The Belgian tax law enables companies to deduct a fictitious interest calculated on the basis of their shareholder’s equity, the so called notional interest deduction (NID). This measure reduces the cost disadvantage of equity in the capital structure of Belgian businesses and effectively lowers the corporate income tax rate.
The applicable NID rate is determined every year, based on the average return on the secondary market of a Belgian government bond with a remaining maturity of 10 years (OLO10).
Business plan practitioners may be confronted with the question which NID rate to use, especially in long term forecasts? The current NID rate is known, but what within 5 or 30 years? Making an accurate estimate for every year during the thirty years to come is practically impossible, so a thirty year average might be an easy-to-use alternative.
One might consider taking a closer look at the historic evolution of OLO10 (see graph).
The data (period 1991-2010) indicate an average for OLO10 of 5,5% with a standard deviation of 1,7%. The notional interest rate is capped by Royal Decree at 6,5%, using this cap would most likely result in a too optimistic projection. Using 3% would conversely result in a too gloomy outlook.
In order to refine this bracket of 3 to 6,5% various approaches can taken. A conservative approach is to argue that 3,8% (average minus 1 times standard deviation) is appropriate. Another option is the use longer-term bond rates (reflecting for instance the horizon of the business plan), which will however result in higher, more aggressive NID rates.
There is obviously no right or wrong answer to this question. Unless the Belgian government would lower the cap of 6,5% to … 3% !