The Regionalization of Income Tax

The elections are already five months behind us and yet there is no sign of a new government before year end. Before a new government can be formed, the winners of the elections – the Flemish nationalist N-VA and the socialist PS in Wallonia – must agree on a solution to the financial/budgetary problems, realize institutional reform and strengthen the socio-economic environment.

If – or when – a decision is reached on state reform, chances are that either personal or corporate income tax will be transferred to the regions. The latter is a sensitive issue, but would be of significant interest to AmCham Belgium members. The Legal and Taxation Committee was briefed on this issue by one of the specialists in the field, Professor Sylvain Plasschaert.

According to Professor Plasschaert, transferring corporate income tax to the regions has been on the Flemish agenda for over a decade. One of the ideas behind it is to give the regions the responsibility for collecting the revenue they are spending, as opposed to relying on grants or ‘donations’ from the federal government. It would also give the regions the means to develop their own economic policies and allow incentives to shift from subsidies towards tax reductions. On the other hand, politicians in the Walloon Region fear this will lead to fierce competition between the regions, with Brussels charming multinational headquarters with drastically reduced tax rates.

The following is a personal summary of the status quaestionis of where we are in the regionalization of the Belgian income tax.

The transfer of the company income tax to the regions has been on the Flemish agenda for over a decade. One of the ideas behind it is to give the regions the responsibility for collecting the revenue that they are spending instead of relying on grants or ‘dotations’ from the federal government. It could also give the regions the means to develop the economic policies for which they have the responsibility and it would allow a general slide in incentives from subsidies to tax reductions.  On the other hand, politicians in the Walloon region fear that this will be the start of a fierce competition between regions, with Brussels charming the headquarters of the multinational companies with cut down company tax rates.

At the request of the Flemish government, Prof. Axel Haelterman has worked out a set of proposal for the regionalization of the company income tax in 2007. He favors credits against company income tax rather than deductions from taxable profits. He recommends taxing a company in the region where it is actually established rather than where it has its registered office (since that would unduly favor Brussels). For the companies that operate in more than one region, taxes could be apportioned in accordance with a formula taking into account on the one hand the cost of wages and on the other the cadastral value of real property and the value of fixed assets.

These proposals have the merit of being relatively simple to put in place, but they leave a number of questions unanswered. One of them is whether companies would have to reinvest the saving in (regionalized) company income in their own region. That would be recommended, but would fall foul of the European rules.

Being faced with three company income tax rates instead of one should not daunt multinational companies planning to invest in Belgium.  In Switzerland, they have the choice between 26 tax rates. Moreover, for most multinational companies, the company tax rate is not the major deal breaker.

During the negotiations, attention has shifted from a regionalization of company income tax to a regionalization of personal income tax, and all parties seem to have accepted that principle to some degree.  The major issue there is how Brussels will not lose out if everyone pays income tax in his region. Many people come to work in Brussels but live in Flanders or Wallonia and pay tax there.  Brussels would be left with the scraps of the income tax paid by a population with a high degree of unemployment.

Royal Mediator Vande Lanotte appears to have put a new spin on the idea of the regionalization of the personal income tax.  In his draft compromise text of November 24, he does indeed abandon the transfers from the federal to the regional governments (‘dotations’) calculated on the revenue from the personal income tax per region. Instead he proposes ad personal income tax with a split rate.  A taxpayer who pays 50 % tax would pay e.g. 25 % to the federal government and 25 % to the region. 

There is something in these proposals for everyone.  N-VA should like the idea that the regions get a certain degree of responsibility for levying the personal income tax and that the employment market will also be regionalized, in part. The regions will have all interest in creating jobs because that gives more revenue in personal income tax.  At the same time, the PS should be reassured that the progressive rates and the level of the income tax  stay at the federal level where they can resist any moves to change these. And finally, Brussels will receive 25 to 30 percent of the income tax collected from commuters.

There may even be some room to let the regions give a limited tax credit for the company income tax, but that would be limited to a couple of percent points.  That will not put a dent in the Belgian income tax rate that is, with 34 %, one of the higher in Europe.

Vande Lanotte may have the set the lines for plan A, it is too early days to say what the end result will be. If he cannot get to plan A, we have little left but B or rather plan E with the E of Elections.

Author: Marc Quaghebeur

Marc Quaghebeur is a Belgian tax lawyer with Cabinet DAVID specialising in international tax issues and cross border estate planning. He is a member of the Brussels Bar and the Society of Trust and Estate Practitioners. He

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