revealed” that a corporate tax reduction not only leads to an increase in investments and GDP, but also to an increase in the demand for labour which, in turn, raises wages and increases consumption, said Van Stappen.
“The outcome of these studies is broadly consistent with the wider academic literature which finds that reductions in corporation tax rates boost investment leading to higher GDP and partial revenue recovery.”
However, he cautions that a reduction in rates will likely not be enough on its own.
“KPMG surveys of clients have consistently concluded that companies want stability, predictability and certainty, both in economic (including tax) and political terms. Indeed a predictable and stable tax and regulatory environment should be created in Belgium to enable companies to implement a viable long-term planning.”
He adds, “As such, any changes to the Belgian tax law should be inspired by a long-term vision, that can be maintained when the political composition of our government changes. A tax policy only based on short-term objectives and driven by the desire of politicians to please specific voters is what should be avoided as such policies are often subject to rapid change.”
Belgian Greens MEP Bart Staes believes Van Overtveldt’s plan was inspired by the Commission’s “attack on tax dodging companies such as Apple.”
Staes argues, “In principle, lower corporate tax rates are a good idea, not least because the rates in Belgium, as everyone knows, are far too high.”
Patrick McCullough, a press officer in the Commission’s taxation and customs union DG, points out that, in general, setting corporate tax rates is a sovereign right of a member state.
But Staes says, “The Greens have proposed an EU wide business tax rate of 25 per cent and it is this that national governments should be aiming for.
“What I do not support are individual member states lowering their tax rates so, in that sense, I do not agree with this. This is just Belgium, rather than the rest of Europe, proposing to lower rates. But this sort of thing only leads to a race to the bottom.”
Staes adds, “Also, of course, this reduction will lead to less income for the federal coffers, and we have to remember that Prime Minister Charles Michel earlier this year said what Belgium needs now is an ‘investment government.’ Having to make cuts of €3-4bn does not correspond with that pledge. Michel seems to have forgotten what he said.”
Businessman John Stuyck, says the big multinational companies operating in Belgium usually pay much less than 33% or even 20%.
“Their real tax rate,” he says, “hovers around 10-12% thanks to a vast range of deductions and crafty accountants. The only ones who get clobbered are the SMEs who do not have access to those tools”.
He adds, “In fact, the government’s decision will affect the headline tax rate which is used worldwide to attract international companies to invest in one place.”
Stuyck believes the government’s as yet unofficial proposal should help inward investment, encourage SMEs and hopefully boost tax receipts in the long term.
“To compensate a potential short term tax revenue shortfall, the government will push for higher taxation on dividends (27% to 30%) and introduce a possible taxation on capital gains.”
Another Brussels businessman, Jerome Vandermeulen, who runs the Manhattns restaurant chain, is particularly scathing of Belgium's current business rates, saying, "When you make risk-taking less rewarding, you get fewer risk-takers, which is exactly what you see across Belgium and Europe. When you raise taxes that high, the Elon Musks of the world find other places to build their companies. No risk taking means no entrepreneurs and no more jobs."
Further comment comes from Brussels-based lawyer Marc Quaghebeur who believes that while corporate tax reform is inevitable the “competition with other jurisdictions will just get harsher.”
He says, “When multinational companies compare countries where they want to invest, they first look at the corporate tax rate. 33.99% does not compare with 20% in neighbouring countries. Then they check whether interest on bank loans is deductible. Very important as well is how much profit they can repatriate, and for that the withholding tax rate is important.”
Belgium is doing well on all accounts apart from the tax rate, he said.
“This,” says Quaghebeur “has nothing to do with ‘motivating entrepreneurs to work harder and settle in Belgium’. It is about attracting foreign investment.
“It does cut down on tax revenues from existing corporations here, but they will be more motivated to make more profits in Belgium rather than look for escape routes to pay less tax in Belgium.”
He goes on, “More investments means more work for Belgians, more work for subcontracting companies who also create more work. More work means less unemployment benefits and more income from personal taxes, more income for spending and more VAT.”
Pieter Timmermans, CEO of the Federation of Enterprises in Belgium (FEB), wants to see a reduction in company tax “as soon as possible” but one “geared towards simplification, which is budget-neutral and further strengthens the relationship between SMEs and large companies.”
“This reduction should be offset by scrapping various tax deductions rather than by measures that stifle entrepreneurship or cause collateral damage to innovative or export-led businesses.”
His message – and the general consensus – is that all companies, small, medium-sized and large, must benefit.
Belgian centre right MEP Tom Vandenkendelaere, who specialises in taxation issues and is a member of the economic and monetary affairs committee, said the rate cut cannot be seen as a stand-alone proposal.
He said, “We want the strongest shoulders to carry the heavier load. Therefore, during the budget negotiations we proposed installing a capital gains tax of 30% on stock investments, decreasing over time. For SMEs and start-ups there would be exemptions.”
The parliamentarian adds, “Simplicity, competitiveness and budget neutrality. Those are the key words we need to bear in mind at all times. In the upcoming months, the Belgian federal government is planning to look into the proposals made during the budget negotiations and our party will make sure these three key words are at the centre of all decisions.”
The Belgian tax system is currently highly complex and greater simplification would benefit the government and business, he believes.
“That’s why,” he adds, “when we reduce the corporate tax rate, we need to close loopholes, allowing Belgian companies to deduct all sorts of expenses.”
He said, “Today, Belgium has one of the highest tax rates in Europe. Due to the tax shift that came into play in the beginning of 2016 we already see some movement in the right direction. We need to make our economy more competitive – that is absolutely vital. At the same time, we need to keep in mind that our government needs a steady income, especially with increasing social security costs as a result of an ageing population. So whatever the final outcome, it is key that it be budget-neutral.”
Looking to the future, he warns, “With the European Commission rightfully keeping a close eye, we cannot afford to create more debt.”
By Martin Banks
From the Highest to the Lowest? Belgium’s Corporate Tax SagaFriday, 16 December 2016 18:29
Martin Banks is a British journalist with more than 20 years of experience. He has been based in Brussels since 2001, specializing in EU Affairs coverage.
Whether it’s Donald Trump or Apple, the issue of taxation has been in the news of late. And the subject has also hit the headlines in Belgium with controversial plans by Finance Minister Johan Van Overtveldt to reduce corporate tax from nearly 34 to 20 per cent.
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