Organization
The World Bank is a specialized organization of the United Nations (UN) that provides loans and grants to low- and middle-income countries. Its initial goal was to reduce poverty by providing temporary loans to countries that are not able to obtain loans commercially. While the Organization concentrates on meeting the basic needs of people in developing countries, their focus has extended over the years to promoting gender equality, combating diseases, ensuring environmental sustainability, achieving universal education and so on.
The World Bank was established along with the International Monetary Fund (IMF) at the 1944 Bretton Woods Conference. The World Bank and the IMF are both headquartered in Washington DC. They have 189 member countries, staff from more than 170 countries and offices in over 130 locations. Two thirds of its staff are based in the US.
The Brussels Office of the World Bank leads the cooperation between the World Bank Group and Belgium and actively participates in its international development agenda. The Brussels desk acts as a first point of contact for individuals and organizations in Belgium who wish to contact World Bank staff anywhere in the world. The External Relations Office in Brussels aims to promote a shared development agenda between the World Bank Group and Belgium.
The World Bank Group is an extended family of five international organizations:
- International Bank for Reconstruction and Development (IBRD)
- International Development Association (IDA)
- International Finance Corporation (IFC)
- Multilateral Investment Guarantee Agency (MIGA)
- International Centre for Settlement of Investment Disputes (ICSID)
All these entities operate according to procedures established by their Articles of Agreement, or an equivalent governing document. Under the terms of the Vienna Convention of 1986, a ‘headquarter agreement’ is typically also concluded between the host State and international organization. This legally binding agreement regulates the status and privileges of the organization in the territory of the host State.
Taxation Immunity
The Headquarters Agreement between both the IMF, the IBRD and Belgium came into existence on 11 December 1945.
In this agreement, it is explicitly stipulated for both organizations that “No tax shall be levied on or in respect of salaries and emoluments paid by the Bank to executive directors, alternates, officials or employees of the Bank who are not local citizens, local subjects, or other local nationals”.
It is generally accepted that officials and staff members of international organizations shall enjoy such privileges and immunities only to the extent they are necessary for the independent exercise of their functions in connection with the respective organization. Privileges and immunities are granted in the sole interest of the organization and not as a personal benefit to the individual officials themselves.
In this context, any salary or other type of remuneration that is earned by an official in connection with their employment at the World Bank, is usually exempt from domestic taxation. Belgium allows a full tax exemption, unless you are a Belgian national or local hire.
World Bank Pension Fund
Things typically change when the World Bank official retires. In general, international civil servants cannot fall back on any tax relief as stipulated in a (bilateral) double taxation agreement (DTA), as the World Bank is not a private employer nor a national government.
Nothing is expressly stipulated in the Articles of Agreement or the Headquarters Agreement about pensions. As a general rule, pensions are considered not to be included in the exempted ‘salaries and emoluments’. Once retired, the staff member no longer exercises any function with the World Bank. For this reason, the domestic pension taxation remains without any further consequence for the general interest of the Organization.
The Pension Fund of the World Bank was created in 1948 and is comprised of 3 funds: (i) Staff Retirement Plan and Trust, (ii) Retired Staff Benefits Plan and Trust, and (iii) Post-Employment Benefits Plan. It currently has a fund size of more than 20 billion USD. In June 2016, there were almost 16,000 active members and 10,000 retirees in the Plan.
The Pension Fund is a contributory, defined benefit pension scheme managed and administered at the HQ in Washington DC. Participants in regular employment are required to make contributions of what is referred to and defined as their ‘pensionable gross salaries’.
Upon retirement, the World Bank Pension can be paid out to the retiree as a monthly pension (in case they have at least 10 years of service or 5 years instead, but your age plus years of service equal 60). Otherwise it is paid out as a lump-sum amount. If you are eligible for the monthly pension, you may also elect to receive a portion or all your pension as an annuity. Specific conditions apply.
In Belgium, a monthly pension is normally taxed at the standard progressive tax rates (of 25% up to 50%, plus communal tax). Pension capital and life annuities, on the other hand, are taxed at a flat rate (this can be 0%, 10%, 16.5%, 18%, 20% or 30%, depending on the circumstances). As the devil is in the details, it is important to make a thorough analysis of the pension entitlements, before the exact tax regime can be determined.
Tax adjustment
There have been a few taxpayers, retired from the World Bank Group or the United Nations, who have challenged the Belgian taxation of their international pensions. In practically all cases, this was based on the argument that ‘salaries and emoluments’ should also include pensions. The tax authorities, supported in this by the Belgian tax courts, have generally been of the opinion that this is not the case.
In respect to the concept of ‘salary and emoluments’, the Belgian authorities claim that the element of compensation for labor should at least be ‘implicitly’present.
For this, the tax authorities often refer to what is stipulated in the National Taxation Guide of the United Nations Joint Staff Pension Fund (‘UNJSPF’). In this document, it says that “periodic pension payments to former officials or to their survivors are generally not exempt from national income taxation”. However, it does not exclude it either. Whether and how periodic pension benefits are taxed, is a matter of domestic law. In some countries, UNJSPF benefits may even be wholly or partially exempt from taxation for several different reasons.
In case the WB Pension is indeed subject to income taxes in the country of residence, the official is eligible to receive a ‘tax supplement’ from the Organization based on the tax rates of the country in which the pension benefit is taxable. The tax supplement is an approximate amount of the actual income tax due. Tax supplements are either paid out once (for lump-sum payments) or on a regular basis (for pensions/annuities) during retirement.
This supplement is often referred to as the ‘fiscal adjustment’. The latter has also caught the eye of the taxman in the past, which resulted into additional discussions with the Belgian tax authorities.
Different approach
While Belgium considers the World Bank pension taxable, this is not always the case in other countries. Some countries are, in general, more attractive for retirees from the World Bank (or the UN), like, for example, Portugal with its NHR regime or Austria that apparently does not tax WB pensions.
In the past, tax courts both in the United Kingdom (Macklin v HMRC, 4 February 2015) and Australia (Macoun v Commissioner of Taxation, 20 March 2014) have also expressly considered the taxation of WB pensions to benefit from a tax exemption. This was either by relevant DTA (in the UK) or by domestic tax law in line with the Articles of Agreement (in Australia).
There are probably many more relevant tax court decisions out there, but the above one from Australia contains some very interesting arguments about the concept of ‘emoluments’. The opinion of the Tribunal there was exactly the opposite of what the Belgian tax courts generally say.
According to the Australian Tribunal, pension payments are in nature an ‘emolument’, because they can be described as a gain arising from employment or as ‘compensation for services’ by way of remuneration. The relevant entitlement arose during the employment and it did not matter that some part was to be paid only after employment ceased.In our opinion, this makes absolute sense; you build your pension rights during your career, not after.
The Tribunal also stated that pension benefits are clearly part of an overall remuneration package which can be expected to provide a strong incentive, especially given the personal inconveniences and disruption due to taking up a position with an international organization overseas. Indeed, the official may have also taken the job in view of the generous pension entitlements afterwards.
The Tribunal concluded: “the characterisation of the payments does not alter simply because the payments are made after the rendering of the services”.
This point of view has, for example, also been confirmed by the Superior Court of Justice of Catalonia (Spain)(Nr. 326/2007, 28 March 2007). In this case, the court also held that pensions paid out after cessation of office as a UN official were tax exempt as ‘emoluments’.
While the Belgian tax courts are generally of the opinion that WB and UN pensions are not covered by the HQ Agreement, this position remains debatable, especially given the dissenting opinion in many other countries around the world.