Tax system grows more complicated

CHANGES to depreciation and new rules introduced to protect construction firms belong among recently adopted revisions most cited by tax experts. Though the Finance Ministry praises them and points out the advantages, analysts warn of the impacts they will have on businesses, especially regarding red tape.

Though Slovakia used to have simple and clearly structured tax laws, this is not true anymore, said Wilfried Serles, tax advisor and partner at Grant Thornton Slovensko. According to him, as a result of the revisions to tax laws adopted in October 2014 and September 2015, entrepreneurs have to follow more than 28 changes when preparing their tax return.

“Unfortunately, Slovakia assumes the complexity of tax changes of Austria and Germany which is constantly criticised by top experts in these countries,” Serles said, as quoted in the press release.

Depreciation still questioned

Tax experts agree that one of the changes which significantly impacts entrepreneurs are changes to depreciation adopted in late 2014 via an amendment to the income tax law. The revision increased the number of depreciation groups from four to six, shortened depreciation of production technologies from 12 to eight years and prolonged depreciation of non-productive real estate from 20 to 40 years. As depreciation reduced the tax base and thus the final tax paid, a longer period of depreciation means higher taxes paid.

The revision also capped the price of motor vehicles that business entities purchase to €48,000 for business entities with a low tax base.

Moreover, it introduced the possibility to choose between flat expenditures of 80 percent in case the asset is used also for private purposes or provable expenditures depending on the real usage of the asset for private purpose and doing business.

The Finance Ministry expected the change to increase cash flow into state coffers, but tax experts are not very optimistic about it. The new rules have brought more administrative burdens to entrepreneurs, according to Branislav Kováč, tax partner at VGD Slovakia.

He considers the changes to tax depreciation groups to be one of the most significant, particularly prolonged depreciation of non-productive real estate from 20 to 40 years.

“This change concerns assets such as administrative buildings, hotels and residential buildings and therefore it will have an impact on the financial planning for this kind of business in future tax periods,” Kováč told The Slovak Spectator.

Grant Thornton Slovensko analysts also question the cap for luxury cars, questioning its effect on small entrepreneurs with zero or only minimal profit.

Silvia Hallová, senior manager of the tax advisory department in Deloitte, also points to limiting the expenses that can be included in the tax base.

“With respect to cancelling the advantaged depreciation of assets procured via financial leasing, the attractiveness of this way of financing has decreased,” Hallová told The Slovak Spectator.

Moreover, the lawmakers did not deal with several questions related to transfer of financial rent, she added.

Builders’ protection problematic

The amendment to the VAT law, valid as of January 1, 2016, introduced two main changes that concern the construction sector: the extension of reverse charge to construction works and the principle of paying VAT only after receiving payment of an invoice.

The first change means that the entrepreneurs who order and pay for certain construction works can use the VAT deduction from a received invoice in their tax return. This in fact means that the state will return the VAT to them. The condition is that the entrepreneur pays at least €5,000 excluding VAT, the Hospodárske Noviny daily reported.

“In case of the local supply of construction works, including the supply of a building or a part of building and supply of goods linked to the installation or assemblage, the VAT is due from a VAT payer who is a receiver of these supplies from another Slovak VAT payer,” Kováč said.

However, in practice the Slovak VAT payers must consider each supplier individually, as this is applied only to the construction works which are defined by the Financial Administration, he added.

Another measure, which came into force in the beginning of 2016, allows companies not to pay VAT from unpaid invoices. While originally the changes were to apply only to companies with an annual turnover of €75,000 and less, the final document increases the upper limit to €100,000. The main aim of this change was to protect smaller companies active in the construction sector which were harmed by big firms who did not pay their invoices.

Though Kováč considers the idea good, he points to some problems. If the VAT payers decide to use this special regulation of VAT, it may have an impact also on the customers of a VAT payer which are applying a special method of VAT application. The reason is that the right for the deduction of the input VAT from the received invoices for goods and services arises for these customers on the same day as the tax liability for the supplier, i.e. only after paying to the supplier for goods or services, he explained.

“There is also an application problem in case the payment is done at the end of the month as the customer may deduct the input VAT only in the VAT period where he has information from the supplier (who applies the special regulation) of when he received the payment,” Kováč added.

Changes for the next government

There are, however, also some good changes the government has adopted.

“The current cabinet focused on the fight against tax evasions which is an actual trend not only here, but also within the EU and OECD,” Hallová said.

In this respect she considers it important that the Financial Administration has a strong position achieved via education, practical experience or employing experts.

She also praised the fact that the parliament passed the tax changes soon enough, so there was enough time to prepare for them.

Grant Thornton praises also new rules for private use of company property, like passenger cars, new rules for companies investing into research and development, and also tax advantages accompanying dual education.

The new government formed after the March 5 general election should focus on reducing administrative burdens in order to become more business friendly, Hallová and Kováč agree.

“Further, there is still place to synchronise the accounting rules with the tax rules as nowadays in some areas the treatment of the same thing is different from the accounting and tax point of view,” Kováč added, citing the creation of provisions and allowances to receivables as examples.