Reporting rules on payments to tax havens constitutional

On 21 January 2016, the Belgian Constitutional Court rendered decision No. 11/2016 on a preliminary ruling request by the Antwerp lower court. The request concerned the question whether the non-deductibility and reporting rules in respect of payments to tax havens violate the constitutional principle of equal treatment and non-discrimination (see Belgium-1, News 15 January 2010 and Belgium-1, News 9 September 2015).

(a) Facts. In 2010, a Belgian company made a payment of EUR 183,114 to a Lithuanian bank account of which the holder was a company established on the British Virgin Islands. The payment was made in respect of real services rendered by a Russian company.

Although the British Virgin Island are blacklisted, the taxpayer did not report the payment to the Belgian authorities. The Belgian tax authorities rejected the deduction of the expenses on the basis of article 198, §1, 10° of the Belgian Income Tax Code (BITC).

The taxpayer disagreed and pleaded before the lower court of Antwerp that the provision did to make a distinction between transactions entailing tax evasion and real transactions and that, in any event, the expenses should be deductible if sufficient proof it provided that they cover real services.

The lower court decided to refer the case to the Constitutional court for a preliminary ruling on the question whether the articles 198, §1, 10° and 307, §1, third paragraph of the BITC violate the constitutional principle of equal treatment and non-discrimination.

(b) Legal background. From 1 January 2010, Belgian companies and Belgian permanent establishments of foreign companies are obliged to report payments to tax havens of EUR 100,000 or more in their tax return (article 307, §1, third paragraph of the BITC).

The term tax haven includes a country which is considered by the OECD Global Forum on Transparency and Exchange of Information as not having substantially and effectively implemented the OECD exchange of information standard (see Belgium-1, News 28 January 2010) or a country included in the royal decree of 6 May 2010 (these countries do not impose a corporate income tax or have a nominal corporate income tax rate of less than 10%, see Belgium-1, News 28 January 2010).

Payments that are not reported in the tax return are not deductible (article 198, §1, 10° of the BITC). Reported payments are only deductible if the taxpayer is able to prove that the payment were made for real transaction with persons, other than artificial structures.

(c) Decision. Assuming that unreported payments to persons established in blacklisted countries should not be rejected if the taxpayer is, upon investigation, able to prove that they correspond to real transactions would make the provision void. A taxpayer will, after all, in such circumstances, not be encouraged to cooperate with the tax authorities. Moreover, it will be difficult, if not virtually impossible, to ascertain whether the taxpayer acted in good faith.

According to the Court, the failure to report payments to persons established in tax havens in accordance with article 307, § 1, third paragraph of the ITC 1992 is, in principle, a sufficient reason to reject the deduction for tax purposes. The reporting obligation exists irrespective of whether it concerns a real or sham transaction. A fraudulent intent is not required.

The Court clarifies that the obligation for companies to report payments to persons established in blacklisted countries, fits into the framework of the fight against tax fraud and is intended to improve the efficiency of tax audits in connection with those payments. The obligation will enable the tax authorities to concentrate on the examination of such payments rather than on identifying them.

Note: Even if the payment, covering real services, had been reported, the expense could, based on the wordings of the provision, be rejected. The account holder, a British Virgin Island company probably an artificial structure (in order to evade Russian taxes).

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