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TAX POLICY - SIMPLIFICATION OF THE TAX SYSTEM APPRECIATED BUT IMPROVEMENTS IN TAX ADMINISTRATION STILL NEEDED

Taxes are not a tool for social policy

TAX experts agree that transparency and attractiveness for foreign investors are the main bonuses of the current tax system, which was created during the second administration of the former government of Mikuláš Dzurinda. Experts also say that the system has its weaknesses, such as the absence of a binding tax ruling system, but at the same time they warn against potential unsystematic changes.

TAX experts agree that transparency and attractiveness for foreign investors are the main bonuses of the current tax system, which was created during the second administration of the former government of Mikuláš Dzurinda. Experts also say that the system has its weaknesses, such as the absence of a binding tax ruling system, but at the same time they warn against potential unsystematic changes.

The new government has said that it wants to amend some tax laws and cut the value added tax (VAT) for selected goods to ease social tension in some regions of Slovakia.

Social problems, however, should not be handled through changes in tax policies, say tax experts. At the end of the day such changes might not bring lower prices and relief for the socially vulnerable but could instead have the opposite effect, resulting in a weak local currency and a decreasing standard of living.

Todd Bradshaw, a partner and tax leader for PricewaterhouseCoopers (PwC) listed the most important trends in the area of taxation during the last four years as he sees them.

He ranked the shift in emphasis from a direct tax system (personal and corporate income taxes) to an indirect tax system (VAT and excise taxes) in the first position. Second was the simplification of corporate tax rules, which make it administratively easier for companies to comply with the law and to prepare their tax returns.

He also appreciated the reduction of tax rates for individuals and the removal of progressive tax levels, a move he said provides an incentive for people to work and to declare their income to the authorities.

Finally, Bradshaw mentioned the abolition of taxes for which the cost of administering the tax was high compared to the tax revenue generated, such as the gift tax and the property transfer tax, for example.

According to Bart Waterloos, country manager of VGD, the simplification of the tax law has clearly helped create an investor-friendly environment. "The introduction of the flat tax rate makes it much easier for foreign companies to get an understanding of the Slovak tax system."

"Do not use the tax system to implement social policy," said Bradshaw of PwC.

He explained that changes in the tax system may partly achieve a social objective but that there are usually negative knock-on effects, such as the fact that progressive personal tax rates may tax higher income earners more but that it discourages individuals from working and from declaring their income to the authorities.

"Under such a system, the middle class usually end up bearing most of the tax burden, as the wealthy are usually able to structure their activities in order to minimize their tax," Bradshaw told The Slovak Spectator.

Tax experts also emphasized that the new government should look closely at tax administration, which they consider as one of the largest shortcomings of the current tax system.

"The government could work on the reform of tax administration, because it sometimes seems that they missed the train of the reforms," added Waterloos of VGD.

Waterloos thinks it would also help if the government were to reduce the cumbersome administration of tax and the amount of paperwork required for taxpayers. Currently, the same information must sometimes be reported to four or five different government agencies, Waterloos said, adding "why does a company need to send a recent extract from the Commercial Register to the tax office when applying for VAT registration? The Commercial Register is online on the Internet."

Koen Dewilde, tax director at Deloitte, explained that low tax rates and a simple and straightforward tax system are appreciated by the business community but that a functioning tax administration is as important as the tax system itself.

"Businesses value a well-functioning tax administration and this is an important factor for foreign investors. The criteria for evaluating the performance of the administration are short deadlines - the legal timeframe of 7 working days for the VAT registration of foreign legal entities can be seen as a good example in this respect - a limited administrative burden and the possibility of legally binding rulings," he said.

The requirement to implement a tax ruling system as part of an effective tax administration appears in the proposed tax agenda of many tax experts.

A tax ruling system functions as a general guideline issued by revenue or tax authorities, outlining their interpretation of certain statutes. If a taxpayer has a tax-related question specific to his business, he may contact the authority for an answer. The response is then binding to both the taxpayer and the authority.

Such a tax ruling system can encourage self-assessment, contribute to good relations between tax administrators and the tax-paying public, give certainty to transactions, provide more consistency in the application of the law and minimize controversies and litigation.

"Given the relatively short period of the new laws, there is no case law available on the interpretation of certain aspects of these laws. And the tax administration isn't bothered about this, because they have five years for their control. But as a company you have to abide by today's laws. Binding rulings on your specific case for how to apply a law would enhance the certainty a lot," Waterloos of VGD pointed out.

The tax experts think that whatever changes are made the government should put its cards on the table as soon as possible so that the business community can prepare itself.

"Foreign investors associate uncertainty with risk. Accordingly, the government should send a clear message to the business community concerning what changes it will make and whether it aims to maintain the current business environment or take a less business friendly direction. If the direction of the government is unclear, Slovakia will look less attractive as an investment location," PwC's Bradshaw summarized.

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