Belgium is currently in the midst of forming a new government, a process known for its length and complexity. As we face yet another challenging government formation, a significant debate has emerged around the introduction of a capital gains tax on profits from the sale of equities that are currently untaxed in Belgium. The proposal suggests a tax rate of around 10% on these profits.
Whether this is a good or bad idea is up for debate. Given the dire state of the government’s finances, exploring new revenue sources is certainly on the agenda, especially as Belgium remains one of the few countries without such a tax.
However, this article focuses on the practical implementation of such a tax. While the concept may seem straightforward, a deeper dive into the details reveals a host of complexities.
Let’s start with a basic scenario: an individual buys shares for €100 and later sells them for €150. The profit is €50, which, under a 10% capital gains tax, would result in a €5 tax liability. This seems simple enough, but the situation quickly becomes more complex when we consider different timelines and more complex scenarios.
Take the same example but compare two individuals: Person A sells his shares two weeks after buying them, while Person B waits two years before selling. Assuming inflation, the real profit and annual return for Person A are significantly higher than for Person B, yet both would be taxed the same. This raises questions of fairness and equity.
Now, let’s consider a more complicated situation.
Imagine someone buys 10 shares for €100 on day one and then purchases an additional 20 shares for €160 on day ten. On day twenty, they decide to sell 15 shares for €165. How should we calculate the profit?
Three possible models could apply:
Weighted Average Cost: The individual owns 30 shares with a total acquisition cost of €260, meaning each share’s average cost is €8.67. The profit, in this case, would be €35 and thus a tax of €3,5.
FIFO (First In, First Out): Here, the first 10 shares bought are sold first. So, for the 15 shares sold, 10 come from the first purchase and 5 from the second. This results in a profit of €25 and thus a tax of €2,5.
LIFO (Last In, First Out): In this model, the last 15 shares bought are considered sold first, leading to a profit of €45 and thus a tax of €4,5.
As the profit varies significantly depending on the model used, the tax liability would also differ, making it crucial to agree on a consistent method.
Now, let’s say this person sold 10 shares on day fifteen for €50, incurring a loss. Should losses be deductible from future profits, as they are in corporate taxes? If so, how would this be managed across different banks? If losses occur at one bank, but gains at another, how would these be reconciled?
And what about joint tax declarations? If losses are recorded on individual accounts, can they still be combined? And for how many years can losses be carried forward? What happens if shares are bought and sold through a foreign broker — how would capital gains be calculated and reported then?
Another issue arises with double taxation. For instance, a corporation investing in shares already pays corporate taxes on its profits. Would a capital gains tax not double-tax this income? Similarly, an employee receiving stock options as part of their compensation package is already taxed on this benefit. Would they face additional taxes upon selling these shares?
Additionally, Belgium has a speculation tax of 33% on shares sold within six months of purchase. Would the new capital gains tax be in addition to this?
The complexities don’t stop there. Consider the following scenarios:
Transaction Costs: When selling shares, one already pays stock market taxes and commissions, often with VAT. Should the capital gains be calculated before or after these costs? What about annual custody fees or other banking charges?
Transfers and Gifts: What happens when shares are transferred as a gift or moved to another bank? Will banks be required to transfer the original purchase price accurately? What if they provide incorrect information? Will the customer be allowed to correct it and if so, based on what evidence?
Corporate Actions and Derivatives: How is the acquisition price determined in cases of stock dividends, mergers, or spin-offs? Or for convertible bonds that result in (a basket of) shares? How is the acquisition cost of the bond then split to the different shares? What about options or futures — are profits calculated based on the underlying asset gain or do acquisition costs of the options or futures also factor in? Similar questions arise with rights issues that allow shares to be purchased at a preferred price.
Obviously, these challenges are not unique to capital gains taxes. Similar complexities exist in other tax areas as well, e.g.
Personal Income Tax: While the principle is simple, defining what constitutes professional income is complex, considering the various perks an employee might receive (e.g. company car, group insurance, meal vouchers etc.) and exceptional incomes a person might generate (e.g. garage sales, gifts, Airbnb rentals, prices in competitions, gambling income…).
VAT: Value-added tax is straightforward in theory, but complexities arise with foreign transactions, different VAT rates, VAT-exempt companies, and other scenarios (e.g. charging expense notes directly to a customer, selling gift cards directly or as an intermediary…).
As with many things, the devil is in the details, and complexity escalates rapidly. The financial sector, often tasked with collecting such taxes on behalf of the government, must navigate this complexity. The associated costs and efforts are often overlooked, diverting resources away from enhancing customer experience and competitiveness.
With potential pan-European banking consolidation on the horizon (as discussed in my blog "The Next Big Shakeup in European Banking: From Local Giants to Pan-European Titans" - https://bankloch.blogspot.com/2024/08/the-next-big-shakeup-in-european.html), it’s crucial that Belgian banks are well-positioned. Forcing them to make substantial investments in a new tax system should not be taken lightly. If pursued, the government must ensure the rules are clear, consistent, and as simple as possible, with a long-term perspective. Frequent changes or sudden cancellations of taxes make it difficult to justify the financial sector’s investment in such systems.
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