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EMBRACING TRANSFORMATION 2017 Priorities for a Prosperous Belgium - #PPB2017

In the 2017 edition of our Priorities for a Prosperous Belgium, we look at our member companies' main concerns about investing and doing business in Belgium: country governance, the labor market, corporate taxation and mobility.

While the labor market, corporate taxation and mobility are perennial problems, this is the first time that country governance has been raised as a priority concern by our member companies. It is a transversal issue, because without improvements in the way the country is governed, fundamental progress in the other areas, such as taxation or the labor market, will be hard to achieve.

Lowering the barriers to doing business, encouraging and rewarding the spirit of enterprise, improving the interface between public administration and private actors, creating forward-looking policies - these are all necessary to strengthen the country's economic fabric.

If it successfully embraces transformation, Belgium can maintain and improve its international competitiveness, attracting investment and jobs. AmCham Belgium is ready to be a partner to all levels of government in this process.

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The gradual decentralization of the Belgian State since the 1970s has entailed frequent changes to the country's governance structure, most recently with the Sixth State Reform in 2014.

While the focus was on shifting responsibilities, not enough attention was given to creating an efficient and transparent operating model.

The resulting complexity, inefficiency and lack of transparency in the way Belgium is governed has a direct negative impact on businesses and citizens and has resulted in very high public spending. This makes it difficult for Belgium to be competitive in comparison to more efficient nearby countries such as Germany, Switzerland or the Netherlands. Our member companies have expressed growing concern about the impact of country governance on the business environment.

RECOMMENDATION: MANAGE GOVERNMENT SPENDING

If Belgium is to enact meaningful socio-economic reform and increase public investment, it needs the budgetary room for maneuver to do so - and that will require not only looking at revenues but also expenditures.

Belgium has one of the highest rates of government spending in the EU at 53.3% of GDP. And few other countries spend as much as Belgium while failing to deliver high-quality services in return. While the multiple layers of administration in Belgium add to the costs, other federal states are nevertheless more efficient. For example, take Germany and Switzerland.

If Belgian public spending (as a percentage of GDP) was on par with these countries, between roughly €40-80 billion would be freed up annually, money which could be spent differently or passed along as savings to taxpayers.

The regional and federal governments, on their own and in collaboration where their responsibilities overlap, should focus on improving their efficiency and the quality of their services for all citizens and residents, including businesses.

RECOMMENDATION: CUT ADMINISTRATIVE BURDENS

Belgium is ranked 42nd of 190 economies by the World Bank for the ease of doing business, in which permitting and other administrative procedures are an important factor.

Obtaining permits is a significant problem for both public and private projects.

The procedures are lengthy, and the appeals process seems interminable. In addition to burdensome procedures, the country's complex governance structure also produces policy inconsistencies (such as the regional governments of Brussels and Flanders being at odds about the noise pollution at Brussels Airport with their contradictory noise standards).

Belgium's regionalized political structure - composed of a federal government, three regions and three linguistic communities - is seen as increasingly complex and inefficient by investors.

Regionalization, in its current form, and government inefficiency are often hindering business activity and economic growth.

In the end, more regionalization should not equate to more complexity. When it comes to interregional issues, the various governments should collaborate, aim for coherence among regional policies, and resolve issues in a quick and efficient manner.

CASE STUDY: ENERGY

As part of a European network, Belgium’s energy ecosystem brings significant risks and costs for business due to multi-level governance and ever-changing policies. While the EU sets an overall energy strategy for the whole of Europe, in Belgium responsibility is split between the federal and regional levels, depending on the generation capacity.

Regionalization has not only increased the complexity of energy management, but has also produced incoherencies between federal and regional policies, often highlighted in permitting decisions and policy turnarounds. Previous federal governments agreed to phase out nuclear power by 2025, but there is still no clear and firm replacement strategy, while time is running out.

Replacing nuclear power and its baseload capacity requires long-term investment decisions, but the debate hasn’t advanced – and without some certainty, investors will not take the risk.

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Belgium boasts a talented, highly skilled and multicultural workforce, but the exceptionally high cost of employing people in this country is and remains the top concern of our member companies.

The country has the highest 'tax wedge' in the OECD at 54% (vs. the OECD average of 36%). Easing the tax burden on labor would not only help reduce costs for employers but also put more money into the pocket of employees.

For every €100 of purchasing power earned in Belgium, the employer pays a total of €215.

In the end, talent is key to a healthy economy. To improve its attractiveness to foreign investors, Belgium needs to further reduce the cost of labor and encourage international mobility and labor market flexibility.

RECOMMENDATION: ADJUST AUTOMATIC WAGE INDEXATION

Belgium's system of automatic wage indexation is pervasive, applying to 98.2% of employees, and it undermines the ability of companies to motivate and reward employees with performance-based compensation, as it eats into the budget for salary increases, especially when combined with current wage moderation policies.

To fulfill its original purpose of protecting lower-income households from inflationary rises in basic living costs, AmCham Belgium recommends only applying the index up to an agreed salary level and calls for a structural easing of the indexation mechanism.

RECOMMENDATION: CAP SOCIAL CHARGES

Belgium struggles to attract senior management and other high-profile positions, mainly because there is no ceiling on social security contributions, contrary to most neighboring countries. Social charges in Belgium increase - without limit - in proportion to the salary.

Introducing a ceiling of €75,000 for the calculation of employer social security contributions would stimulate job creation, particularly for more specialized and senior positions, and would also have a positive spill-over effect on the employment of lower skilled workers and investment in general.

RECOMMENDATION: SIMPLIFY TALENT ACQUISITION

With the current and coming changes in the labor market, Belgium has to take steps to develop the right talent for the future. And, it should be easy for companies to find and hire the right people for the right roles.

While labor costs are high in general, there are regimes in place to make it more affordable and attractive to hire certain profiles in Belgium.

For example, the partial exemption of the wage withholding tax for qualified researchers is one of the many helpful incentives which exist to encourage R&D and innovation activities in Belgium. However, the administrative burden around this exemption has become a cause for concern: in particular, the upfront notification procedure - which must done per project - and the intense audits are dissuading some companies from even using this measure in the first place.

When there is not enough talent available at home, companies need to have the option of recruiting from abroad.

To simplify international hiring, AmCham Belgium calls on the Government to swiftly transpose the necessary EU legislation into law:

  1. A quick transposition of the Single Permit Directive would streamline the application process and reduce administrative burdens for third-country nationals seeking to work in Belgium.
  2. Rapid adoption of the Intra-Corporate Transfer (ICT) Directive would facilitate the ease of movement of third-country citizens within the same company across the EU.

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Corporate taxation is a key factor in investment decisions. In our June 2017 publication Belgium as a Hub for Regional Headquarters, tax regimes were identified by three-quarters (75%) of respondents as the primary determining factor for the location of regional headquarters.

The international tax environment is also rapidly evolving, with such initiatives as the OECD's Base Erosion and Profit Sharing (BEPS) project and the EU's Anti-Tax Avoidance Directive (ATAD). As many 'fiscal niches' are eroded or eliminated, these reforms are driving countries to compete more and more on headline rates.

The Federal Government presented a long-awaited corporate tax plan as part of its Summer Agreement in July. According to the plans, the corporate income tax rate will be reduced from 33.99% to 29.58% in 2018 and to 25% in 2020. SMEs will immediately benefit from a 20.4% tax rate on their first €100,000 of net income.

Unfortunately, while welcome, this proposal will not do enough for Belgium's international competitiveness.

RECOMMENDATION: REDUCE THE CORPORATE INCOME TAX RATE TO 20% FOR ALL COMPANIES

Although it will no longer be an outlier, at 25% Belgium's corporate income tax rate will still be above the EU average. A tax rate of 25% by 2020 sends a positive signal to investors, but it is only a staging post - the critical goal must remain to achieve a headline rate of 20% for companies of all sizes.

As the corporate tax reform aims to be budget neutral by maintaining current levels of revenue with 'compensatory' measures, it will not actually ease the overall tax burden on business.

Certain industries will, either directly or indirectly, even end up paying more to the Belgian State.

Contrary to expectations, this summer's corporate tax reform leaves the participation exemption on dividends-received untouched at 95%, leaving a 'tax leakage'. AmCham Belgium recommends increasing the participation exemption to 100%, which would help attract new and retain existing headquarters in Belgium and in that way lead to further investment in other areas.

RECOMMENDATION: PROVIDE A SIMPLE AND PREDICTABLE FISCAL FRAMEWORK

In addition to competitive tax rates, international companies seek clear and consistent rules, where changes to the law can be anticipated and planned for.

The Notional Interest Deduction (NID) has been subject to debate and change ever since its introduction, and the latest tax reform proposal is no exception. Under this proposal, the NID will be calculated only on the increase of the taxpayer's net equity, averaged over the five preceding years. AmCham Belgium recommends to retain the NID in its current form. Further changes would not only undercut its effectiveness, but also send a negative signal to investors about the stability of the country's corporate tax environment and incentives to invest.

Corporate income tax is imposed at the federal level, but companies are also liable to pay regional and local taxes, such as the property tax on material and equipment.

Property tax rates and modalities differ between the regions, resulting in complexity and uncertainty, particularly for companies which operate across the country.

Finally, gold-plating - when, in its implementation, Belgium goes above and beyond the requirements set at the EU or international level - flies in the face of both simplicity and predictability.

By exceeding minimum standards, such as for Belgium's Transfer Pricing documentation requirements, Belgium creates additional burdens for companies - which must then comply with different rules when doing business in multiple jurisdictions.

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Belgium's central geographic location and dense transport networks are paramount for businesses and have in the past helped attract investments, particularly in logistics. However, in recent decades, traffic has increased while the country's infrastructure has significantly deteriorated.

Mobility has a direct impact on the wider economy and public health, because it affects company costs, commuting times and energy emissions.

Mobility patterns are changing, as seen by the growing popularity of car-sharing platforms and ride-hailing apps, and AmCham Belgium believes now is the time for Belgium to take advantage of new technologies and innovation to improve mobility and transport.

RECOMMENDATION: TACKLE CONGESTION WITH CREATIVE SOLUTIONS

Belgium ranks as one of the countries with the highest levels of congestion, particularly in and around Brussels and Antwerp.

Easing congestion will require a coordinated approach - transport flows do not start or stop at regional borders or city limits.
  • Road charging can steer individuals' driving habits and, if all revenues would be earmarked and reinvested in road transport, it could support much-needed infrastructure investments.
  • City access policies differ from one urban area to the next - a more harmonized approach is needed, involving all stakeholders and balancing the residential and commercial function of cities.
  • Data analytics, such as geo-localization technology, can be harnessed to understand and reduce congestion.
  • Greater flexibility, such as remote working or flexible schedules, and the financial incentives to actually change people's behavior, is necessary to start solving this problem.
In 2016, the total length of traffic jams on Belgian roads exceeded 100 kilometers for 1383 hours - a 65% increase over 2011.

RECOMMENDATION: INVEST IN INFRASTRUCTURE

Years of underinvestment have resulted in a network that is close to the point of saturation, with roads and tunnels falling into disrepair. Investment in infrastructure is key to maintain and expand the country's transport system, benefitting its competitiveness and improving the overall quality of citizens' lives.

Belgium, as a logistics gateway to Europe, has a clear role to play in ensuring optimal connections between its sea and airports and the hinterland.

A lack of a long-term interregional vision among policymakers detracts from a strong countrywide infrastructure plan. More investment in all parts of the network (road, railways, waterways, air traffic and parking spaces) is needed to start using Belgium's infrastructure and its geography to its full potential.

Responsibility for mobility is currently divided between the different levels of government and many delays in mobility projects are caused by planning and permitting issues between the various government authorities in the country.

Simplifying these processes and encouraging collaboration between the regions would be a welcome move from a business perspective.

The full report '2017 Priorities for a Prosperous Belgium: Embracing Transformation' is available here on our website.

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