Corporate Income Tax

 

When Less is More

 

Once again, Dirk Van der Maelen (SP.A) will not rest until the Notional Interest Decuction (NID) is eliminated (which is ironic as he approved of it back in 2005).  Along with Bruno Tobback, last year he submitted a proposal denying the benefit of NID to banks.

In its policy document Priorities for a Prosperous Belgium, the American Chamber of Commerce in Belgium outlines a three-pronged approach to using taxation as a tool to keeping Belgium an attractive place for multinational companies to do business. AmCham Belgium proposes to gradually reduce the nominal corporate income tax rate to 25%, maintain the notional interest deduction, and reduce the so-called “wage wedge”.

Reduce the nominal corporate tax rate to 25%

There is a well-known principle among tax economists (The Laffer Curve) that holds – within certain limits – that the revenue generated by a tax will increase in absolute figures to the extent the rate of such tax is decreased. When, in the 1990s, the percentage of the (flat-rate) interest withholding tax dropped from 25% to an eventual 15%, it only took one quarter for the revenue generated by that tax to start climbing. With respect to corporate tax, we believe the reduction of the nominal rate in 2002 (from 40.17% to 33.99%) led to a substantial increase of revenues to the fisc.

Within the OECD (the club of 30 industrialized countries) Belgium has the fourth highest nominal corporate tax rate (Federal and Regional combined). Only Japan, the US and France score “better” on the charts. Although perhaps not the right way to look at it, from the perspective of foreign companies, the nominal corporate tax rate is a very significant factor in making investment decisions.

When Belgium competes head-to-head with such countries as Austria or Denmark (25%), the Netherlands (25.5%) or the United Kingdom (28%), our nominal rate of 39.99% not only looks odd, it is also up to 10% higher than the rate of our closest competitors. Even though the effective rate in Belgium is substantially lower than 33.99% — to a large extent due to the Notional Interest Deduction — eyebrows are raised when somebody explains that of each additional dollar of profit, 34 cents disappear into the Belgian Treasury.

Maintain the Notional Interest Deduction

The Notional Interest Deduction is an effective tool for reducing Belgium’s effective corporate tax rate (compared to the nominal rate of 33.99%). The introduction of the NID in 2005 (effective 1.1.2006) has not led to a drop in corporate tax revenues as many feared. Rather, it has had the opposite effect.

Between 2005 (the year before NID) and 2008 (the third year of NID), Belgium’s corporate income tax revenues nearly doubled, from 16.5 billion to 31.15 billion euros. That is almost 15 billion euros of additional revenue per annum, notwithstanding the fact that, until 2005, banks were among the most important taxpayers while also being among the largest beneficiaries of the NID (as from 2006 onwards).

Another — and perhaps even more important — argument for maintaining the Notional Interest Deduction is that stability of the tax system and tax legislation is critical for any country portraying an image of being a reliable regime for businesses. The threat of frequent, unpredictable and significant changes in the tax system makes multinational businesses gun shy – especially new members and investors with major projects. This is not only because they fear unpredictable increases in their tax cost, but also because every change in the tax system requires substantial amounts of time and attention from management, in-house lawyers, accountants and tax experts to grasp and comply with the changes.

To those who are of the view that a requirement for benefiting from NID should be the hiring of additional personnel in Belgium, be warned: the European Union has previously struck down such protectionist measures (for example, when Flanders made a reduction of the estate tax due when family-owned businesses are inherited contingent on the conservation of employment in Flanders). If that occurs, Belgium will run the risk of subsidizing employment in the other 26 Member States, with the Belgian Treasury alone swallowing the entire budgetary cost of the NID. Or shall we sin once again against the adage, Shoot first, aim later?

Reduce the “Wage Wedge”

In relative terms, taxes on profits have less of an impact on employment than the so-called “wage wedge” — i.e. the balance between the gross cost of compensation for an enterprise and the net salary an employee takes home.

In labor intensive industry sectors – which are primarily at stake in the debate on taxation and employment – the gross cost of compensation often represents 10, 20, 30 or more percent of sales (turnover). Conversely, taxable profit often amounts to no more than 2, 3 or 4 percent of sales. Therefore, if – for illustration purposes – one third of gross compensation cost could be alleviated through a substantial reduction of the (tax and social) levies on labor, taxable business profits would immediately surge.

By doing so, one makes labor affordable – which will effectively temper the incentive to relocate labor abroad – while taxable profits will increase such that, even with a reduction in the nominal tax rate, the revenue for the Treasury grows exponentially.

It’s two for the price of one!

 

Werner Heyvaert is an attorney with Jones Day and Chairman of the Notional Interest Deduction Task Force, part of the Legal & Tax Committee of AmCham Belgium. Roel Van Werde is a tax advisor and Vice-Chairman of the Legal and Tax Committee.