High taxes in Belgium: Are they according to the benefits for the people?

Belgium tax revenue as a percentage raises to 43.2% of the GDP. As a country with a constitution that guarantees "the right to health," Belgium has an especially costly health care system to maintain. With Belgian citizens paying only a small fee, the government bears the bulk of the cost for care. The country also needs high tax revenues to keep up with its expenditures on infrastructure and industry subsidies. Taxes are collected on both state and local level. The most important taxes are collected on the federal level, including an income tax, social security, corporate taxes and value added tax. At the local level, property taxes, as well as various fees, are collected. Belgium enjoys a reputation for being a tax haven for the idle rich, but ordinary working people suffer from some of the highest tax rates in the world. Income tax is calculated by applying a progressive tax rate schedule to taxable income, with rates that go from 25% to a maximum rate 50%. For residents of Belgium, the taxes are irrespective of their nationality and come even from worldwide income.

Between income tax and social security charges, they add up to 65% of their gross pay each month to the government and the top income tax rate in Belgium is a whopping 50 percent. Employees' income tax is deducted at source by their employers, and if you have various sources of income, Adam Greene CPA suggests to employ an accountant or professional tax advisor to complete your tax returns and ensure that you are properly assessed, as the tax system in Belgium is complicated. And because of this, the Ministry of Finance publishes extensive information on income taxes on its website, often in English as well as the local languages. On the Belgian website, there is a link to a tax survey, which is updated as the laws change. There are local tax offices where you can obtain brochures or have questions answered. Tax brackets for the income year 2016 are applicable to net taxable income after the deduction of social security charges and professional expenses.

Corporate Income Taxes

For corporate income taxes, a range of measures has recently been approved, and other measures are currently under review at the Chamber or pending before the State Council. The Program Act of 1 July 2016 has been published in the Belgian Official Gazette on 4 July 2016. It introduces transfer pricing documentation requirements and extended reporting obligations for payments to tax havens. The draft Act providing urgent tax provisions contains measures related to the reduced withholding tax on dividends distributed to non-resident minority shareholders and repeals the current patent income deduction system. Some draft measures concern the implementation of European Directives. The draft Program Act II provides some changes to the tax provisions applicable to the Belgian Regulated Real Estate Company and introduces the new Real Estate Investment Fund.

Income Taxes

Employers withhold salary taxes according to the personal situation and tax status of the employee. This often covers the income taxes due on your salary, but a tax return form must be filed. Investment income, refunds, tax allowances, and liable municipal or community taxes have to be included on your tax return. There are stiff penalties for self-employed individuals failing to make prepayments as well as a surcharge for 'late' payment. Self-employed individuals must make quarterly pre-payments of estimated income tax based on the amount of tax paid the previous year.

Personal income tax is calculated by determining the tax base and assessing the tax due on that base. Taxation is charged on a sliding scale to successive portions of net taxable income. For the income year 2016, the federal tax rates range between zero and 50%. Residents pay municipal taxes at rates that range between nil and 9% of the total income tax payable. The tax calculation contains two major components, notably the federal personal income tax and the regional personal income tax. Belgian regions are now entitled to retain surcharges on 'reduced federal personal income taxation', and also grant tax reductions/tax credits, so the tax liability differs depending on the region in which the residence of the taxpayer is located on the 1st of January of the respective tax year.

Benefits

When it comes to high taxes in the World, Belgium is high on the charts. The people enjoy a high per capita income and standard of living, and the country consistently ranks high in the quality of life ratings published in the United Nations Human Development Report. The welfare programs funded with the high taxes have kept the poverty rate low, medical benefits, unemployment insurance, family allowance, retirement plans, freedom of education, and disability payments in the event of illness. While the country has a wide social safety net, there are indications that the substantial cost is beginning to take a toll on economic prosperity.

What You Need to Know About Entity Classification Election

Business entities may elect to be treated as corporations taxed at the entity and member levels or as "flow through" entities taxed only at the member level. However, entities organized as corporations under U.S. state laws and certain foreign entities are treated as corporations, with no optional election.

Corporate tax is imposed in the United States at the federal, most state, and some local levels on the income of entities treated for tax purposes as corporations. Federal tax rates on corporate taxable income vary from 15% to 39%. State and local taxes and rules vary by jurisdiction, though many are based on federal concepts and definitions. Taxable income may differ from book income both as to timing of income and tax deductions and as to what is taxable.

There is an entity in charge of regulating the inflow of resources through tax collection in the country: The Internal Revenue Service. The Internal Revenue Service is the revenue service of the United States federal government. Is important to know that the government agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue.

The Internal Revenue Service s responsible for collecting taxes and the administration of the Internal Revenue Code. It has also overseen various benefit programs, and enforces portions of the Affordable Care Act.

Is also important to remember that some entities treated as corporations may make other elections that enable corporate income to be taxed only at the shareholder level, and not at the corporate level. Such entities are treated similarly to partnerships. The income of the entity is not taxed at the corporate level, and the members must pay tax on their share of the entity's income.

An entity which is eligible to make an election is referred to as an eligible entity. Generally, a corporation organized under the United States federal or state statute, and referred to as a corporation, body corporate or body politic by that statute, is not an eligible entity.

Reform business entity classification rules for foreign entities: Under the proposal, a foreign eligible entity may be treated as a disregarded entity only if the single owner of the foreign eligible entity is created or organized in, or under the law of, the foreign country in, or under the law of, which the foreign eligible entity is created or organized.

Therefore, a foreign eligible entity with a single owner that is organized or created in a country other than that of its single owner would be treated as a corporation for federal tax purposes. Except in cases of the United States of America tax avoidance, the proposal would generally not apply to a first-tier foreign eligible entity wholly owned by a United States person. The tax treatment of the conversion to a corporation of a foreign eligible entity treated as a disregarded entity would be consistent with current Treasury regulations and relevant tax principles.

For the record, a business entity is an entity that is formed and administered as per commercial law in order to engage in business activities, charitable work, or other activities allowable. Most often, business entities are formed to sell a product or a service. There are many types of business entities defined in the legal systems of various countries. These include corporations, cooperatives, partnerships, sole traders, limited liability company and other specifically permitted and labelled types of entities.

The following types of business entity are treated as eligible entities:

●     An eligible entity that previously elected to be an association taxable as a corporation.

●     A foreign eligible entity that became an association taxable as a corporation under the foreign default rule.

●     A foreign corporation that is not identified as a corporation under Treasury regulations.

A quick glance at history

Long before 1996 entities both domestic and foreign were classified as corporations or not based on the called "multi-factor test", which looked at limited liability; continuity of life; free transferability of interests; centralized management; associates; objective to carry on business for joint profit.

The initial regulations also included a list of foreign entities which would always be classified as corporations and which could not elect to be disregarded.

The first federal income tax was enacted in 1861 and expired in 1872, amid constitutional challenges. A corporate income tax was enacted in 1894, but a key aspect of it was shortly held unconstitutional. In 1909, Congress enacted an excise tax on corporations based on income. After ratification of the Sixteenth amendment to the United States of America Constitution, this became the corporate provisions of the federal income tax. Amendments to various provisions affecting corporations have been in most or all revenue acts since. Corporate tax provisions are incorporated in Title 26 of the United States Code, known as the Internal Revenue Code. The present rate of tax on corporate income was adopted in the Tax Reform Act of 1986.

Take a look to this article to learn how to reduce your personal and business taxes.

What is Brexit and How Will it Affect Taxes?

One of the most important events that have happened these days is the so called Brexit (or British Exit), a term used to refer to the United Kingdom leaving the European Union. This Event has had a lot of consequences in both national and international aspects and has affected greatly the finances of the country. These consequences can be seen in the drop in both the price of the Pound and British shares, this has led to different reactions in international finances, for example the rise of the American dollar just days after the decision.

Most think that this was a bad decision and will have bad consequences for the United Kingdom, and these problems have started to appear through the country. One of the biggest consequences people think the United Kingdom will face is the fact that the intervention of the European Union helped keeping the United Kingdom, well, united. Brexit has made the tension between the countries that make part the United Kingdom clearer, especially from the side of Scotland as most of them didn’t want Brexit to happen. Scotland has also been historically against British control and Brexit seems like it will strengthen the Scottish separatist groups even more and this might just push Scotland enough to leave the United Kingdom. Ireland on the other hand, depended a lot of the European Union help reduce tension in the borders, also most of Ireland supported to Remain in the European Union.

Image courtesy Karen Bryan | Flickr

As we said before, most consequences of the decision will be economical and one of the things that will be affected both directly and indirectly is taxes. Taxes will face changes from both Brexit directly and from other economic aspects that are also affected by it. Before we go into taxes directly, we have to take into account that many things may vary depending on how the government of the UK decides to manage their relationship with the European Union and what models they choose to follow. The three models that are the most likely to be chosen, are the Norwegian model, the Swiss model and the Canadian model. The Norwegian model means the UK will make part of the European Free Trade Association and will be a party of the European Economic Area Agreement, meaning its economic relationship would be regulated by the European Union. In the Swiss Model, the UK would make part of the European Free Trade Association but it would not be a party of the European Economic Area Agreement, this would make trade between both to be regulated via an agreement between both sides, though this seems to be the less viable model. The final model is the Canadian model, this model makes use of the World Trade Organization to regulate and supervise the relationship between the countries and the European Union, and would depend on other groups and alliances to help regulate the commerce. Some of these alliances include the OECD, G20 and the one mentioned before, the WTO. After they choose one of these models, the consequences will be easier to predict as more information will be available.

Image courtesy Images Money | Flickr

First we will analyze what taxes will be affected indirectly be Brexit. The first one will be VAT, VAT is chargeable in most products and services provided within the European Union but each member chooses how it works for them, including methods of collection and rates. This will mean the UK will have to analyze and modify it so it can be viable for them when they are not part of the EU. The UK leaving the EU means the UK will have total power over their taxes and might even overhaul the whole system, but this will also mean they would have to pay additional taxes when making commerce with the EU. The UK will not be able to make use of some of the economic advantages of the EU, like the proposed US-EU Transatlantic Trade and Investment Partnership that will remove some custom duties and other trade barriers.

Finally the taxes that will be affected directly are mostly those related with company profits and capital gains, as the UK will have no obligation to follow the EU laws designed to reduce the burden of direct taxation for companies. These laws are designed to avoid double taxation when working within the single market. Even before the Brexit, the UK was not really fond of the models of corporate taxation proposed be the EU, so this will represent a benefit for the UK as they will have control of it.

So we will have to wait a little before we see the full consequences of the British Exit and according to how the issue develops we will have varied results. If you like related topics and are interested in the world of taxes and finances you should check more content in this blog by Adam Greene, the recommended post is What you need to know about corporate taxation as it is about a related topic.

What You Need to Know About Corporate Taxation

Image courtesy GotCredit on Flickr

Becoming a company carries a new range of legal commitments and responsibilities.  One of those responsibilities is corporate taxes.  Whether they like it or not companies are affected by them.  The concept might be alarming at first but understanding its generalities and who it affects helps its management. Corporate taxes have been a frequent topic in the news and the headlines of articles and major publications because it is a major concern for big and small businesses.  Let’s talk about a little more about corporate taxation.

Definition

Corporate taxes are levied on the profits a corporation, large or small, generates by all levels of government.  Corporations are legal entities, not individuals or the owners of a company.  As such, corporate taxes can be considered the equivalent of the personal income tax an individual pays. The rates and laws of corporate taxes vary notably across multiple countries, since different governments and nations perceive corporate taxation differently. This is why companies have chosen to have their headquarters in specific places where corporate taxes are way lower.  One example is seen in companies that have moved to the Republic of Ireland (Irish tax rate is only 12.5%) compared with the rate they would have to pay in the U.K. 

Mobile capital: the example of the U.S.

Another example could be seen in the United States.  This country has one of the highest corporate tax rates in the world. It is 35% and almost 40% when state taxes are added.  For this reason, some American companies have “relocated” outside the country, through mergers with or purchases of a foreign company.  This way they become a foreign entity and can be still managed from the U.S. but because of their headquarters address (at least on paper) they are no longer subject to U.S. corporate taxes. They are taxed according to that foreign country’s rules. Therefore, this business behavior is increasingly seen due to high corporate rates that companies are trying to avoid.

Another reason for this tax behavior in the case of the United States is because its corporate tax system could be considered different compared to most other developed countries systems.   This country taxes corporations based on the profits they make worldwide as opposed to profits they make at home.  On the other hand, other countries tax corporations for the business that takes place in their own territory. So there are American companies earning money overseas, and since they do not have to pay U.S corporate tax until they repatriate these moneys, their profits are sitting overseas as a mechanism to avoid  bringing the money home and paying American taxes.

Corporate taxes are a matter of debate in many countries due to their economic impact.  Thus, there is some concern that being tougher on taxes may do more harm than good. Those who favor higher corporate taxes argue they give governments the assets to fund programs (education, hospitals, security), to raise revenue, to encourage specific investments in specific industries, to stimulate economic growth (basically taxes provide many nations with a large source of income) for the welfare of the nation.  Others argue that lower rates help companies hire employees and producing goods, thus boosting an economy.  Although, the desire for some companies to pay lower taxes and reduce their tax bill is understandable, there are some that simply do not want to pay it at all.  And of course, they are considered by many unpatriotic corporate citizens.

What can be done about the taxation system?

Image courtesy 401(K) 2012 on Flickr

When companies leave, particularly in the case of the U.S., the country loses significant tax revenue, money that would probably be reinvested into the nation through more jobs, more improvements, more infrastructure, and prosperity in general terms.  This situation undoubtedly preoccupies the government and for this reason it is experiencing an increasing pressure to stop it, and the approach do not seem to be yielding the results expected regarding foreign inversion.  It is believed that when companies prefer business overseas to protect their income they are betraying their nation.  This situation has forced the government to implement strategies to close these tax “loopholes”, obligating companies to stay loyal to the U.S. and keep their capital into their jurisdictions. 

The bottom line is that taxes have been affecting decisions in companies concerning location and investment to manage and control their tax obligations. Because corporate taxation plays a special role in economies, nations should consider the complexity of the topic and design reforms that improve the welfare of all the parties affected and reduce the risk associated. As it was said by Kate Elliot from Rahtbone Brothers PLC:  “A total lack of tax planning is bad for investors and evasion is illegal, but we know companies operate in grey areas.  The key thing for investors is to understand where a company sits on this spectrum: how light or dark grey its tax practices are.”

The Countries With the Highest Taxes in the World

When it comes to the countries with the highest taxes in the world, most people imagine a simple list that can be ordered from highest to lowest. In reality, there are multiple forms of taxation to consider, from the dreaded personal income tax to corporate taxation. As such, while one country may have a surprisingly low income tax, it could still lead the world in terms of corporate taxation. This all makes getting to the bottom of where people pay the highest taxes rarely as simple as it initially may seem. 


Personal Tax Rates
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Coming in at number one on the list of countries around the world with the highest personal tax rates is the nation of Aruba. Aruba is an island country governed by the Netherlands that has a hefty tax rate of 58.95 percent on all personal income over $171,149.

Although Aruba has the highest income tax rate in the world, its citizens have the lowest average income compared to the other countries with the top 10 highest income taxes. 

Because the population of Aruba only earns an average of $23,000 annually, wealthier residents are expected to pay more to make up the difference. Offering some financial relief are Aruba's generous tax policies for married couples, who receive a 3 percent tax break. Workers in Aruba can also rest easy knowing that employers cover their Social Security contributions, leaving more of their paychecks in the bank.


Corporate Tax Rates
The United Arab Emirates has the highest corporate tax rate in the world at 55 percent. Out of 163 nations reviewed by the Organization for Economic Cooperation and Development, this figure is much higher than the nation of Chad, which has a corporate tax rate of 40 percent. The United States is another top contender with a corporate tax rate of 39.1 percent. 

It's worth noting that the United Arab Emirates — which is actually a federation of seven different Emirates — makes up for its high corporate tax rate by not imposing a federal corporate income tax. Instead, most of the emirates impose more forgiving individual tax decrees that vary up to 55 percent. Corporations that produce oil, gas and other natural resources from the area also face harsher tax penalties. 


Overall Tax Rates
When it comes to the highest overall tax rates, Italy ranks at the top with a rate of 50.59 percent. While Italian workers are expected to give the government more than half of their paychecks, this high rate applies after Social Security contributions have been paid. Italian tax rates are even higher than they seem at first glance when you consider how little an Italian citizen has to earn in order to qualify for the highest tax rate.

Italy's highest tax rates kick in at $125,000, while the United Kingdom's top rate of 45 percent begins at an income level of approximately $250,000.

European countries tend to have higher overall tax rates than others around the world, but these rates vary. Each country has its own set of rules governing Social Security contributions, payroll taxes, and other financial exemptions the country's residents may be entitled to.

Tax Rates in the United States
While the United States doesn't make the top of any list for the highest tax rates, it ranks highly in each of the prior categories. United States workers in the highest tax bracket take home only 60.56 percent of their earnings, according to New York State Tax.

Compared to Aruba, the highest American income tax rate is 39.6 percent. The second highest income tax bracket in the United States is still 35 percent. 

The United States falls behind Italy, India, the United Kingdom, France, Canada, Japan, and Australia for income tax rates. While the United States ranks third in terms of corporate tax rates — at 39.1 percent — the country is also a world leader in corporate tax deductions. These deductions mean that corporations generally pay less to operate their businesses in the United States than they do in most European nations.

United States tax law is also unique in that state taxes play such a large role in what each corporation pays. Some states have corporate tax rates that are generous enough to make up for higher federal tax rates, giving businesses more incentive to keep their operations in the country. Tax laws between states can vary as widely as tax laws between countries. 

Comparing tax rates around the world requires a broad approach that keeps in mind how different various forms of taxation can be. From income brackets to state policy, the amount individuals and corporations actually pay in each country isn't always the figure seen on paper. Understanding the way these dynamics work with each other goes a long way towards understanding the truth about which nations really have the highest taxes in the world.