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Hope springs anew for SMEs as new licence scheme debated

Despite the fact that the current government is orienting its policy towards attracting foreign businesses with two incentive packages already approved this year, small and medium-sized enterprises (SMEs) are still struggling to grow and are looking to a new amendment to throw them a lifeline.
Several members of parliament, led by Pavol Prokopovič of the ruling SDK party and chairman of the Slovak Union of Businessmen, are preparing an amendment to the income tax law which would boost the SME business sector by allowing firms to purchase inexpensive tax 'licences' instead of paying the going annual corporate tax rate.
The main aim of Prokopovič's amendment, which passed its first reading on May 10 despite several objections raised by members of the ruling coalition SDĽ (Democratic Left Party), is to increase the number of existing businesses that are allowed to buy the licence, and thereby support the development of the business sector.

Despite the fact that the current government is orienting its policy towards attracting foreign businesses with two incentive packages already approved this year, small and medium-sized enterprises (SMEs) are still struggling to grow and are looking to a new amendment to throw them a lifeline.

Several members of parliament, led by Pavol Prokopovič of the ruling SDK party and chairman of the Slovak Union of Businessmen, are preparing an amendment to the income tax law which would boost the SME business sector by allowing firms to purchase inexpensive tax 'licences' instead of paying the going annual corporate tax rate.

The main aim of Prokopovič's amendment, which passed its first reading on May 10 despite several objections raised by members of the ruling coalition SDĽ (Democratic Left Party), is to increase the number of existing businesses that are allowed to buy the licence, and thereby support the development of the business sector.

But despite Prokopovič's assertion that his amendment will be passed by parliament in one month, some government officials, especially those at the Finance Ministry, have expressed deep-seated reservations to the plan.

The licence scheme was originally drafted in late fall last year, and was to have allowed small and medium-sized businessmen with annual incomes under 1.5 million Slovak crowns ($35,000) to pre-pay their fiscal year taxes at rates of between 1.5% and 2.5% at the beginning of every year; corporate tax at the time stood at 40%, although it was eventually lowered to 29%, effective 2001.

The Finance Ministry hailed the licence scheme as one of the most important developments for the business sector in the year 2000. But by the time the plan was actually approved in December, the ministry had severely restricted the number of firms eligible to apply, turning the development impulse into a fiasco with only 1,020 out of 740,261 registered small business people buying the licence from January to April 2000.

The ministry's conservative approach to the new tax policy has been criticised by self-employed people who were not eligible to apply for the licence. The criticism has now motivated Prokopovič to try again, with the main aim of his new amendment to the income tax law being to increase the number of businesses that can apply for the licence to up to 30% of all SMEs in Slovakia. "When businessmen are rich, a country will be rich as well. The business sector has been really harmed by not allowing more businessmen to buy the licence," Prokopovič said.

However, officials at the Finance Ministry are again saying that Prokopovič's proposal will have to be carefully scrutinised, claiming the amendment is poorly formulated and contains some crucial points that could be detrimental to the country's present tax system.

According to Peter Švec, spokesman for Finance Minister Brigita Schmögnerová, Prokopovič's bill contains a list of professions that would be ineligible to buy the licence, rather than listing types of firms that qualify, as the current law does - an example of "negative exemption," Švec said, that encouraged tax evasion by allowing self-employed people to define their professions on licence applications in such a way as to avoid being barred from the tax break.

"If the proposal listed only those professions that can buy the licence, then other professions, especially self-employed people, wouldn't be allowed to plug into this list. However, the current [Prokopovič] proposal is quite risky for the tax system, and we might finally arrive at the point where it is a mish-mash," Švec said.

The Finance Ministry is also unhappy that Prokopovič's proposal would render relatively lucrative professions such as auditors, doctors and court executors eligible for the tax break, saying that the bill does not discriminate logically between those who do and do not qualify for the license scheme.

Counter proposal

While on the one hand criticising Prokopovič's plan, Schmögnerová's ministry has also been planning its own amendment to the income tax law. "In our proposal we wanted to increase the number of businesses that can buy the licence by six more professions, mostly focusing on skilled labour, similar to that in Hungary," Švec said.

But with a senior government body deciding to give Prokopovič's proposal priority, the ministry has been forced to shelve its own plan. Švec explained that in order to clarify some issues in the MP's bill, minister Schmögnerová will meet with deputies to make clear exactly which parts of the proposal are not acceptable for the Finance Ministry. "We are expecting some cooperation with Mr. Prokopovič on this, because the Finance Ministry is in charge of the tax laws," Švec said.

However, for Prokopovič, the issue is clear. "I think that the Finance Ministry is worried that this amendment might hurt the state budget. But the opposite is true. So far we have been hurting only small businessmen by not giving most of them the chance to buy the licence. By giving them more incentives we can only help the budget," Prokopovič said.

Švec rejected the claims. "Revenues from self-employed persons last year amounted to only 0.5 billion Slovak crowns ($10.6 million) which certainly isn't a primary risk for the state budget. Our primary intention is to prevent negative elements penetrating the tax system of this country," the advisor said.

Economic analysts are also calling for further incentives for self-employed people, but say that these must be conditionied by cuts in state budget expenditures.

According to Ján Tóth, an analyst with ING Barings, in terms of the budget expenditures nothing has changed since December last year. "It is time for the government to come up with cuts in expenditures. Moreover, development projects like this amendment to the income tax law have to be balanced with some restrictions on the expenditures side," Tóth said.

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