Throughout the financial turmoil of recent years, Belgium has been praised for its handling of the downturn, having felt only a relatively minor impact from the disturbances, which was followed by a quick recovery. However the country is now at an impasse, seeing its debt-to-GDP ratio increase to 97 percent, which is putting an indefinite delay on the government’s plans to create funds for potential financial problems in the future.

In a report released on June 12th the Organization of Economic Cooperation and Development (OECD) identified shortfalls in the Belgian tax system which will need to be addressed if the country wants to decrease its debts levels.

According to conclusions drawn in the report, the government of Belgium will need to make significant cuts in government spending. The tax system will also need to be overhauled to remove distortions and inefficient biases. The key changes that were recommended to Belgium were a shift of tax burdens away from labor and productivity, and a general broadening of the tax base. Both measures should be complimented with a reduction in tax rates, with particular attention to cuts to personal income tax rates and corporate income tax rates.

It was noted in the report that the government of Belgium should make greater efforts to coordinate its environmental policies. New taxes should be instated to address housing and transport emissions, as these pollutants are not covered by the EU emissions trading scheme. A well designed and thoroughly planned carbon tax would be an ideal measure to address the issue of green taxation.

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Recently the tax authorities of Belgium released a long-awaited circular intended to clarify a tax law that was introduced into the Belgian tax code on December 23rd 2009. The law concerned the reporting requirements for Belgian resident and non-resident business entities operating in the country which transfer funds or make payments to tax haven jurisdictions.

The law became effective on January 1st 2010, although the concerning legislation was largely regarded as unclear and ambiguous. Commenting on the regulations’ original state and the tax industry’s reaction to the new circular Dirk Van Stappen, tax partner at KPMG Belgium, was quoted as saying, “… the circular on tax havens has been anticipated eagerly, as the legislation was not clear on some points.”

The reporting laws are applicable to all Belgian based companies which make transfers exceeding an amount of EUR 100 000 to countries considered to be tax havens by Belgian authorities, and to any country listed as an “uncooperative jurisdiction” by the Organization for Economic Cooperation and Development (OECD). The new law requires a strict time frame for reporting any transactions to tax havens. Belgian tax authorities also clarified that for the purposes of the legislation all transfers of cash, any interest payments, and transactions involving balance sheet adjustments will be required to be reported. Further, companies and individual taxpayers must be able to provide sufficient evidence that the payments serve a genuine “industrial, commercial or financial need,” which are paid and valued at appropriate accordance with “the arm’s length standard,” and are not constituent to any illicit or suspicious behavior.

Failure to appropriately meet any of the requirements of the new law clarified in the new circular could result in action by tax authorities, with a potential for penalties or disallowance of a deduction for the payments in question. However, the circular reveals that the tax authorities have conceded that some of the requirements may be waived when international information disclosure and movement of capital treaties are applicable.

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At a recent conference co-hosted by the Belgian Government and the European Commission, representatives of Belgian tax authority explained several beneficial aspects of the Belgian tax system and the country’s propensity for accommodating innovative and environmentally conscious companies. Delegates at the conference were told that the Belgian tax system is especially beneficial to expatriate workers, with multinational employees being exempt from income taxes on days when they are not in Belgium. International research and technology firms operating within Belgium will also be able to receive discounts on sales taxes for products developed by them and covered by patents registered in the country. Multinational companies registered in Belgium are also eligible for corporate income tax deductions based on the amount of equity capital they carry throughout the financial year. According to Paul Op de Beeck, tax partner at KPMG Belgium, this measure alone can reduce the effective annual corporate income tax rate to 25 percent for a typical firm, or even lower for firms with low returns on investments.

In an effort to attract even greater numbers of large companies to establish operations in Belgium, federal authorities are also authorized to negotiate tailored tax packages with large firms, offering subsidies for infrastructure projects and employee training programs. Cumulatively, a foreign company establishing a presence in Belgium would be eligible for tax allowances equal to 50 percent of its equity capital, in its first year of operation, if it chooses to take all commonly offered tax benefits.

While the tax benefits are offered throughout all of Belgium, the Government is currently concentrating on attracting investors to the southern region of Wallonia. According to figures released by Belgian Ministry of Finance, the region of Wallonia experienced approximately EUR 489 million in foreign investment in 2009, and EUR 536 million in 2008. The Ministry projects that its international push for greater numbers of investors and the global economic recovery will cause even higher investment levels in the near-term.

Google recently opted to establish a major base of operations in Belgium, citing the country’s tax system and availability of green-technology as the major reasons for the decision. The international companies Skechers, GlaxoSmithKline and Janssen Pharmaceutica, have revealed that they will all soon be establishing operations in southern Belgium, after having investigated other major European investment areas.

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On April 6th the OECD and Council of Europe released a media statement announcing that the CMAAT will be updated in order to bring it up to currently agreed upon standards of international tax transparency. The Convention, opened for signing in 1988, is an international framework which provides facilitation of multinational exchange of fiscal information. The Convention will be updated to reflect modern internationally agreed upon standards in tax transparency and exchange of fiscal information. Under the update, domestic tax law limitations will be removed and exchange of bank information will be available.

The CMAAT update will open participation in the agreement to non-Council of Europe and non-OECD nations, and invitations will be extended for new signatories, especially among developing economies. Angel Gurría, OECD Secretary-General, explained the need for the change, saying that it “…provides for the opening of the convention to countries that are not members of the Council of Europe or the OECD, thereby transforming it into an instrument to fight tax evasion worldwide.”

The CMAAT, originally drawn up under the aegis of the OECD and the Council of Europe, is currently enforced by Azerbaijan, Belgium, Denmark, Finland, France, Iceland, Italy, Netherlands, Norway, Poland, Sweden, United Kingdom, United States, and Ukraine. Canada, Germany and Spain have signed the agreement, though have yet to ratify it.

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On January 28th the EC placed an official request to the Belgium Government to address its tax treatment of dividends and interest distributions to foreign owned investment funds, as it claims the current treatment is discriminatory and restricts the freedoms mandated by the Treaty of the European Union. Under current legislation, distributions made by a Belgian company to Belgian investment funds can be exempt from withholding tax, if the receiver meets a predetermined set of legal requirement concerning its investments and investors. Conversely, distributions made to foreign held investment funds will face a tax burden of 15 or 25 percent, depending on the circumstances.

The request comes as the second step of Article 258 of the TFEU (Treaty on the Functioning of the European Union), which outlines the EC’s infringement procedures. The first stage of the process involved the EC making a request to Belgium to supply information in order for an investigation to be conducted. The current stage consists of a formal request of action, called a reasoned opinion. The last stage is invoked if Belgium does not make a satisfactory reaction to the reasoned opinion, at which point the matter may be referred to the Court of Justice of the European Union.

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