Tax Autonomy in Personal Income Tax After the Sixth State Reform

TAX AUTONOMY IN PERSONAL INCOME TAX AFTER THE SIXTH STATE REFORM

Introduction

The Sixth State Reform has thoroughly reshaped the financing of the Regions and Communities (R&C) in Belgium. Not only have the existing funding mechanisms been adapted, but a number of new powers have been transferred to the Regions and Communities, together with the associated resources to implement these powers. A transitional mechanism was set up to make the transition budget-neutral in the start year of 2015. The Regions and Communities were given further and recurrent powers in the area of pensions and climate. Lastly, the Brussels institutions received additional financing.

The reshaping of Regions and Communities financing manifests itself specifically in extended powers in respect of tax autonomy. As from 1July 2014 (2015 tax year), the Regions were given wider powers with regard to personal income tax (PIT). Since then, the Federal Administration has allowed a system of tax autonomy through surcharges for a portion of the resources that it receives via PIT.

General framework

2.1.Transfer of powers and financing

Under the Sixth State Reform, a number of powers and associated financing have been transferred by the Federal Administration to the Regions and Communities. The tax autonomy of the Regions has also increased through the introduction of a surcharges system.

The expanded tax autonomy replaces the existing allocations to the Regions and also partly provides the resources that the Regions need to finance specific tax expenditure in personal income tax that became an exclusively regional competence as of the 2015 tax year.

Table1 provides a summary of the transferred powers (at least in large ‘groups’ of powers) and shows how the R&C finance the transferred powers.

Table 1. Resources concerning new R&C expenditure powers (in billions of euros and 2015 prices)

Power / R&C / Flemish Region / Method of financing
Allocation / Surcharges
Employment policy / 4,085 / 2,416 / X
Child benefits / 6,471 / 3,429 / X
Care for the elderly / 3,530 / 2,212 / X
Health care / 0,782 / 0,495 / X
Tax expenditure / 3,048 / 1,724 / X (60%) / X (40%)
Other powers / 1,059 / 0,768 / X
Total / 18,975 / 11,044
Abolition of the PIT allocation and negative term / 10,274 / 6,348 / X

2.2.Increased tax autonomy

The expanded tax autonomy (via a surcharges system) serves firstly to finance the abolition of the regional PIT allocation and corrected negative term that existed until 2014 and, secondly, to finance 40% of the transferred powers relating to tax expenditure.

Until 2014, what was known as the PIT allocation was a fixed amount, linked to inflation and economic growth, and was financed with the revenue from federal personal income tax. However, it was not a shared tax. The Regions were not entitled to a certain percentage of the revenue, but to a fixed amount (subject to annual indexation). That amount was divided among the Regions on the basis of their share in the revenue from federal personal income tax.

Until 2014, what was known as the negative term was a negative correction on the PIT allocation aimed at keeping the expansion of the regional taxes, dating from 2002, budget neutral.

A comprehensive explanation (in Dutch)of the Special Finance Act before Sixth State Reform can be consulted online via the following link):

Besides specifically implementing the surcharges system (see below), the Regions also have exclusive powers (as of 2015) for tax relief and tax credits relating to:

-expenditure relating to acquiring or retaining an own home (i.e. including the Flemish ‘woonbonus’ tax relief scheme,the ‘bouwsparen’ home financing scheme, the long-term savings and the interest deductions);

-expenditure in relation to securing homes against burglary or fire;

-expenditure in relation to maintaining and restoring protected monuments and landscapes;

-expenses paid for services pertaining to local employment agencies (PWA/ALE) and for services paid with service vouchers other than social service vouchers;

-energy-saving expenditure in a home with the exception of interest that relates to loan agreements as referred to in Article2 of the Economic Recovery Act of 27March 2009;

-expenditure in relation to renovating homes located in a zone for positive metropolitan policy;

-expenditure incurred for renovating homes that are let out for a reasonable rent.

40% of this power is financed via the surcharges system.

For a comprehensive explanation of the different aspects of personal income tax (taxable income components, expenses eligible for tax relief, calculation method of the tax payable, etc.), reference is made to the Tax Survey. The Tax Survey can be consulted online via the following link:

Extent of tax autonomy: autonomy factor

The autonomy factor determines the extent of the regional surcharges and is accordingly the indicator of tax autonomy. In specific terms, the autonomy factor is a ratio whose numerator (A+B–C) consists of three components:

A = what is known as the PIT allocation for the 2015 financial year (i.e. the amount referred to in Article33 of the Special Finance Act (SFA) for the 2015 financial year and for the three Regions collectively);

B = 40% of the amount of transferred tax expenditure for the 2015 tax year[1] and for the three Regions collectively;

C = the corrected negative term for the 2015 financial year, being the minimum of the following values [negative term FR / PIT formula FR, negative term WR / PIT formula WR, negative term BCR / PIT formula BCR] in which the PIT formula of the relevant Region is the amount of the PIT allocation for the 2015 financial year for that Region divided by the sum of the PIT allocations of the three Regions collectively.

The denominator of the autonomy factor consists of the State Taxation for the 2015 tax year based on the income collected up to and including 31December 2016.

The Special Finance Act stipulates that the autonomy factor is equal to 25.990% for the 2015, 2016 and 2017 tax years. The Federal Administration is thus granting an overall deduction (25.990%) on the federal tax which the Regions can use as a surcharge on the reduced federal tax (i.e. on the reduced State Taxation). The regional surcharge rate is equal to a fraction that has the autonomy factor as the numerator and factor1 minus the autonomy factor as the denominator. Regional surcharges are expressed as a percentage and rounded off to the higher or lower third decimal, depending on whether or not the figure of the fourth decimal reaches5.

The surcharges are initially fixed at 35.117%[2]. If the surcharge rate of 35.117% remains unchanged, the Regions will receive 25.990% of the State Taxation collected by FPS Finance relating to the residents of the Region concerned or to the non-residents whose taxable income is allocated to that Region. FPS Finance sets off the exclusive tax expenditure allocated to the Region (see paragraph 2.2: own home, service vouchers, etc.) from this.

The Special Finance Act has fixed the autonomy factor at 25.990% for the 2015, 2016 and 2017 tax years. The autonomy factor has been determined partly on the basis of extrapolations from State Taxation and tax expenditure for the 2012 tax year, as well as on the basis of estimates of the allocations that were referred to in the previous Special Finance Act and ceased to apply on 1January 2015. In 2018, the autonomy factor will be definitively determined on the basis of the definitive figures for allocations in 2015, as these would have been determined under the previous Special Finance Act (componentA), the definitive regional tax expenditure for the 2015 tax year within a constant policy framework (of which 40% has been converted into surcharges and 60% into a new allocation) (componentB), the definitive value of the corrected negative term for 2015 (componentC), and the definitive State Taxation for the 2015 tax year (situation at the end of December 2016) (denominator). The autonomy factor is expressed as a percentage and mathematically rounded off to three decimals. The definitive autonomy factor will be determined by means of a Royal Decree to be enacted after consultation in the Council of Ministers and passed after consultation with the Regional Governments on the basis of the reports of the Belgian Court of Audit referred to in Article81ter of the Special Finance Act.

Determining the surcharges at micro level

In specific terms, taxable income is determined first for the calculation of personal income tax. That is an exclusive power of the federal legislature. Taxable income is the sum of the aggregated taxable income and the separately taxed income. Only alimony payments can still be deducted from the taxable income. All other deductions have been converted into tax relief.

Source: 2015 Tax Survey, Federal Public Service Finance

Federal basic tax is calculated by applying the basic scale to the aggregated taxable income, i.e. the tax on the zero-rate band, the tax relief for pensions and replacement income and the tax relief for foreign income are successively deducted. The result of these calculations is known as the principal.

Note that these three forms of tax relief are an exclusive power of the Federal Administration. The Regions cannot invoke any conflict of interest against a unilateral change by the Federal Administration, even if a change to one of those forms of tax relief influences the revenue from regional surcharges.

The principal is then added to the tax calculated on the separately taxed income. The tax on interest, royalties, dividends,lots of loan securities and capital gains on securities taxed as miscellaneous income is separated from that total. This is known as State Taxation. State Taxation is reduced by the autonomy factor in order to arrive at the reduced State Taxation. The autonomy factor is equal to 25.990% for the 2015, 2016 and 2017 tax years and will be definitively determined in 2018. The Federal Administration is thus granting an overall deduction (25.990%) on the federal tax which the Regions can use as a surcharge (initially fixed at 35.117%) on the reduced federal tax.

The regional surcharges (or regional personal income tax) are thus a tax on a tax. The regional personal income tax is determined by the revenue from the surcharges calculated on the reduced State Taxation, plus any regional tax increases, less any regional deductions and tax relief, taking what is known as the overflow into account. The overflow scheme entails that both the Federal Administration and the Region may determine that a surplus from tax relief that has not been set off may be set off against the balance of the tax of the other entity. The entity that allows this bears the budgetary burden so as to ensure that the income of the other administration is not affected. This overflow scheme is provided for automatically in the start-up phase so as to avoid taxpayers being adversely affected during the application of the new tax autonomy model. The overflow scheme applies until the entity involved adjusts the regulations in that regard. As a result of the overflow scheme, either the federal personal income tax or the regional personal income tax may be negative. They can never both be negative or negative when added together.

Source: 2015 Tax Survey, Federal Public Service Finance

Degrees of freedom with regard to regional tax autonomy

The Regions’ tax powers are exercised with due observance of the federal loyalty referred to in Article143 of the Belgian Constitution and the general regulatory framework of economic union and monetary union, while also complying with the following principles:

1°the exclusion of any unfair tax competition;

2°the avoidance of double taxation;

3°the free movement of persons, goods, services and capital.

Based on the localisation of personal income tax, the Regions may:

1°impose surcharges on a portion of the personal income tax (i.e. on the reduced State Taxation);

2°allow deductions and apply tax relief and tax increases to the surcharges referred to under1, without this giving rise to a reduction in or increase of the tax base.

The surcharges are initially fixed at 35.117% (see section 3.). Each Region has the power to adjust the initial rate of 35.117%.

The Regions’ powers with regard to the surcharges, deductions, tax relief or increases, and tax credits must be exercised without any reduction of the progressivity of personal income tax. The principle of progressivity is understood as follows: as the federal basic tax increases, the ratio between the amount of the surcharges and tax increases to the basic tax may not decrease, and the ratio between the amount of the deductions, tax relief and tax credits to the basic tax may not increase.

Deviations from the aforementioned progressive rate structure are curbed by two conditions:

1.the regional surcharge rate on a tax bracket cannot be lower than 90% of the highest regional surcharge rate of the lower tax brackets;

2.the tax benefit for each taxpayer arising from the deviation from the progressivity rule may not exceed €1,000.00 (indexed) per year.

The Belgian Court of Audit is tasked with verifying that the progressivity of personal income tax is maintained when new tax measures are introduced.

An extensive legal database on the Sixth State Reform (in Dutch) can be consulted via the following link:

[1] That amount is provisionally estimated in the SFA at €3,047,959,879.

[2]35.117%= 25.99%/(1-25.99%)