So far, reforms of the Belgian tax system have had neither a positive nor a negative effect
For the third year in a row, Tax Freedom Day falls on 10 June. In other words, Belgian taxes remain as high as ever, in spite of the efforts that have been made to reduce the tax burden. On the other hand, one can argue that the reforms carried out did not cost the State anything. You only have to think of the recent discussion about the notional interest deduction. Or we could look at it from a different viewpoint: we are all continuing to invest in a thriving State apparatus. Are we getting value for money? And how are the others doing? Because a tax system also means fierce competition between the various countries. Inward investment means economic growth and prosperity. So how can we bring in as much as possible? "Innovation" also has a role to play there!
Tax Freedom Day (TFD) is the day when the average Belgian taxpayer has paid his annual tax bill and can start working for himself. To calculate this, we divide the total tax revenue (including social security contributions) by the Gross Domestic Product. For 2008, this ratio is 44.1%. That definitely does not put us at the head of the field. In Switzerland, TFD comes on 14 April. The United States fare rather worse, with TFD on 23 April. Netherlands just makes it in May, on 27 May. The United Kingdom comes next with 2 June. Another neighbour, France, reaches the milestone date on 7 June. Germany does it on 9 June, which is about the same as Belgium.
Do we get value for money? Good question. Professor Moesen of the Catholic University of Leuven tried to answer it. He looked for, but did not find, a link between the size of the government budget (tax revenues) and the competitiveness of the country. To do this, he used the competitiveness index published by the World Economic Forum (WEF), namely the Global Competitiveness Index. If we take 23 mature economies, comparable with Belgium, as a basis for comparison1, Belgium comes in 6th place in terms of the size of the government budget, behind the Scandinavian countries and France. Further analyses showed that an increase or reduction in the government budget does not entail any equivalent change in the effectiveness of government. In concrete terms, this means that if Belgian tax revenues were to be reduced, the effectiveness of government would not be reduced.
Professor Moesen then started looking for, and this time found, a link between the effectiveness of government and the competitiveness of the economy. To do this, he used the "Government Effectiveness Index", developed by the World Bank. The Belgian government's score for effectiveness was average, in 13th place. Denmark, Iceland and Switzerland came in the top three places. One way of improving the effectiveness of the government would seem to be the introduction of stricter budgetary rules, as well as creating greater trust in government.
In practice, it means that it must be possible both to cut taxes and improve the efficiency of government. Based on the analysis of the same group of 23 countries, Professor Moesen is of the opinion that a total 8% cut in taxes over 8 years is compatible with "government performance" that would be 8% higher. In that case, in eight years' time, Tax Freedom Day would fall around 25 May.
Proposals for further reform of our tax system
“Countries around the world are competing to attract foreign investors and the tax system often forms a decisive argument in that competition", explains Frank Dierckx, Managing Partner PwC Tax Consultants. “Investors keep the economy moving, and in other words, generate prosperity. It starts with a European or international headquarters, but soon new plans are thought up, for which the host country is in pole position. Countries like the Netherlands, Ireland and newcomer Cyprus are good at attracting investors. Belgium has taken steps in the right direction, but still has a long way to go. Our major disadvantages remain the complexity of our tax rules, and the lack of transparency. Belgium levies no fewer than 63 different taxes on companies. That speaks for itself ... Uncertainty over whether newly introduced tax breaks will remain in place is an inhibiting factor", says Frank Dierckx.
Let's take a look at income tax. Progressive tax scales can be found in several countries, but in our case, the tax rate climbs very fast. Starting from 17 920 EUR, you have to pay a marginal tax rate of 45%. That makes the tax that you pay on the same taxable income very high in comparison with other countries. The highest marginal tax rate is 50%, which is also very high. Some investors only look at the marginal tax rate. On top of that, you almost have to be a specialist to complete your tax return. No fewer than 279 codes have been added since 2000. There is a whole raft of tax-deductible expenses or investments, for example relating to green energy or renovation of a home. Why not replace this all by deductibility of the interest on a mortgage for the purchase, construction or renovation of a home? Another possibility is to opt more systematically for a direct grant, which is already the case for example on purchase of a green car, rather than a tax deduction that will only be felt two years later.
With regard to corporation tax, the main reason why Belgium is not the ideal location for regional head offices is the tax levied on dividends. Although there is a system of holding companies, the introduction of total "neutrality" in this regard would certainly attract investments. PricewaterhouseCoopers argues that, on the one hand a 100% exemption of incoming dividends (instead of the current 95% exemption) is a necessity. At the same time, scrapping of the withholding tax on dividends paid to non-residents could provide a tremendous boost to the Belgian stock market. Furthermore, there is withholding tax on interest for foreign parties. Most of them are covered, nevertheless, by one exemption or another. It would make the situation clearer if this withholding tax were just scrapped.
The corporate tax rate is currently 33.99%. Although it is possible in practice to pay less, including via the notional interest deduction, this still comparatively high rate is a disadvantage. Many investors do not study the possibilities for cutting the tax liability in detail, but merely compare the prevailing nominal rates. In that comparison, we fare very badly. A decrease of the corporate tax rate would therefore be essential.
A final proposal is to make tax consolidation possible. In practice, this means that a parent company which has a profitable and a loss-making subsidiary would be able to offset the profit and loss.
A measure to improve our competitive position in terms of indirect taxation (VAT) would be, for example, to allow deduction of VAT on construction costs, even if the building is subsequently let to another business. Belgium is one of the last remaining countries where this is not allowed. This measure would stimulate investment in real estate here.
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Information for journalists:
‘Tax Freedom Day 2008 – Some perspectives on taxation and the public sector in Belgium’ can be found on: www.pwc.be.
The publication is also available on request:
· for journalists: from Elsie Van Linthout at Luna: 02 658 02 70 or elsie@luna.be;
· for other stakeholders: from Isabelle Jacobs at PwC: 02 710 71 40 or isabelle.jacobs@pwc.be.
1. Denmark, Iceland, Switzerland, Norway, Finland, Canada, Sweden, Australia, New Zealand, the Netherlands, the United Kingdom, Luxembourg, Belgium, the United States, Austria, Ireland, Germany, Japan, France, Spain, Portugal, Greece and Italy.
