Tax regulation has always been a contentious issue within the EU. Various tax regimes in different countries have forced companies to come up with creative tax plans which have left citizens vulnerable to excessive taxation. And as austerity measures endure across Europe, tax bills are on the up and viable alternatives for companies are scarce, making it difficult to operate in the region. There is a lot of national regulation to contend with, but the EU tax framework makes it a doubly complicated environment to navigate.
“Though no one will ever phrase it outright, the aim within the EU is to eliminate tax competition between member countries,” explains Thierry Afschrift, founding and Managing Partner at Afschrift Law Firm, a renowned Belgian firm with bases in Brussels, Antwerp, Madrid, Geneva, Luxembourg, Tel Aviv and Hong Kong. “So far, taxpayers, whether companies or individuals, have the freedom to establish themselves in a country of their choice – after taking into consideration its tax legislation. For instance, one may decide to work in Luxembourg because of bank secrecy or inventive regulations, or might choose to establish in Belgium because, for example, capital gains are not taxed under certain conditions. It is absolutely legal for taxpayers to make such choices, as long as their operations correspond to reality.
What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing
“What is curious, is that while the EU works hard to protect competition, at the same time, when it comes to taxes, it maintains that competition is not a good thing. This is not true: as in any field, healthy competition is always a good thing.”
Violations of privacy
Another issue that comes with eliminating tax competition between countries is that it often threatens the privacy of citizens. “Take bank secrecy, for example,” explains Afschrift, “it cannot be disputed that bank secrecy might be able to sometimes protect people who are carrying out illicit activities like fraud; the problem is that new regulation in Europe is too wide-ranging. A US private lawyer once wrote that when dealing with people’s private lives, one should use a scalpel. Nevertheless, this is not really an option chosen by our governments.”
So right now, an individual established in Belgium can be asked – under certain conditions too easy to fulfil – to provide the authorities with every document relating to their account, and if they do not do so, they can break the bank secrecy of your account. “That means that not only does the tax administration gain access to all your transaction history, they can also know how and where one spends his money in private – and that is a fundamental violation,” says Afschrift.
“This is not supposed to happen. And furthermore, once bank secrecy has been broken, and they see transactions between one company or person and another, then they can try to get access to other people’s accounts as well. It is a big problem for citizens because they cannot escape any more. From any point of view, it is evident that people’s rights are being eroded.
“The states’ policies all over Europe demand too much in taxes and social security charges from employers, making it too expensive to hire new employees. There are also charges to cover unemployment benefits, even if companies would rather have more employees. Before going any further, it is useful to be reminded that growth is close to zero, and that public finances are still managed improperly.”
All over Europe governments are facing the same challenges. The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money. But, as with anything, there is a limit on how much citizens and companies are willing to put up with, as exemplified by the French tax exodus. This makes it hard to predict upcoming trends, but Afschrift is confident that not much will change in the next few months. “The main preoccupation in Europe right now is with information. From a political point of view it is difficult to keep demanding new taxes, so for the time being governments will likely pursue more subtle options,” he says.
The financial crisis has left them struggling for cash, and taxes are a seemingly easy way to raise money
“The idea is not to have new taxes but to broaden the tax base by trying to add concealed revenue. This way most measures taken will concern information, particularly data transmission between countries. We are now going further: at first it was just pertaining to revenues of savings, now we have included other financial products on the list. From 2015 – a bilateral agreement with Belgium will allow transmission of certain information from January 1, 2014 – Luxembourg will have to start transmitting data. Two or three years after that, they have already announced that information pertaining to accounts of residents living abroad will be divulged to the authorities concerned.”
In this context, those who are struggling to do business in today’s tough environment cannot afford to hire new employees, because that costs money… money they don’t have. Unemployed people still need a decent standard of living and are, thus, helped by the state, which also costs money. As a result, the state’s needs increase, yet at the same time the number of taxpayers able to contribute directly to the funding of the state decreases. Consequently, the existing taxpayers will pay more tax in order to compensate for the lack of new sources of income to the state. All these actions mean that most European jurisdictions are facing rising domestic tax bills; the austerity policy adds to the weight of the problem.
Speaking of his native country, Afschrift is scathing: “Belgium is a federal country, so there are federal tax rules, then there are regional rules, then provincial, communal… multiple taxations without end.
“This is a tough environment for tax lawyers who deal with businesses facing a number of issues. They increasingly have to get more and more creative in order to find legal solutions to people’s problems. But that creativity has limits. Furthermore, sometimes it is even difficult to foresee the problem that could affect the client. For example, the Belgian government has passed new ‘anti-abuse’ legislation. The new set of rules is so obscure that nobody is certain that authorities have a real sense of how it will be applied in practice. There is nothing worse than nonsense rules that cover every other rule in the tax code. The new anti-abuse rule ensures that while you abide by the strict legal boundaries of the law, if the tax administration feels that the way you conduct your affairs violates the spirit of the law – and here there is a distinction between the text and the spirit – then the operation may be disregarded by the tax administration, and taxed in accordance with the spirit of the law. The rule casts a shadow of doubt over every operation and suggests the tax code is no longer sufficient.”
What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes
Apparently, the real problem is that instead of trying to “create” new resources, the state’s policy is to draw more from existing ones. What Afschrift is keen to emphasise is that there are ways to incentivise growth and boost the services industry without continuously raising taxes. Asked about the new Fairness Tax on companies, Afschrift said: “This is an additional tax for companies of a certain size. It is true that this is not an additional withholding tax on dividends, but a tax on the benefit of the company: that means that there is actually an indirect effect on shareholders who will pay the same tax but on dividends calculated on a lower benefit.
Thus, additional expense will eventually prevent the company from hiring new people or making new investments. This is a structural problem of increasing taxation,” he explains. “I would prefer if the establishment of a new tax was inevitable, with the option of avoiding the tax if the company were to invest in development and/or employment. Those would be concrete measures, with durable effects. Of course, no authority can force anybody to invest or to hire new people, but they can say, ‘there is an additional tax to be paid, unless you spend an amount equivalent to the tax you should pay investing or creating new jobs’.”
The facts mentioned above undoubtedly create a challenging environment for companies and individuals operating in Belgium, especially given that the economic forecast for Belgium remains gloomy, with the growth forecast for 2013 remaining stubbornly stuck at zero percent. However, the Belgian tax regime is still appealing to certain companies, especially because of the interest that arises from the so-called ‘Belgian Holding’ regime.
Furthermore, Belgium’s tax regime is also appealing to wealthy foreigners, mainly from France, who flock to Belgium for several reasons. “The tax environment in France is as challenging as that in Belgium, the difference – for the time being – is that we don’t have a tax on wealth,” says Afschrift. “So, wealthy French individuals come here, also attracted to the fact that Belgium does not charge any tax on capital gains from shares.” The French ISF – which stands for Solidarity Tax on Wealth – will continue to drive wealthy French nationals to Belgium looking for fairer taxes. “The moment the French State decides to abolish the ISF, then this influx to Belgium might cease. Some French politicians have recently spoken of abolishing this tax, probably because wealthy people are leaving the country, but, for the moment, there is no official discussion on this subject”.