4 minute read 16 Apr 2021

How legal security may be the key of economic recovery

By Charles Carlier

EY Belgium Tax Partner

Passionate about entrepreneurship, innovation and the world of taxes.

4 minute read 16 Apr 2021
Related topics Tax Tax compliance

In a health crisis whose most deleterious economic effects are undoubtedly and unfortunately still to come, confidence is a factor of the indispensable economic recovery.

To maintain and even strengthen confidence in a context in which the decisions to be taken are largely influenced by changing circumstances and unpredictable events, governments and parliaments must in particular act in favor of legal security.

As far as tax legislation is concerned, it can sometimes be perceived as an incentive for investment, and sometimes as a brake on entrepreneurial initiatives. In this area, legal certainty associated with taxpayer’s actions and their tax consequences are even more important if we wish to support economic recovery, which will require making the best possible use of tax incentives and controlling the consequences of reorganization operations and business takeovers, which bring with them their share of uncertainties in terms of taxation.

Legal certainty in tax matters: state of play concerning the practice of ruling  

The Belgian legal framework offers taxpayers a relatively secure legal environment insofar as it allows them to avoid any uncertainties surrounding the application of tax law to a given transaction by submitting a request for an advance ruling (a "tax ruling") to the Ruling Commission 

The guiding principles associated with the advance rulings issued by the Ruling Commission, a service located within the FPS Finance but independent of the other general administrations, are binding on the tax administration, which is in principle not authorized to challenge them during a tax audit. 

The "contract" between the taxpayer and the Ruling Commission can be summarized as follows: the former submits a request in which he sets out, in full transparency, all the relevant circumstances relating to the transaction he is considering and obtains, from the latter, legal certainty as to the tax treatment that will be applied to this transaction.  

Given the complexity and volatility of the Belgian tax environment and the impact of taxation on companies' projects, the practice of "Belgian-style" rulings is widely favored both domestically and internationally. 

However, we note that in practice, some tax authorities do not always agree with the office's views and try to challenge the validity of the rulings issued, not so much because of a possible failure by the taxpayer to comply with the "contract" (which of course remains acceptable), but because of the legality of the positions taken by the office for Advance Tax Rulings, even though the legal certainty associated with rulings is itself enshrined in the law.

Let us note for the record that such a "tendency" is also observed in other acts taken by independent administrative authorities. For example, the opinions issued by BELSPO in the context of tax measures promoting innovation and research and development activities are increasingly being challenged by the administration, notwithstanding their binding nature, which is once again enshrined in law.

A reform of the ruling procedure?

The government wishes to remedy these differences of interpretation by reforming the status of the Ruling Commission in order to integrate it into the General Administration. According to the draft reform, the principles of autonomy and independence would not be called into question. 

We doubt this if the Ruling Commission is placed under the direct authority of the General Administration and thus loses its functional autonomy.  

Even if this were the case, it is undeniable that this integration would at the very least change the perception that taxpayers might have of the office, and would most certainly make the procedure for obtaining advance rulings more cumbersome and potentially less transparent.  

In these uncertain times, we believe that the signal sent to investors by this reform project is not a priori opportune as it does not contribute to reassuring the various economic actors, whose level of confidence will be key to reviving the investment dynamic. 

This is all the less the case as this reform, as envisaged at this stage, in our opinion, aims the wrong target and will in no way avoid the only real pitfall inherent to the ruling procedure and its implementation: the possible imbalance between, on the one hand, the legitimate wish of the tax administration to verify that the "contract" entered into with the taxpayer via the ruling is respected and, on the other hand, the guarantee of maintaining legal certainty that values this decision through the equally legitimate interpretations of the tax legislation that it contains.

The complexity of our tax environment, which makes the advanced ruling procedure so valuable, is amplified by the interweaving of tax texts that are often unclear and subject to multiple interpretations. The multiple and sometimes contradictory sources that surround them (circulars, parliamentary questions, frequently asked questions, etc.) do not necessarily provide the required legal security. 

In exchange for clear legislation?

If one were to consider the need to reduce the potential capacity of the office for Advance Tax Rulings to provide this legal certainty a posteriori via a tax ruling mechanism, then it would be necessary, first and foremost, or even in exchange for this, to grant the legal texts immediate and unambiguous clarity.

If this is not possible, we believe that it is appropriate to maintain what is working and which therefore favors, in the tax field, this legal security which is more than ever essential to our economic activity and competitiveness.

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Summary

To maintain and even strengthen confidence in a context in which the decisions to be taken are largely influenced by changing circumstances and unpredictable events, governments and parliaments must in particular act in favor of legal security.

In this area, legal certainty associated with taxpayer’s actions and their tax consequences are even more important if we wish to support economic recovery.

About this article

By Charles Carlier

EY Belgium Tax Partner

Passionate about entrepreneurship, innovation and the world of taxes.

Related topics Tax Tax compliance