When comparing the Belgian tax calculation for individual tax payers with other countries one immediately notes that the Belgian calculation is much more complex than the majority of other systems. For most tax payers, the seemingly endless listing of figures is incomprehensible and even for tax experts, it can take considerable time to fully analyze and understand all details of a calculation. Making a manual calculation without the use of specialized software has become almost impossible.

This year, the calculation becomes even more complex due to the transition of certain tax powers from the central government level to the various regions in the country. The new tax calculation is composed of several phases:

1.  Base calculation
2. Regional tax calculation
3. Final calculations

 Phase 1 – Base calculation

The starting point for the calculation is the determination of the net taxable income. There are still 4 different income categories (income from real estate, passive investment income such as dividends and interest, income from professional activities and a special category of ‘other income’).

Per income category, the net taxable amount is determined by applying the related calculation rules and deductions. Certain income types are taxed at the regular progressive rates (25 to 50%), while others are taxed at specific fixed rates.

In the base calculation, the following deduction types are applied:

• expense deductions (including social security)
• deduction of 80% of alimony pay
• deductions for pensions and other state allowances
• foreign income deduction

All income, that is taxed at the progressive rates is then added and the tax is calculated on this total amount. For income, that is taxed at separate rates, the tax is calculated per income type.

After the calculation of all taxes, the amounts are added to a single tax amount, that is called the (reduced) state tax.

Phase 2 – Regional tax calculation

The regional taxes are calculated on a part of the reduced state tax (RDS). From the RDS, certain components are removed (taxes on interest and dividends since there is only state tax on these types of income). In addition, the basis for the calculation of the regional taxes is further reduced by an ‘autonomy factor’ (25,99% for income years 2015 – 2017) to create room for the establishment of taxes at the regional level. In this way the state tax is decreased and subsequently regional taxes can be calculated.

The regions can determine the percentage of their regional tax. When the new system is initiated, the percentage of the regional tax has been determined in such a way that it results in exactly the same tax amount as the fore-mentioned autonomy deduction, that was applied on the RDS. This results in a regional rate of 35,117% and makes the new calculation system tax neutral in the beginning.

As the regions can determine the regional rate, differences can start to appear between the regions in the future and the overall tax bill can start to move upwards or downwards as determined by each region.

The taxes are then reduced by regional tax credits, based on creditable items, that were claimed by the tax payer in the tax return (for example own home credit, life insurance credit, gift credit, etc…).

 Phase 3 – Final calculations

The RDS and the regional taxes are then added and a number of final calculation parameters are applied, such as:

• credit for prepaid taxes, payroll and other withholding taxes
• tax increase for insufficient prepayments
• certain refundable tax credits
• communal taxes

Although the new rules initially have no impact on the overall amount of tax due, it is clear that it will now become even more difficult to analyze a Belgian tax calculation and to understand the actual impact of tax deductible items.

In the future one will start to notice the impact of the regional decision powers on part of the tax calculation and it may be interesting to see what further developments will occur in this area and in which way the regions may start internal tax competition and develop their own tax policies.

One of the biggest challenges, related to the Belgian calculation rules is the overall and ever increasing lack of transparency of the system. In order to be perceived as equitable and just, a tax system needs to have a basic simplicity and must be understandable for tax payers. Although the regional tax calculation rules are logical in view of the complicated Belgian government structure, one needs to be aware of the fact that the new rules may further have a negative impact on the confidence of the tax payers in the overall justice of the system.