Administrative circular allows mitigated application of secret commissions tax

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An addendum to the circular relating to the secret commissions tax published by the tax authorities end of July provides for the possibility for the tax authorities to mitigate the application of this tax in certain cases (addendum to circular nr. Ci.RH. 421/605.074 (AAFisc nr. 71/2010) of 1 December 2010 and the addendum of 23 December 2011).

Secret commissions tax: the principles

The deduction of certain professional expenses (commissions, salary expenses and benefits in kind that qualify as professional income at the level of the beneficiary) is in principle subject to the condition that these expenses are reported by the payer on individual forms and summary forms. For corporate income tax purposes, a secret commissions tax of 309% is applied in case these items are not reported on such forms. Article 219 ITC 92 contains an escape clause according to which this secret commissions tax does not apply when the corporate taxpayer is able to prove that the payment is reported in a timely tax return of the beneficiary.

In case the secret commissions tax is applied, this tax and the unreported expenses become tax deductible at the level of the payer. It should be kept in mind, however, that if the secret commissions tax does not apply because of the escape clause, expenses that are not reported in a timely manner and unreported expenses remain non-deductible. The tax authorities may still allow the deduction in case of a late filing of the forms, provided they can still tax the beneficiaries of the payment within the legal statute of limitation.

Benefits in kind

The addendum to the administrative circular provides for the non-application of the secret commissions tax to benefits in kind that are valued on a lump sum basis, provided there is only a limited valuation error which is committed in good faith and provided the taxpayer has spontaneously regularized his taxable basis. It also allows an administrative leniency for the valuation of the benefit in kind for the private use of a company car. Given the different recent legislative changes in this respect, the tax authorities are willing to show the above leniency in case of the incorrect valuation of this benefit in kind for income year 2012, even when the taxpayer has not proceeded with a spontaneous regularization of his taxable basis.

Also for payments to foreign beneficiaries … 

In a strict interpretation of article 219 ITC 1992, the escape clause would only apply when the items are reported in a timely Belgian tax return and not to payments to foreign beneficiaries. However, the addendum to the administrative circular goes further and allows the application of the escape clause when the items are reported in a timely foreign tax return of the beneficiary in accordance with a foreign legal provision which is similar to article 305 ITC 92.

… and in case of an incorrect characterization in the tax return of the beneficiary 

The secret commissions tax does not apply when the items are reported in a timely tax return. The addendum to the administrative circular adds that this is even the case when the items are not characterized correctly.

Traffic/penal fines and restaurant expenses 

In principle, the repayment of traffic or penal fines by the employer to his employee or director constitutes a benefit in kind at the level of the employee or director and is deductible at the level of the employer, provided it is reported on the respective forms. Private restaurant expenses borne by the company constitute a taxable benefit in kind for the employee or director, whereas excessive professional restaurant expenses borne by the company do not. In the latter case, the deduction of the excessive part must be fully rejected at the level of the company and not only up to the level of 31%.

Conclusion

The administrative leniencies towards certain bona fide mistakes in the forms are welcome. It is recommended, however, to consistently take care of reporting the necessary information in the respective forms and submitting the forms in a timely manner. This way, taxpayers avoid having to rely on leniencies for which they must meet a burden of proof which may be difficult in practice.