• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month
Page
  1. 1
    1
  2. 2
    2
  3. 3
    3
  4. 4
    4
  5. 5
    5
  6. 6
    6
  7. 7
    7
  8. 8
    8
  9. 9
    9
  10. 10
    10
  11. 11
    11
  12. 12
    12
  13. 13
    13
  14. 14
    14
  15. 15
    15
  16. 16
    16
  17. 17
    17
  18. 18
    18
  19. 19
    19
  20. 20
    20
  21. 21
    21
  22. 22
    22
  23. 23
    23
  24. 24
    24
  25. 25
    25
  26. 26
    26
  27. 27
    27
  28. 28
    28
  29. 29
    29
  30. 30
    30
  31. 31
    31
  32. 32
    32

What is the impact of the Notional Interest Tax Deduction system on investments in Belgium?

Extracts from this document...

Introduction

Extended Essay "What is the impact of the Notional Interest Tax Deduction system on investments in Belgium?" Word Count: 3985 words Table of Contents Title Page Number(s) 1. Abstract 3 2. Acknowledgements 4 3. Introduction 5 - 6 4. Benefits of the NITDS 7 - 11 5. The balance between Debt and Equity financing 12 - 14 6. Drawbacks of the NITDS 15 - 16 7. International Awareness 17 - 19 8. Changes encountered in statistics 20 - 21 9. Other reasons for investing in Belgium 22 - 23 10. Conclusion 24 - 25 10.1 Conclusion 10.2 New Questions 10.3 Limitations 11. Bibliography 26 12. Appendices 27 - 32 1. Abstract My Extended Essay was based on the innovative tax system that had newly been launched in Belgium for companies to gain greater possibilities of making larger profits. With the recent recession looming over all financial markets and companies, I felt it was interesting to see what the effect of this tax regime, which benefits companies, would have on investments in Belgium. Since the tax system was first to be established in Belgium, by investigating the effect on investments, it would be easier to suggest to countries worldwide whether they should adopt the tax system in order to compete with the developing economies of Brazil, India, China and Russia (BRIC countries.) The investigation was conducted thoroughly, and firstly I interviewed Mr Steven Gils and Dirk Eilers who are tax specialists in order to understand the system. To evaluate whether the tax system was actually benefiting the economy, I looked at the statistics issued by the National Bank of Belgium along with other publications by banks and other countries in order to conclude how effective the new tax regime was. In order to focus my study on the investments in from America, I discussed the issue with Marcel Klaes. By looking at the statistics as well as economic ideas, I could deduce that investment in Belgium has increased after the introduction of the NITDS. ...read more.

Middle

The effect can be seen in Figure 4. We must understand that in this simulation, each company's profits before taxes and financial expenses are equal at �100. When Company A allocates all the money to interest payments, the private Belgian investor will receive a final interest income of �85 (100 minus 15% withholding tax.) However, when Company B finances entirely out of its own resources, a deduction cannot be obtained and so normal tax rates of 33.99% (approximately 34%) apply, thus leaving profits after tax at �66. The sum that the private investor will receive depends on whether dividends are issued or not. If dividends are issued, the private investor will receive �49.5 due to a 25% withholding tax. Conversely when dividends are not issued, the individual will obtain all the profit after tax, �66.00, since capital gains are not taxed in Belgium. This brings the conclusion that a company should primarily finance through debt, then equity without issuing dividends and finally equity financing with the issuing of dividends. However, there is a difference when a borrower firm is financed through another company, for example by a "parent company." Even though, the order in which one should finance changes, the amount that is received changes marginally in some cases as well as a large amount in other cases. For example, when Company A receives funds from Company C (parent company) the whole of the interest will be taxed and therefore the Company will receive �66, whereas when it is not financed through the parent company the individual will have �85. Conversely, for Company B there will be an increase in earnings instead of a decrease. This is because only 5% of the dividends paid will be taxed and therefore the profit remaining after taxation will be �98.3 instead of �75. This conveys that after the introduction of the NITDS the Belgian government will have a reduction in their working capital since they will receive less in tax revenue. ...read more.

Conclusion

They are 'confident that new measures will create a valuable alternative for the expiring coordination centre regime and increase the attractiveness of Belgium for capital intensive companies, equity-funded headquarters and treasury centres.' 20 With the world heading for a deep recession and with many companies filing for bankruptcy, it seems that all countries will increase their investment in Belgium. This is because they will try and reduce spending at all costs and since the NITDS will allow a reduction on tax expenditure, with companies needing to invest in order to survive they may highly consider investing in Belgium since it may be the safest and most efficient option as shown in Appendix 8. According to a survey carried out by the daily De Tijd 21 many companies have expressed their enthusiasm about Belgium's latest tax cut for corporations. 22 With this innovative tax system, corporate tax rate is reduced to approximately 25%. For example Arcelor Steel Group will pay �31 million less in taxes due to the introduction of the NITDS. New investment will come into Belgium as Randstad 23 have shifted its headquarters into Belgium, both things happening this financial year. The government expects to miss out on �560 million; however Verhofstadt anticipates a broad recovery effect through increased economic activity. 10.2 - New Questions But it is important to understand, that even Belgium's innovative tax system has increased investments and has the potential to do so in the future, however will these increases be sustained? The Belgian government will have to ensure that they compete positively with fast developing economies, such as India and China. 10.3 - Limitations It is very difficult to draw conclusions at such an early stage but even with this in mind we can observe that the NITDS has benefited the Belgian economy. It is very difficult to collect concrete data as highlighted in the interview with Marcel Klaes, who said that 'the figures have a certain delay since the introduction of the NITDS was in 2006 we can see an increase but we cannot place that as the sole reason.' 11. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our International Baccalaureate Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related International Baccalaureate Economics essays

  1. Role of ICT for "Make in India" government initiative.

    Be it plastics or cars or satellites or agricultural products, come make in India?we need to encourage the manufacturing sector. Manufactured goods should have zero defect as also zero effect on the environment? * Sri Narendra Modi ICT goods Import and Export in India .

  2. What has been the impact of globalisation?

    Even so, the control over global finance remains firmly embedded within the core financial capitals of Tokyo, London, New York, Frankfurt, and Paris. Core countries have a disproportionate amount of control over the institutions of global governance and thus are expanding their control over the global capitalist process despite the threats to their own sovereignty.

  1. What has happened to Canada's demographic over the past 50 years? What are ...

    Vision Many people believe that the only change in vision that older people can have is simply having a hard time seeing far or short distances. However, there are many other changes that can occur, such as peripheral vision, visual acuity (blurriness), depth perception, and much more.

  2. Is there possibilities of war for resources?

    in order to meet the demand, without considering ecosystem services losses and setbacks in yields and available cropland (FAO, 2003; 2006). Increases in available cropland may be possible in Latin America through the conversion of rainforests, which in turn will accelerate climate change and biodiversity losses, causing feedback loops that may hinder the projected increases in crop yields.

  1. The Benefits of Microcredit to Bangladesh

    (%) Very Small < 10,000 483 75.35 323 76.00 314 69.32 342 69.94 Small ? 10,000 but < 50,000 123 19.19 73 17.18 104 22.96 108 22.09 Medium ? 50,000 but < 100,000 20 3.12 16 3.76 18 3.97 21 4.29 Large ? 100,000 but < 1,000,000 12 1.87

  2. 15 Historical Economic Questions on Mercatilism and the Development of European Countries.

    The existence of a monopoly in itself is enough to indicate that that nation is not allocating all of its possible resources in an efficient manner. The suppression of prospective business competitors through monopoly eliminates the potential for full resource utilization, full employment, and low costs through competition.

  1. Commentary on the article. The introduction of the weed pass in Amsterdam will lead ...

    or the cost of suppressing the black market is it would be? As the last paragraph of the article depicts, 386 people have been arrested for purchasing or selling cannabis illegally. If those 386 people could?ve been able to buy their cannabis legally, all 386 people most likely would have.

  2. Identify the components of Aggregate Demand. Explain the impact on an economy of ...

    Moreover the imports will be reduced, because there is not the same quantity demanded as before and even the exports might reduce, because of the companies less confidence, they might lower their production.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work