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EDITORIAL

Tax breaks: Keeping up with the Joneses

As of last week, Slovakia has a new tax incentives law that allows it to offer both foreign and domestic investors 10-year exemptions from paying taxes. The cabinet law was passed to little fanfare, for two reasons; first, because no government really likes such laws, and passes them only because all of its neighbours have one, and second, because in its drawn-out battle with the European Union to get approval for the law, the Slovak side had to write in a few clauses that significantly restrict eligibility for the incentives.

As of last week, Slovakia has a new tax incentives law that allows it to offer both foreign and domestic investors 10-year exemptions from paying taxes. The cabinet law was passed to little fanfare, for two reasons; first, because no government really likes such laws, and passes them only because all of its neighbours have one, and second, because in its drawn-out battle with the European Union to get approval for the law, the Slovak side had to write in a few clauses that significantly restrict eligibility for the incentives.

For starters, one of the main things the EU had insisted on was that domestic investors, as well as foreigners, be allowed to qualify for tax breaks. Fine, said the government, and set the minimum investment required to qualify at 400 million crowns ($8.24 million), or 200 million crowns in areas where unemployment was over 10%.

The upshot is that you could count on the fingers of one hand the number of Slovak companies which can stump up the funds for an investment of that size, or profits high enough to convince banks to give them a sufficient line of credit. According to the 1999 financial results of Slovak corporates, only tire-maker Matador Púchov recorded a profit high enough to participate in the upcoming scheme - 240 million crowns. Next in line was chemicals firm Duslo Šaľa, where profits were only 165 million crowns. And that's it for domestic firms.

Nor may foreign firms prove that interested in the tax breaks, given that the EU forced the Slovak government to restrict the 10-year tax holiday to those investors who put their money into regions whose GDP per-capita is lower than 75% of the European Union average. This clause basically means investors who want 10-year shelters can put their money anywhere in Slovakia but Bratislava, whose GDP per-capita rate is 99% of the EU average - the second best in central and eastern Europe after Prague with 115%.

The problem is that Bratislava is where investors tend to want to go, as it's where the best infrastructure is to be found. Last year, when Slovakia recorded its highest-ever foreign investment inflows, Bratislava hogged over 60% of the pie, while Košice, Slovakia's second-largest city, took over 30%.

Thus the choice offered by the government to investors - take a 10-year tax break, but be forced to settle in the Slovak countryside far from where you'd prefer to be, or invest near Bratislava and make do with what's already on offer.

Most will likely choose the second option, and stick with the existing 'five plus five' tax incentive legislation (a 100% tax holiday for the first five years following the investment, and 50% for the next five years). To qualify for this, investors need make only a 190 million crown total investment, or 130 million crowns in regions with unemployment over 10%.

Which makes you wonder why countries bother passing 10-year tax holidays anyway. It's clear that foreign direct investment is far more dependent on economic and political stability, and on a business-friendly legal environment that allows them to get things done quickly without having to bribe too many people. Tax holidays can help a bit - but only if their authors intended they actually be made available to more than a few business.

Perhaps these holiday packages are something like nuclear weapons - if the competition has them, you need them too, but neither of you imagine their ever being used.

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