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International Monetary Fund. European Dept.

This Selected Issues paper explores key features of Belgium’s corporate income tax (CIT) regime as background for potential growth-enhancing reform options that also safeguard revenues and limit distortions. Comprehensive reform of business and investment income taxation in Belgium is both promising and challenging. The challenge arises from the need for fiscal consolidation and the limited scope for shifting the tax burden away from the CIT to other taxes. The absence of capital gains taxation undermines tax neutrality between different forms of businesses, leading to organizational inefficiencies and a misallocation of capital. Overall, there appears to be scope for a broader reform that could raise Belgium’s growth potential without undermining fiscal revenues.

International Monetary Fund

This Selected Issues Paper on Belgium provides an overview of the extent of trade and financial openness of Belgium and the links to particular countries. With an export-to-GDP ratio of 79 percent, Belgium belongs to the most open economies in Europe and also globally. Its exports are highly concentrated with a share of three-fourths of total merchandise exports accounted for by the European Union, of which close to two-thirds go to Germany, France, and the Netherlands.

International Monetary Fund

The European Union’s (EU) financial stability framework is being markedly strengthened. This is taking place on the heels of a severe financial crisis owing to weaknesses in the banking system interrelated with sovereign difficulties in the euro area periphery. Important progress has been made in designing an institutional framework to secure microeconomic and macroprudential supervision at the EU level, but this new set-up faces a number of challenges. Developments regarding the financial stability may assist in the continuing evolution of the European financial stability architecture.

International Monetary Fund. European Dept.
This Selected Issues paper explores key features of Belgium’s corporate income tax (CIT) regime as background for potential growth-enhancing reform options that also safeguard revenues and limit distortions. Comprehensive reform of business and investment income taxation in Belgium is both promising and challenging. The challenge arises from the need for fiscal consolidation and the limited scope for shifting the tax burden away from the CIT to other taxes. The absence of capital gains taxation undermines tax neutrality between different forms of businesses, leading to organizational inefficiencies and a misallocation of capital. Overall, there appears to be scope for a broader reform that could raise Belgium’s growth potential without undermining fiscal revenues.
International Monetary Fund
This Selected Issues paper analyzes the effect of aging on pension expenditure in Luxembourg. The paper highlights that Luxembourg is in a relatively favorable position because its GDP growth has been well above the average for industrialized countries in the post-war period. Moreover, growth has been unconstrained in that much of it has been based on the influx of foreign capital and labor. The paper provides some illustrative simulations of pension expenditure in Luxembourg, and describes the demographic developments. After reviewing methodological issues, simulations of pension expenditure until 2050 are also presented.
International Monetary Fund. European Dept.
This Selected Issues paper considers features of the Luxembourg tax system that may be susceptible to changes in international tax transparency standards and surveys related policy options. Luxembourg’s predictable and generally low-rate tax system has helped establish it as a leading financial and commercial entrepôt and has supported its fiscal revenues. Its revenue base could, however, be susceptible to changes in the European Union and global tax environment. This paper highlights that to address potential challenges to Luxembourg’s revenue base, the tax policy review should explore selective rate increases and base broadening measures. Moreover, the tax practices should seek to avoid encouraging unnecessary complexity in corporate ownership structures and intragroup financial contracts.
International Monetary Fund. European Dept.
This Selected Issues paper analyzes investment slowdown in Denmark. The post-global financial crisis (GFC) weakness in Denmark’s aggregate investment cannot be fully explained by the output slowdown. The baseline accelerator model confirms that output slowdown played a role, but post-GFC investment has fallen beyond the level explained by output movements in most of the post-GFC period. Most recently, investment converged to the level explained by output movements. The augmented accelerator model suggests that additional factors, such as high leverage, weak competition, and elevated policy uncertainty, also had a significant impact. Panel regressions using a panel of advanced economies show that reduction in leverage and product market reforms can boost investment in the medium term. Well-designed policies are needed to boost private investment.
Mr. Howell H Zee
This paper proposes a new hybrid cash-flow tax on corporations that, on one hand, taxes only excess corporate profits as they accrue, and, on the other hand, treats real and financial transactions neutrally. It is, therefore, a superior tax compared to the cash-flow tax on real transactions that seems to have gained common acceptance. The hybrid tax is a modified version of the cash-flow tax on real and financial transactions combined. The modification involves replacing expensing of fixed assets with normal depreciation allowances, but the undepreciated value of fixed assets is carried forward with interest at the opportunity cost of equity capital.
Mr. Alexander D Klemm
This paper provides an overview of full and partial allowance for corporate equity (ACE) tax systems in practice. In the recent past, ACE systems have been used in Austria, Croatia, and Italy. Brazil still applies a variant of such a system and Belgium introduced one this year. This paper summarizes the empirical literature on past ACE systems, and provides a theoretical and empirical assessment of the Brazilian ACE variant. The main finding is that the Brazilian reform introduced an ACE system for a minority of firms only, with the majority instead having a system of dividend deductibility. Despite the reduction in the tax preference for debt finance, capital structures have not changed much, but dividends have increased. Investment appears to have benefited from the reform, although the extent to which this was due to the new structure rather than the tax cut is unclear.
Khaled Abdel-Kader and Ruud A. de Mooij
This paper discusses the theory and practice of tax design to achieve an efficient and equitable outcome, i.e. in support of inclusive growth. It starts with a discussion of the key principles from tax theory to guide practical tax design. Then, it elaborates on more granular tax policy, discussing key choices in the structure of the personal income tax on labor and capital income, taxes on wealth, the corporate income tax, and consumption taxes. The paper concludes by highlighting the political economy considerations of the issues with concrete recommedtions as to how to implement tax reform.