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No 10-year holidays in new FDI package

A much anticipated investment incentive package received the final go-ahead from the government on October 18, raising hopes that Slovakia's FDI laws would finally put the country on a level playing field with its neighbours. But a crucial 10 year tax exemption was absent, despite promises since May this year that it would be included in the new legislation.
The new bill, given preliminary approval by cabinet in May 2000, was supposed to counter criticisms levied at the former incentives package for falling short of what investors were offered by neighbours Hungary and the Czech Republic. The Finance Ministry, however, dropped the 10-year exemption for investors in a last-minute alteration to the bill, instead opting to stay with the five year holiday in the former legislation.

A much anticipated investment incentive package received the final go-ahead from the government on October 18, raising hopes that Slovakia's FDI laws would finally put the country on a level playing field with its neighbours. But a crucial 10 year tax exemption was absent, despite promises since May this year that it would be included in the new legislation.

The new bill, given preliminary approval by cabinet in May 2000, was supposed to counter criticisms levied at the former incentives package for falling short of what investors were offered by neighbours Hungary and the Czech Republic. The Finance Ministry, however, dropped the 10-year exemption for investors in a last-minute alteration to the bill, instead opting to stay with the five year holiday in the former legislation.

"I'm not happy with this," said Ján Jursa, plenipotentiary for OECD accession and advisor to Deputy Prime Minister for the Economy Ivan Mikloš. "Given the attractive incentives for FDI in neighbouring countries - in particular Hungary and the Czech Republic - I think this is a lost opportunity for the government. The process of stabilisation in Slovakia is dependent on continued economic growth from strategic investments."

Criticism also came from economic professionals, with Ján Tóth, analyst for Dutch bank ING Barings, saying that while Slovakia did have an advantage over regional neighbours regarding labour costs, it still needed to compete more effectively with its tax incentives.

"The advantages of FDI are so huge that it is imperative that Slovakia attract as much FDI as possible, and if I were in the government this would tell me to follow the taxation policies of neighbouring countries," Tóth said. "If these countries have 10 year tax holidays, then we are more or less forced to have a 10 year tax holiday as well."

In defence of the legislation passed, Jozef Mach, spokesperson for the Ministry of Finance, said that the reason for the last-minute change was simple: EU tax legislation did not allow it.

"Slovakia would like to be in the EU in 2004 or 2005, and in European Union countries there is no possibility of a 10 year tax holiday incentive. That's why we did not include this in the draft - because our legislation would not correspond to EU legislation," Mach said. He added that the Czech Republic and Hungary were able to skirt this barrier because they had implemented their packages before they applied for EU membership.

Still something to offer

Despite the absence of the 10 year holiday, analysts and investors still believe the investment package has much to offer. They identified one strong point of the newly passed legislation - which goes into effect as of January 1 2000 - as the cancelling of a previous requirement stating that for a firm to qualify for a tax break at least 60% of goods it produces must be exported, a clause that disqualified suppliers to major local industrial producers such as auto giant Volkswagen.

The new package has also decreased the minimum investment required to apply for the tax holiday in areas with certain unemployemnt rates. Under previous legislation, in areas with an unemployment rate of 15% investors could only qualify for tax breaks if they invested five million euros. Under the new package, the top rate of investment for qualification for the tax holiday has dropped to 3.5 million euros for areas with 10% unemployment. For areas with an unemployment rate greater than 10%, the minimum investment required has been reduced from 2.5 million euros to 2 million.

According to Mach, the decreased minimum investment and the dropping of the 60% export requirement more than made up for the missing 10 year holiday. "From our perspective, the main point of this legislation is that it will allow medium-sized companies to receive the incentives, because we decreased the minimum investment necessary to apply for the incentives. Also, this legislation rules out the 60% export requirement. And these two are more important for us than the 10 year tax holiday," he said.

Another benefit of the new bill is that government discretion has been taken out of the equation for companies looking to qualify for the incentive package. This, said Tóth, was key for many overseas investors concerned about any possible political influence on granting tax holidays to investing firms.

"I was very happy to see that in the new law there is a rule that does not allow for a government decision [regarding what companies are eligible to receive incentives]. Under this new legislation, if you meet certain conditions, you will automatically qualify for the tax holiday, rather than the government discussing your case then deciding whether you receive the benefits or not. This is a great step ahead," Tóth said.

Additionally, analysts said, too much emphasis may have been placed on the absence of the 10 year holiday, as the overall economic and political environment are far more important for investors than tax considerations

Karol Balog, director for the Agency for Industrial Development and Revitalisation (AIDR), said Slovak strengths such as legal and political stability, land availability, infrastructure and qualified workforce together painted an attractive picture for investors.

"I'm of the opinion that these tax incentives, although very important, are not among the top priorities for investors. Investors look for a combination of things, and because they are here for the long-term and the incentives are for [either] five or 10 years, incentives don't affect immediate decisions. And frankly, every large investor can adjust their accounting to avoid paying large taxes."

Indeed, this appears to be the case for German motor giant BMW, which is currently looking to establish a $440 million production plant somewhere in central Europe. Jurg Dinner, spokesperson for BMW, said that factors such as space, the market availability of qualified workers, accessibility and a country's political framework were all vital factors in FDI decisions.

"Taxes are of course one of the factors you look at when establishing a new site, but the package as a whole will make the decision, not one factor," he said. "When you make a decision to build a factory, you look 20 to 30 years ahead. Incentives are just for the first part of a whole lifetime of a factory."

However, with competition for large and strategically important investments such as that of BMW likely to become even tighter as governments within the region fight for FDI dollars, details such as tax holidays may in the end tip the balance.

"If you have several alternatives that look alike, that have the same quality of land and labour and other criteria, then tax incentives could, of course, be one of the decision making criteria," said Dinner.



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