“Only in Belgium” is the tagline used to attract international companies to invest under Belgium’s “excess profit” tax scheme. The scheme has been in place since 2005 and allows multinational corporations to discount profits that resulted from their multinational status. For example, profits derived from the company’s international reputation, or profits made as a result of the synergies that come with multinational operations, are not taxed. Instead, taxes are calculated using the amount of profit the company would have made, but for these advantages. This results in tax savings of 50-90% for some companies. The tax scheme was said to avoid double taxation. However, Margrethe Vestager, the EU competition chief, explained that the system resulted in double non-taxation, as the excess profits were not taxed in any other country.
This tax scheme was set in place to increase foreign investment in the country, and allowed companies to avoid €700m of taxes on recorded profits. In a decision made on January 11, 2016, the European Commission ordered Belgium to collect these taxes from the respective companies on grounds that the tax scheme violated the EU’s state aid rules. EU rules allow countries to stimulate economic and employment growth by making themselves more attractive to foreign investors. However, member states may not establish tax schemes that benefit only a select group of companies, leaving other companies in the market at a disadvantage. Belgium’s tax scheme had a particularly chilling effect on smaller European businesses.
This is one of a series of investigations conducted by the European Commission since 2013, often referred to as a “crackdown,” on tax evasion across the 28-nation EU bloc. Other cases arising from these investigations include decisions against the Netherlands and Luxembourg, countries which violated the EU state aid rules by granting selective tax advantages to Fiat Finance and Starbucks. Similar to the Belgian tax scheme, these countries taxed these multinational companies on artificial profits that did not reflect economic reality, resulting in large amounts of profit going untaxed.
Although Belgium’s tax scheme primarily benefitted European companies, it also offered a great opportunity for American companies to pay fewer taxes on revenues generated by their offshore subsidiaries. €200m of the taxes evaded were allocated to non-EU companies, including American brewing company, Anheuser-Bush, which is said to have transferred €140m of profit from around the world to Belgium. American tax officials have expressed concern with the opportunity for companies to evade U.S. taxes by investing in Belgium. American companies investing in Belgium were not only able to avoid U.S. taxes, but were only responsible for paying Belgian taxes on a small fraction of their actual revenue. The effects of these practices on national governments are grave, as the European Union has reported that tax evasion costs the union approximately one-trillion euros annually.
Belgium is now charged with the assignment of recovering these funds from over 35 multinational corporations. Allocating the taxes owed is expected to be complicated task, which would put the country and its tax officials in a difficult position. The Belgian Finance Minister has mentioned the possibility of an appeal and intends to negotiate with the commission regarding the outcome of the case. Nonetheless, the EU is steadfast in their efforts to eradicate tax evasion in member states. Investigations into the tax arrangements of many large corporations, such as McDonalds, Apple, and Amazon, are well under way.
The issue of tax evasion is as old as taxation itself. The EU has been combatting this issue since 1998, when the OECD published its first report on harmful tax competition. In the 1990s alone, the European Commission found 206 tax evasion regimes among member states. As the EU continues in its unwavering efforts to uproot even the most unsuspecting tax havens, companies must prepare for a bitter end to the age-old practice of tax evasion in European countries.
*Candice Diah is a second-year law student at Wake Forest University School of Law. Her hometown is Nassau, Bahamas, where she worked in the compliance department of a financial advising firm. She holds a Bachelor of Science in International Business and Marketing from the University of Tampa and studied Business and Luxury Brand Management at The American Business School of Paris in Paris, France. She is passionate about both business and international law.