Fiscal unity enhances competitive position and benefits employment

Brussels, 24 November 2006

Belgium is definitely internationally known as of today

The introduction of the fiscal unity is, just as the Notional Interest Deduction, an improvement for Belgium's competitive position and employment. These tax instruments increase Belgium's attractiveness as a potential location for group and corporate headquarter functions in shared service centres. They can counter delocalisation within the European Union (e.g. to Ireland or Poland) and outside the European Union (to India or China).

What is a "fiscal unity"?
The fiscal unity allows groups of taxpayers (e.g. company groups) to be treated as one single "taxpayer". There cannot be any taxable supplies or services provided between the members of the fiscal unity, as is visualised below:

Businesses continue to be internationally competitive by taking advantage of centres of excellence
Globalisation and fast-increasing international competition force companies to go for maximum efficiency in order to be able to remain internationally competitive. The creation of centres of excellence performing centralised crucial back-office functions for the entire group is internationally regarded as best practice. The European Commission, particularly the Directorate-General Market, is promoting this trend.

The centres of excellence represent back-office tasks such as invoicing, accounting and credit management, but also IT services, call centres and other labour-intensive functions. Centralising business support functions in service centres that operate for entire company groups increases quality, which decreases costs. Economies of scale increase cost-efficiency. The centres of excellence enable other group companies to focus on their core business.

Fiscal unity determines where multinationals set up centres of excellence
Both Belgian and non-Belgian international players now decide in what country they will set up centres of excellence to bring together their group support functions. The EU member states are mutually rivalling to win over such centres. The fiscal unity plays a key role in this rivalry. Already 12 member states have implemented the concept of fiscal unity. Spain is to introduce it on 1 January 2008.

A study performed by PwC on behalf of the European Commission has shown that the centres of excellence are established in the member states that already provide for the fiscal unity, and that the fiscal unity influences competitiveness positively .

Representatives from multinational companies in the financial and industrial sectors have repeatedly confirmed those findings. This means that, as of today, Belgium is definitely internationally known.

Fiscal unity and competitive position: a few facts
Currently, Belgium ranks 15th in the Lisbon Index, an index that measures the EU member states' competitiveness (source: Federation of Enterprises in Belgium, VBO/FEB, 16 March 2006). Out of 14 best performing countries, 9 have implemented the fiscal unity. On 1 January 2008, Spain is to introduce the fiscal unity and will then join the club.

Worldwide, Belgium ranks 17th in the competitiveness index. Out of 8 EU member states that rank higher, 7 have implemented the fiscal unit. Switzerland and Norway are also familiar with the concept.

In order to assure competitiveness, the introduction of the fiscal unity had to comply with the Sixth VAT Directive and make the grade of international best practices.
 

"Together with the Notional Interest Deduction, the fiscal unity enhances competitiveness and employment growth as corporate headquarter and group functions are brought together in centres of excellence. Delocalisation becomes less attractive. That is why the fiscal unity is a future-oriented option and is in line with the development of a Belgian knowledge economy," Ine Lejeune comments. "Centres of excellence must offer high quality at a competitive price. Their development is usually accompanied by significant investments in research and development with respect to efficiency increases so that European businesses can compete with foreign service providers from for instance low-wage countries."
  • Example of impact of tax systems on attractiveness to corporate headquarters – see the example of Ireland (see table 3 below);


Benefits: administrative simplification and cost-saving
  • The fiscal unity offers simplification for all taxpayers: no VAT needs to be charged on intra-group transactions. Consequently, the treatment of such transactions does not need to be examined for VAT purposes, which prevents any wrong treatment;
  • Only one VAT return is filed for all members of the fiscal unity;
  • The European Commission agrees that the fiscal unity contributes to administrative simplification and cost-saving, two requirements for the implementation of the Lisbon strategy as approved by the Governments aiming to make the EU the most competitive economy by 2010.

Ine Lejeune: "The fiscal unity leads to significant simplification in several respects, in line with the trend of centralising VAT obligations for all company groups and thus simplifying them and upgrading them from a quality perspective. The introduction of the fiscal unity is a positive measure aimed at maintaining and increasing employment in Belgium. We are very happy to have been given the opportunity to contribute, through our experts, to this most important case."

The aim of the proposals advanced by the European Commission as regards creating the one-stop-shop for VAT is the same. This is also in line with a study performed by PwC on behalf of the European Commission on the simplification of the VAT obligations in the European Union.

Benefits for the Authorities
  • The Authorities can recover all VAT debts owing by the members of the fiscal unity from the group on a joint basis;
  • The Authorities need process only one VAT return for the fiscal unity;
  • The audit of the fiscal unity replaces the individual audits of the related companies;
  • VAT collection is improved (due to the members being severally liable);
  • Among the members of the fiscal unity, no VAT-liable transactions occur, which prevents fraud using carrousels;
  • Tax Administrations are allowed greater focus on transactions between unrelated enterprises, where fraud is a more poignant issue.
Background

The fiscal unity is defined in the Sixth VAT Directive (article 4 (4)) laying down the criteria to be observed by all EU member states in introducing the fiscal unity.
In Belgium, the fiscal unity is introduced through an order implementing the VAT Code.

The effective date is April 1, 2007. On the basis of an international analysis by PwC, the Belgian Government has chosen for the fiscal unity best practice by letting businesses freely decide whether or not they include all companies belonging to a group in the fiscal unity.