AMONG several measures adopted by the Slovak government to ease the impacts of the global economic downturn on Slovak businesses were amendments to the tax laws. Tax and audit experts welcomed these revisions but questioned whether the government could do more and suggested that changes in the administration of tax matters would also be beneficial.
The Slovak Spectator spoke to Branislav Ďurajka, tax partner at KPMG in Slovakia; Christiana Serugová, tax and legal services partner at PricewaterhouseCoopers; Stan Jakubek, country managing partner at Ernst & Young; and Pavol Boroš, partner for business consulting and Milan Krško, senior business consultant, both at Centire, to get their views.
The Slovak Spectator (TSS): The Slovak government has produced three packages of measures to ease the impacts of the global economic downturn on Slovakia. How do you assess these measures and which do you think could be the most beneficial ones? What are the measures that call for certain cautions in terms of potentially negative side effects?
Branislav Ďurajka (BĎ): The tax measures taken by the Slovak government are in general a reasonable response to the crisis. In my view the most positive measures are accelerated excess value-added tax (VAT) deduction refunds and VAT grouping which may bring real benefit to companies in terms of easing the pressure on their cash flows. The question is whether the government could do more. There are certain other areas in which more relief could be provided to companies without creating too much pressure on the state budget, such as fiscal grouping also for corporate tax purposes, reverse charge VAT mechanisms on imports, or extension of deadlines for filing tax returns which has been refused by parliament. Also it is very positive that the government decided to enable component depreciation for tax purposes in case of certain parts of buildings but this should only be the first step and later on the mechanism could be extended to other assets.
Christiana Serugová (CS): The government measures in the area of taxes have just materialised in amendments to the Income Taxes Act and the VAT Act approved by the parliament. Acceleration of VAT refunds from 60 to 30 days, as well as introduction of the long-awaited VAT grouping which enables businesses which are part of such a group to not charge VAT on mutual transactions, are definitely going to help. Also, release of the obligation to keep accounting for individual entrepreneurs under certain conditions helps to reduce significant costs and administrative burdens of small entrepreneurs and hence helps them to survive during the economic turmoil.
Stan Jakubek (SJ): From the business perspective, not only those measures that reduce the tax burden but also measures which improve cash flow can bring about considerable benefits. In particular, in challenging economic times, companies are seeking ways to improve their cash positions. If implemented effectively, several of the amendments such as new rules on tax depreciation, excess VAT deduction refunds or VAT grouping will bring a cash flow benefit to business.
Pavol Boroš (PB): The stance to anti-crisis measures adopted by the Slovak government depends on the length of the crisis.
If we assume that the crisis in the United States and other developed countries will end within one year, the current anti-crisis measures by the government could be evaluated positively. The evaluation of the government’s packages is slightly different if the crisis does not end in the next six to 12 months, but drags on for longer. If the pessimistic scenarios come true, the current measures by the government will not be sufficient. If the government accepts that the crisis will last longer it needs to seek solutions which do not have just the character of ‘first-aid packages’. In that case measures should be directed at supporting trade, innovation and reducing costs. It is extremely important to maintain the production ability of companies which are still able to export their products. Slovakia’s experience has already shown once that cutting direct taxes and payroll taxes can have a positive effect on the business environment. This will strengthen the viability of small and medium-sized companies as well as result in the higher competitiveness of the state in attracting investments.
TSS: What are the main challenges that the global economic crisis bring for tax, audit and consultancy firms? How can these firms benefit from the situation?
BĎ: Obviously when companies suffer from a crisis they tend to cut spending, which may include reduction of tax and other advisory services and create pressure on audit fees. On the other hand, companies may need special services such as crisis management advice, optimisation of processes and cash flows, or assistance with selling assets or lines of businesses, which is an opportunity for our business. And finally, no crisis lasts forever and there will be further growth potential once the difficult times are over.
CS: The main challenges are exactly the same as for other businesses - to deal with the sharp decline in demand, constant pressure on fees, etc. On the other hand, the new economic situation brings new opportunities for consultants - restructuring of businesses, downsizing, managing the cost base of the clients, dealing with employee cost reductions while maintaining the effects: a whole range of new challenges for both businesses and consultants.
SJ: The challenges we are facing today are very similar to those faced by many of our clients. In order for us to continue to be successful, we have to continually strive to re-assess our clients’ needs in a rapidly changing environment. Understanding the challenges they face and adapting the services we offer to help them through those challenges is absolutely essential. A professional firm that can do this really well will emerge from the crisis as a stronger organisation.
TSS: Even though Slovakia has one of the lowest tax rates in the European Union, the country has also been repeatedly criticised for its administrative tax burden. What measures could help ease the administrative burden?
BĎ: Actions could be taken, for instance, towards reduction of the administrative burden in the area of social and health insurance contributions where extensive reporting is required each month to a number of institutions. This burden could be reduced, for example, by centralising these obligations to one single point of contact, that is, by unifying the collection of taxes and social and health insurance contributions.
CS: Unification of collection of taxes, customs duties and social security contributions announced by the government to be implemented by 2012 would definitely reduce a great amount of time in dealing with all tax payments, as well as the amount of payments that businesses need to make to different Slovak institutions within different deadlines - these are the main issues which contribute to the administrative burden on taxpayers. PwC, together with the World Bank, is globally preparing the annual survey on Paying Taxes, which assesses the ease of paying taxes as part of a broader analysis of regulations relevant to domestic, small to medium-sized companies in 181 economies around the world. It does so by assessing the time required for firms to prepare and file tax returns and pay taxes; the number of tax payments per year; and the company's total tax liability as a percentage of commercial profits. The 2009 Paying Taxes survey rated Slovakia as 126th in ease of paying taxes. This is the combination of rankings in the number of tax payments - rated 94th with 31 yearly tax payments; time to comply - rated 129th which translates to 325 hours needed annually purely for tax compliance matters; and the total tax rate being 47.4% - rated 115th out of 181 countries.
SJ: The Slovak tax system has indeed been criticised as being too administratively onerous. However, I think that the legislators now acknowledge this and in this latest round of amendments we have seen several measures aimed at reducing the administrative burden. The best examples are the changes that got rid of the need to re-file tax returns in many cases. Previously, for both corporate tax purposes and VAT purposes, if adjustments to deductions in past periods were necessary, the tax returns filed previously had to be re-filed. Under the new rules, adjustments may be made through the current return being filed by the taxpayer. This new approach should significantly reduce the need for re-filing and significantly reduce the administrative burden on the part of both taxpayers and the tax authorities.
Milan Krško (MK): Clear and stable legislation, effective organisation of structures administering taxes and effective and optimal setting of processes securing this administration are necessary to facilitate the tax administration. Currently, there are flaws in each of these areas. But reform of the tax and customs administration with an outlook of unifying taxes, customs and insurance contributions is becoming acute. A well-done reform should remove these flaws.
TSS: Has Slovakia achieved the desired progress in the area of moving its tax administration online?
BĎ: Although some progress has been made, e-filing is still not widely used due to administrative and technical obstacles. This is clearly an area where improvement could be achieved in the future. We could take lessons, for example, from Estonia, which is far ahead of most of Europe in terms of electronic tax administration.
SJ: A few years ago Slovakia adopted e-filing of tax returns as a first step towards online tax administration. Some companies have taken advantage of this option. However, further simplification of the process entailing electronic signatures will open e-filing for use by the general public.
Slovakia is engaged in an ongoing process to move tax administration online. A key element of this is a project which would see a unification of the systems for the collection of taxes, customs and compulsory payments to social and insurance funds. The project is still in its early stages but, once successfully implemented, it will be a big step in the automation of administration.
MK: For a longer period of time, the tax administration has been providing a certain part of its services electronically via its portal. Compared with other sectors of public administration it is possible to label it as a leader in provision of online services.
On the other hand, it is necessary to say that genuine online services are provided, in the sense of valid legislation, only in the case of a guaranteed electronic signature. But for tax subjects this means costs linked with obtaining the necessary certificate. This is one of the reasons why these services are not used to the extent expected.
