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Hope alive for 10 year holidays

Debate on a controversial 10-year tax holiday for foreign investors continues, as Slovak investment professionals lobby to have the measure approved, and government officials - who nixed the bill in an October 18 cabinet meeting - concede they would have few objections if parliament overturned the government decision.
In its effort to attract more FDI and to make Slovakia's investment incentives more compatible with those offered by neighbouring countries, the government recently approved a new investment package lowering the size of investment needed to qualify for five year tax holidays, scrapping previous legislation that at least 60% of production be exported and offering further incentives to companies settling in regions with over 10% unemployment.

Debate on a controversial 10-year tax holiday for foreign investors continues, as Slovak investment professionals lobby to have the measure approved, and government officials - who nixed the bill in an October 18 cabinet meeting - concede they would have few objections if parliament overturned the government decision.

In its effort to attract more FDI and to make Slovakia's investment incentives more compatible with those offered by neighbouring countries, the government recently approved a new investment package lowering the size of investment needed to qualify for five year tax holidays, scrapping previous legislation that at least 60% of production be exported and offering further incentives to companies settling in regions with over 10% unemployment.

The package did not, however, extend the current five-year tax holiday to 10 years, as had been widely expected, and as is the practice in relatively FDI-rich nations such as the Czech Republic, Poland and Hungary. The Finance Ministry, the principal opponents of the 10 year holiday, explained that EU law frowned on such holidays as discriminatory, since they could lure investors away from other countries and hurt similarly FDI-hungry economies.

But with the government bill now in a second reading in parliament, some are predicting that MPs will re-insert the 10 year holiday clause and send the draft on to final approval in Parliament.

"At a meeting of the Council of Economic Ministers, Deputy Prime Minister Ivan Mikloš said he would take care of the amendment in the second reading," said Ján Jursa, government plenipotentiary for OECD accession. "This is important, because it is a pro-active decision by the Deputy PM, and it shows an understanding of the gravity of the situation."

"I don't rule out this possibility," said Brigita Schmögnerová told The Slovak Spectator November 8, explaining that her original objection had been based on a letter from the European Commission "which stated very openly that Slovakia must take into consideration that after accession to the EU, we must harmonise our legislation, and it's very unlikely that we could at that time have 10 year tax holidays."

If Slovakia went ahead and enacted 10 year holidays, she continued, it might have to remove the law to enter the EU: "If we have to adjust our legislation and disallow the extra five years, we could be forced to compensate those investors that decided to invest in Slovakia because of the existing legislation. I am not going to insist on this, but I would just like to explain to MPs that they have to understand the risk."

Some, like Jursa, scoff at the notion of risk and maintain that tax incentives do not constitute "harmful tax competition" and therefore are not subject to OECD or EU interference. "It sounds very strange to me," said Jursa of the EU law argument used by the Finance Minister. "We need it [the 10 year holiday] and we should explain to European authorities that this is not permanent, it's a package of transitory measures.

"I also found strange the Ministry of Finance's explanation that any tax incentives would frustrate the efforts of the OECD to slow down harmful tax competition. I've been at the OECD since the beginning, and I explained that tax incentives should not fall within the purview of harmful tax competition because they reflect the fact that these countries are transforming."

But Schmögnerová, facing mounting calls for a reversal of the government decision, refused to be cowed. "It's true the OECD doesn't see this as harmful tax competition, but they don't like it very much either. It has a negative fiscal impact on the economy providing tax holidays, and may attract investors away from countries where they would otherwise invest. This type of competition is not generally accepted."

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