CORPORATE TAX REFORM
The legitimate feeling aroused by certain business closure threats leads some to require abandoning the notional interest and revising the corporate income tax. The idea is excellent, yet it should be executed in a systematic way and within a rigorous framework. For too long, tax measures have reflected short-lived budgetary constraints or ideological motivations which lead to assessment errors. Hence, this time it is essential to delineate a structured framework for reflection and in particular to involve academic specialists.
We are going through, what Keynes called, a demand crisis. Consequently, we have to reconsider corporate income tax in order for productive and job creating investments to be deployed in our country. This is important because inBelgium, it’s the large corporations that create wealth, whereas it’s the SMEs that create employment. We thus need a tax system which is adapted to both stakeholders.
I am putting forward various ideas to boost or to reformulate our tax system in order to make it more attractive.
Notional interests and corporate income tax decrease. The current economic downfall would require to progressively tilt the fiscal stimuli from the liabilities side of the balance sheet, notably equity subsidies through notional interests, towards the asset side of the corporate balance sheet. Hence, productive investments should now be promoted.
Why consider such an approach, which wouldn’t remove, yet rather progressively phase out (e.g. over a period of 5 years) notional interests, together with a decrease of the corporate income tax nominal rate, which should be close to 25%?
There are several reasons. The road to economic recovery goes through the demand (and thus the assets) rather than through the offer (and thus the liabilities), in Keynesian words. Even if credit access is more difficult for large corporations, interest rates are low, even negative after the deduction of inflation. Corporate financing is thus no longer economically destructive. Moreover, the reduction rate of notional interests, i.e. 2.7%, is higher than the rate of the 10 year fixed-rate Belgian bonds. This is an economic peculiarity, the reason for which I call for an alignment of the reduction rate of the notional interests with German Bunds. Finally, corporations should be protected against inflation which affects their capital.
One could also think of limiting the benefit of notional interests to corporate self-financing, i.e. to that part of the income retained within the company rather than distributed in dividends. That would allow to link the benefit of the tax measure to the growth of corporate capital. Incidentally, this was a modality that existed in the first draft of the legislative texts in 2005, after which it disappeared for obscure motives.
Investments. Together with a decrease of the corporate income tax, an accelerated depreciation system should be set up for tangible and intangible corporate assets. Several methods could be considered, such as was the case at the end of the seventies, when the industrial economy was running out of steam. The measure can be modulated in a variety of ways: early depreciation of intangibles, endowments based on their replacement cost, etc. We could also think of a deduction of depreciations amounting to more than 100% of its value, so as to protect recapitalisation dented by inflation. This essentially boils down to anticipating the deduction of depreciation, provided that the corporate taxable base is sufficient. This measure would cost the State only the financing of the tax, the assessment of which is delayed in time. The measure is thus a simple and temporary tax referral.
Reinforcing equity. Another measure is to stimulate specifically SME capitalisation. Recapitalisations should thus be promoted through tax deductions linked to conditions regarding investments. This approach resembles the Cooreman measures deployed in 1982-1983. Certain advantages could be granted to companies that increase their capital in order to carry out productive investments. For the SMEs, these measures would go hand in hand with notional interests (in progressive phase-out) and corporate income tax rate cuts. We could only consider SMEs enjoying a lower corporate income tax rate, so as to help them softening the impact of the economic crisis. However, the idea of a minimal corporate tax rate does not apply, for corporate income taxes are essentially proportional and non-progressive.
Tax consolidation promotion. We should promote tax consolidation and the diffusion of a European tax system with harmonised corporate income taxes. Tax consolidation does not only bring advantages for a small and open economy, but it forms part of the European harmonisation history. Tax consolidation would obviously require maintaining a system that is extremely beneficial for taxation of dividends and capital gains on shares, all the more sinceBelgium is a country of holdings. The 25% tax on capital gains on short-term shares should be cancelled for it is useless and unproductive and obstructs capital mobility.
Tax loss disposal. An innovative idea would be the disposal of tax-loss carry-forwards within a corporate group. Tax loss disposal, referred to as “Group Relief” has already been in use in the UK for several years. This method would consist in considering tax losses as monetizable assets. Such a system is very similar to the system that allows to recover tax losses against previous profits, a method that is currently being used inFrance.
Corporate income tax regionalisation. Contrary to tax consolidation, we could think of a regionalisation of the corporate income tax. Why not maintain a nominal tax rate at the Belgian level of 25%, yet consider a tax cut, expressed as a percentage of the taxable base, the modalities of which are to be determined regionally? One region could, for example, promote accelerated investments in fixed assets, whilst another could provide specific incentives in the field of research and development. This tax cut, which would thus become a regional differential, would be part of a maximum permissible tension, which wouldn’t endanger foreign income.
Obviously, this would be problematic for companies that are economically active in several regions. We would need to know how to allocate taxes between the regions, the simple linking of taxes to the headquarters not making a lot of sense. Allocation keys should thus be identified. Foreign income tax treatment is another issue. Theoretically, there cannot be a difference in foreign income treatments depending on which particular region a Belgian company is active in.
Tacitus stated that countries cannot have rest without an army, cannot have an army without wages and cannot have wages without taxes.
Yet, inversely, this maxim evokes the need to cut taxes to win future economic wars. Ever since entering the euro zone, the open, transit character of the Belgian economy has been exacerbated. Our country has to develop an attractive tax system that has become even more indispensable due to the crisis.
