THE TAX reform introduced by the government of Mikuláš Dzurinda back in 2004 garnered international praise and attracted foreign investors, but tax professionals still said it was only the first step on the road to a simpler and more business-friendly tax system.
Today it is easier for Slovaks to pay taxes than their neighbours in Hungary or Poland, but the country has a long way to go, according to a recent international study.
The Paying Taxes 2008 report prepared by the World Bank and PricewaterhouseCoopers ranked Slovakia 122nd out of 178 countries.
“The effect of the 2004 tax reform was very positive and it was not exaggerated,” Todd Bradshaw, partner at PricewaterhouseCoopers, told The Slovak Spectator. “However, the reform did not make it easier to pay taxes, file tax documents or deal with the tax office.”
The tax reform introduced in 2004 was focused on simplifying the tax system by reducing direct tax rates (such as corporate income tax and income tax for individuals), eliminating smaller taxes that were expensive and difficult to administer (gift tax and property transfer tax), and broadening the tax base by eliminating exceptions in the tax law, Bradshaw said.
“The tax reform was revenue-neutral in the sense that the reduction in direct taxes was balanced by an increase in indirect taxes (VAT and excise tax),” he added. “The tax reform did not cover the Slovak tax administration system.”
The report focused not only on the tax rate, which is indisputably low in Slovakia, but also on how complicated the tax reports are and how many hours it takes a business to fill out tax returns, an analyst with Tatra Banka, Juraj Valachy, told The Slovak Spectator.
“So we did pretty well in terms of the amount of the tax rate, but scored worse in the number of hours that business people spend on tax administration, and for example, how many times a year they have to fill out different forms and returns,” Valachy said.
The new tax report puts Egypt in the spotlight for introducing radical tax reforms two years ago. The country slashed corporate income taxes almost by half, which boosted the amount of taxes collected and the incomes of the state coffers.
The countries that have made it the easiest to pay taxes are the Maldives, Singapore, Hong Kong, China, United Arab Emirates, Oman, Ireland, Saudi Arabia, Kuwait, New Zealand and Kiribati.
Belarus imposed the heaviest administrative burden on its taxpayers, the study said.
Market watchers and tax experts said the Dzurinda government has already lad the groundwork for further improving the tax environment in Slovakia.
“The next step in tax reform for Slovakia is clearly a reform of the tax administration system,” Bradshaw said.
The Paying Taxes 2008 report quoted a Swedish business owner as saying: “In Sweden, we pay taxes online. Corporate income tax, value added tax, labour contributions and property tax are filed on a single form. Doesn’t everyone do it that way?’’
“Unfortunately not,” Bradshaw answered. “In the technologically-advanced, internet-based environment we live in, why do we still need to sign, stamp and file so many forms manually? Why do we need to make so many payments and why are people still lining up at the tax office each March?”
Reforming the tax administration system will require significant investments into technology, tax professionals said.
Theoretically, some Slovak tax returns can be submitted with electronic signatures, but in practice, electronic filing is simply not working effectively, Bradshaw said.
Businesses burdened too
The Paying Taxes report confirmed that meeting the administrative tax requirements still poses a burden on companies. Slovakia was ranked 83rd in the number of tax payments needed, and 129th in the time needed to comply with all the tax requirements. Measured by its total tax rate, Slovakia was 121st on the list of 178 economies.
In terms of complying with tax legislation, Slovakia falls behind Romania and Slovenia. While a firm in Slovenia spends an average 202 of hours working to meet the regulations, in Slovakia it is 344 hours, Slovakia’s main economist at the World Bank, Anton Marcinčin, said in an interview with the Sme daily.
Other areas for concern for businesses are the transfer prices charged between related business entities, and the inability of companies to obtain binding opinions on uncertain tax issues, Bradshaw said.
“In other countries, such as Hungary and Poland, you can ask the tax authorities to provide you a ruling on such matters,” Bradshaw told The Slovak Spectator. “This provides some level of comfort that particular transactions, for example, will not be attacked by the tax office. Often businesses have to pay a large fee for these binding rulings, however many businesses are prepared to pay the price in order to reduce risk and uncertainty.”
International institutions have been warning that the payroll tax burden is still very high in Slovakia. However, both the previous and the current governments said that they do not see any room for cutting levies.
The Paying Taxes survey shows that Slovakia ranked 171st out of 178 in terms of its labour tax rate.
In the model adopted in the survey, 79 percent of the total Slovak tax cost was made up of labour tax costs (e.g. social insurance), while corporate income tax made up only 18 percent of the total Slovak tax cost, according to Bradshaw.
“This shows that labour taxes make up a significant part of the tax burden of Slovak businesses,” Bradshaw said. “Accordingly, I think there is a need to look at the balance of the tax system to ensure we are not taxing labour too heavily.”
As a result, the system may discourage businesses from hiring more employees and it could make unregistered illegal employment more attractive, he said.
“In Slovakia, first of all, levies complicate the situation; on one hand they are high, and they need to be paid 12 times a year to different institutions,” Valachy said.
In Sweden, taxes are relatively high, but they only make two or three payments a year, he added.
According to Bradshaw, the Fico government has not made significant changes to the tax system. The changes that have been made, such as reducing personal allowances for individuals in higher income brackets and introducing a lower VAT rate of 10 percent for some goods, have not had a major impact on the Slovak tax environment.
“However, the proposed 2008 tax changes such as introducing thin capitalisation rules (which restrict interest deductions on related party loans) and limiting tax deductions for bad debts could have a more significant impact,” Bradshaw said.
“These changes reintroduce similar restrictions which were in the law prior to the 2004 tax reform.”
3. Dec 2007 at 0:00 | Beata Balogová , With files from Marta Ďurianová