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Tax licence scheme widened

In an attempt to boost a flagging small- and medium-sized enterprise sector, parliament September 20 broadened the list of professionals able to qualify for independent business licences, and thus for greatly reduced tax rates. However, the change, cited by the government as one of the most important impulses for business sector development in the year 2000, had been heavily delayed by Finance Ministry intransigence.
The amendment, which will take effect as of January 1, 2001, allows self-employed people and small and medium-sized enterprises (SMEs) to purchase inexpensive tax 'licences' under which they are allowed to pay a lower amount of tax than the going annual corporate tax rate of 29%.
The standard corporate tax rate has in the past discouraged the setting up of small businesses, while dense and often confusing tax legislation has put some firms which were unable to pay expensive tax advisors and accountants out of business.

In an attempt to boost a flagging small- and medium-sized enterprise sector, parliament September 20 broadened the list of professionals able to qualify for independent business licences, and thus for greatly reduced tax rates. However, the change, cited by the government as one of the most important impulses for business sector development in the year 2000, had been heavily delayed by Finance Ministry intransigence.

The amendment, which will take effect as of January 1, 2001, allows self-employed people and small and medium-sized enterprises (SMEs) to purchase inexpensive tax 'licences' under which they are allowed to pay a lower amount of tax than the going annual corporate tax rate of 29%.

The standard corporate tax rate has in the past discouraged the setting up of small businesses, while dense and often confusing tax legislation has put some firms which were unable to pay expensive tax advisors and accountants out of business.

But now, if they buy the licences, SMEs will no longer be obliged to stick to the letter of tax law and declare their income at the end of the tax year in March. Instead, skilled self-employed labourers such as electricians, plumbers and carpenters, as well as SME's with annual turnover under 1.5 million Slovak crowns [$35, 000], will be allowed to prepay a small fraction of the going tax burden at the start of each year.

"I think that this amendment will encourage those SMEs which are afraid of current tax legislation to buy licences and do their jobs without having to worry too much about taxes and rules which they would normally have to stick to," said author of the legislation and head of the Slovak Union of Businessmen (UZPS) Pavol Prokopovič.

The broadened licence scheme allows 140,000 out of 270,000 registered small and medium-sized businessmen to prepay their tax dues at rates of between 1.5% and 2.5% at the beginning of every year. The minimum fee for the licence is 4,000 crowns and the maximum 37,000 crowns depending on the revenues of the enterprise or individual holding the licence.

Analysts have welcomed the widened availability of the licences. Tatra banka's Michal Kustra said that the small and medium-sized enterprise sector should be given as much support as possible by the government because its growth should help in cutting the country's troubling unemployment rate of 17.4%.

"The SME sector is one of the key sectors which can boost employment in Slovakia," he said. "Many people who would buy the licence are unemployed right now, and the licence would stimulate a lot of these people to try and run businesses."

The amendment has also been welcomed by many smaller businessmen who were left disappointed at the start of the year after an earlier amendment proposed by Prokopovič last fall was pared down dramatically by the Finance Ministry, with the number of professions eligible to obtain the licence severely restricted.

"I was looking into the possibility of buying this licence, but when I found out [at the start of the year] that I couldn't buy it I simply forgot about it. Now I will seriously consider it again," said Peter Tóth, head of a small language school in Bratislava.

Tóth added that the taxes that he paid were high, even after writing off items for tax purposes, and that the licence would save him both money and additional paperwork. "If the fees for the licence are as they [the authors of the amendment] say, then it will definitely help my business," he said.

It took Prokopovič almost nine months of hard negotiating with the Finance Ministry to succeed in pushing the legislation through parliament. The ministry claimed that the amendment was poorly formulated and needed to be thoroughly discussed.

The Finance Ministry eventually managed to incorporate some of its proposals into Prokopovič's amendment and gave up further work on a separate amendment to the licence scheme which it had been preparing. "We made sure that we incorporated all changes that we felt were crucial for the legislation to correspond with the tax system in Slovakia. We respect this legislation and have no criticism of it," said Jozef Mach, spokesman for the ministry.

Both Prokopovič and the ministry were forced to give ground in finally getting the law into parliament. The Finance Ministry accepted a crucial part of Prokopovič's proposal, which stressed that the bill contain a list of professions that would be ineligible to buy the licence rather than listing types of firms that can qualify as the existing law does - a process called "negative exemption". This, the ministry had originally argued, would encourage many self-employed people who were currently ineligible to buy the licence to 'creatively' re-define their professions in such a way that they would become eligible to buy the new licence, thus depriving the state of valuable tax revenue.

Prokopovič, for his part, relented on his insistence that the amendment admit professions like medical doctors, vets and craftsmen. According to the ministry, these professions, especially doctors, are lucrative enough not to need an opportunity to buy the licence and avoid taxes. Bailiffs, lawyers and almost all foreigners are also forbidden to apply.

"For me, there is no difference between a doctor and any other small businessman, but the authors of the amendment and the Finance Ministry decided to make a compromise. We also saw that [Finance] Minister [Brigita] Schmögnerová was willing to support most of our proposals, so we accepted her changes," Prokopovič said.

He added that the Finance Minister had ultimately been persuaded of the economic benefits of widening the licences' availability. "I met with the Finance Minister many times and succeeded in persuading her of the positive influence of the legislation on the small and medium-sized business sector as well as the state budget itself," Prokopovič said.

He explained that with several SMEs already writing off many services and company expenses, the average tax paid by small businesses under the current tax system stands at 3,000 crowns per year, while the lowest cost for a licence is 4,000 crowns. "So, there is nothing to lose - the budget can only gain," he added.

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