TCS Daily

Belgian Brew-ha-ha

By Jeremy Slater - April 26, 2004 12:00 AM

Belgium is a small country that is often (and often unfairly) ignored by its bigger European brothers on economic and business issues -- and on just about everything else, for that matter. Yet this nation is a center of excellence in certain fields such as high-technology and, perhaps more notably, brewing.

So it came as a body-blow to the national psyche when word came that Interbrew, a beer company with a more than 600 year history in Belgium, was considering leaving the country for more tax-friendly shores. One possible new headquarters for the company is neighboring Luxembourg. The company is not threatening to decamp simply because it prefers the weather in the Grand Duchy. It just wants a better business climate. First, the company would pay significantly less corporate tax in Luxembourg. And second, Luxembourg has more flexible takeover laws. (Interbrew recently announced a merger with AmBev, a Brazilian brewing conglomerate.)

The proposed move by Interbrew, which can trace it roots in the Belgian university town of Leuven back to 1386, immediately caused an uproar on the national political scene. Prime Minister Guy Verhofstadt, who once allowed that it would be nice if Belgium could get its tax rates below 50 percent, expressed shock and said the move would amount to "abusive tax avoidance". He further argued that the move is unnecessary as tax rates in Luxembourg are not that much lower than in Belgium.

On paper the difference between the two countries' rates of company tax is only 3 percent. Since the 1960s Belgium has rewarded companies that create European coordination centers in the country by taxing only 10 percent of their turnover. This encouraged many US firms such as Levi-Strauss to set up their continental headquarters in and around Brussels.

But in 2002 the European Commission claimed the Belgian scheme was illegal and must be eliminated by 2010. The decision put a halt to any new centers being set up. In April of last year the Belgian government and Forum 187, the coordination center association, filed an appeal with the European Court of Justice against the Commission's decision and in June the Court accepted the appeal. As a consequence, the Court suspended any execution of the Commission's announcement and has said it will take the final decision.

Despite the possibility that the European Court might rule in favor of the current tax policy companies are starting already to consider their options.

Hence Interbrew's proposed move to Luxembourg (or some other tax haven) and the news only a week later that the DHL next-day delivery service would move its global coordination center to Bonn from Brussels. Analysts say that it wasn't just the Commission decision on coordination centers that spurred the move, but also a new night-flight ban at Brussels airport (an issue that has seemed to dominate the Belgian political scene during the past year).

The law also encouraged the Irish airline Ryanair to set up a hub at Charleroi airport in Belgium's Wallonia region, benefiting the local economy with an infusion of tens of millions of euros a year. Earlier this year the Commission ruled against what it claimed was an illegal local subsidy, as some of the running costs the carrier incurred had been paid for by the Wallonian government. Following this announcement Ryanair threatened to end its service to London and quit the hub. The local government has fought hard to keep the deal and an agreement was reached to allow the airline to continue its service until 2005. After that the picture is less clear.

Interbrew, DHL and Ryanair are doubtless not the only companies that will be considering whether to stay in Belgium over the next few months. Tax rates in Belgium are amongst the highest in the EU; Verhofstadt's government has made it an important part of its policy to try and cut rates, but has had mixed success. And now Verhofstadt is fighting for his life in a re-election campaign.

EU policymakers often defend their new initiatives by claiming they want to create a "level playing field". The effort to harmonize taxes across the EU, and make it more difficult for countries such as Luxembourg to offer incentives to businesses, is one such example. However, if such moves make local economies poorer and unfairly punish businesses, then the thinking behind them must be questioned.


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