OPINION | Capital gains tax: Who really pays the price in business acquisitions?

Perhaps it’s more interesting to reflect on the potential effect of a future capital gains tax on the pricing of business transfers. Do you remember the principle of price elasticity? If you raise the price of your product by 10% and this leads to a 2% drop in sales, it may still be profitable. This pattern repeats itself until the curve, and the outcome, turn negative. But does this principle apply to pricing when selling a company?

Probably not. After all, the price of a business is not determined solely — thankfully — by tax rules. The valuation of a company is a complex exercise in which numerous qualitative and quantitative factors play a role. Think of interest rates, micro- and macroeconomic conditions, the quality of management, the ‘quality of earnings’, the sector, the size of the company, the USP of its products or production process, and so on.

On top of that, the government is, de facto, a tax monopolist. A taxpayer cannot choose under which regime they are taxed, nor which public services they receive in return.

A relevant question, therefore, is whether the "price" of a business will increase to (partially) compensate for the impact of the tax. Again, the likely answer is no. As mentioned earlier, the drivers of pricing are influenced by a complex mix of factors that go far beyond mere taxation at the time of sale.

We must therefore fear that a capital gains tax will ultimately be borne unilaterally by the selling shareholder or entrepreneur, in the form of a lower net amount received in their account.

Will this slow down mergers and acquisitions (M&A) activity? Again, the answer seems to be no. After all, there is plenty of international experience to draw from. Belgium is, alongside Switzerland, one of the last countries where capital gains on shares were, until recently, exempt. Statistics show that M&A activity in neighboring countries, where such taxes have been in place for quite some time, is not lower — on the contrary.

We can therefore conclude that a capital gains tax, in whatever final form it takes, is an almost inevitable tax. Especially in an international context, this has been anticipated for some time. However, this should not discourage entrepreneurship. Entrepreneurship is not just about the amount of money in one’s bank account, even if that amount may be somewhat lower in the future.

Perhaps, in return for this new tax, entrepreneurs can finally receive the respect they truly deserve?