Q1.
When the United States Tax Reform Act (TRA) of 1986 was enacted, the normal corporate tax rate in the United States dropped from 46 to 34 %. At that time, corporate tax rates in Europe ranged from 35 to 56 %. Since then, corporate tax rates in some European countries had fallen, but they were usually higher than in the United States.
To attract major high-level foreign investment, Belgium enacted various favorable tax provisions in the late 1980s. Belgium is an interesting country. With 10 million people, it is only the 8th largest country in the European Union. Thus, it is the sixth largest in per capita GNP, second in population density (and eleventh in the world), and first in the European Union in urbanization. In 1988, 66 % of Belgium's GNP was in services, 32 % in manufacturing, and only 2 % in agriculture.
One important tax attraction is the opportunity of establishing a coordination center. A coordination center will be established for one or more of the subsequent activities: development and centralization of advertising; gathering and supply of information; insurance and reinsurance; R&D; relations with international and national authorities; financial; administrative services and accounting; currency hedging; and other associated activities. Most coordination centers are financial and accounting in nature.
The activities of the center are free from Belgian exchange controls and are almost tax free. Taxes are based on a small percentage (generally 8 percent) of expenses, except for finance charges and salary costs. Any dividends paid by the center to its parent company are exempt from paying preservation tax. A coordination center will hold title to assets that it can lease to other members of the corporate group both outside and inside Belgium. The center will also be used to finance operations in other countries. For example, a member of the corporate group in Germany would borrow money from the coordination center and pay all interest to the center.
Q2. How does the establishment of the coordination center impact the tax liability of companies that lease assets from the center and organizations that finance asset acquisitions during the center?
Q3. Illustrate the impact on the tax liability of the parent company of the activities?