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Tax incentives back to drawing board

Just five months after being voted into law, it's back to the drawing board for tax incentive legislation. Although the current law only went into effect on January 1, 2000, after being revamped from an April 1999 draft, the pro-investment package is undergoing yet another face-lift and is slated to be submitted to the government in the week beginning May 8.
The latest version of the law has been hailed as the most investor-friendly to date, presenting improved incentives on the most criticised issues of the present law: stipulations on initial investment, minimum requirements on exports, and tax credit periods. Additional changes include governmental subsidies for the creation of new jobs, consideration for domestic and already-established firms, and the creation of a new consolidated governmental department dealing specifically with foreign investors and investment.
Both the government and analysts were optimistic about the changes.


Proposed new investment incentives are hoped to bring the crowns rolling into the government's coffers and boost the domestic economy.
photo: Vladimír Hák

Just five months after being voted into law, it's back to the drawing board for tax incentive legislation. Although the current law only went into effect on January 1, 2000, after being revamped from an April 1999 draft, the pro-investment package is undergoing yet another face-lift and is slated to be submitted to the government in the week beginning May 8.

The latest version of the law has been hailed as the most investor-friendly to date, presenting improved incentives on the most criticised issues of the present law: stipulations on initial investment, minimum requirements on exports, and tax credit periods. Additional changes include governmental subsidies for the creation of new jobs, consideration for domestic and already-established firms, and the creation of a new consolidated governmental department dealing specifically with foreign investors and investment.

Both the government and analysts were optimistic about the changes.

Under present legislation, eligible firms receive a 100% rebate on payable taxes for five years, while the new law would extend the holiday to 10 years. The revamped version would also give monthly subsidies to the tune of 10,000 Slovak crowns for each job created for a person until then unemployed, and would provide land incentives for qualifying companies.

Unchanged would be the amount of the initial investment needed to qualify for the holiday, according to which firms must invest a minimum of 5 million euros in areas where the unemployment rate is less than 15%. In regions where unemployment exceeds 15%, the minimum requirement would be reduced to 2.5 million euros to qualify.

Ján Jursa, plenipotentiary for the government for negotiations with the Organisation for Economic Co-operation and Development (OECD), helped draw up the new draft. Jursa said that by the end of June the draft would lead to proposals of new government amendments, and that the new legislation would take effect some time in the beginning of the fourth quarter, allowing companies established this year to qualify for the tax holiday.

One of the biggest concerns addressed in the new draft revolved around a requirement that 60% of goods produced must be exported in order to qualify for the tax holiday. This stipulation automatically ruled out investors looking to supply domestic contractors. The proposed legislation would impose no such export limits.

Another sticking point in the old draft was that already-established companies could not apply for the holiday on expansion projects.

"The new law will delegate power to the government to amend the legislation so that other investments will qualify for the holiday, which includes the expansion of existing foreign investment," Jursa said. "It would be case by case, but there will be clear criteria that investment must comply with."

Renata Blahová, lead tax advisor with BMB partners, a Bratislava-based tax advisory firm, agreed that including expansion projects under the tax holiday umbrella was key to attracting prospective investment. "The new law seems to be less stringent. What I really find useful is that they are losing the re-investment criteria, which I think caused a lot of problems for many investors. Basically, most of the changes are positive."

Swedish furniture manufacturer Swedwood echoed the sentiments of many businesses that would be affected by the new legislation. Because the law is still in the works, little is known in the industry and no decisions on future company strategy were being based on what was proposed.

"I have heard there were some planned changes to the tax law, but I am not too familiar with them. We would not really concern ourselves with them until the changes are put into practice," said Per Riese, administration manager for Swedwood, which is currently expanding its operations in the western Slovak town of Malacky.

Organisational influences

Another dramatic change with the new proposal would be the creation of the Slovak Agency for Development of Investments and Trade (SARIO), to make a more comprehensive entity to deal with foreign business. SARIO would absorb the duties of the SNAZIR foreign trade organisation, which now stands as Slovakia's main body dealing with foreign direct investment.

Presently, the responsibilities of SNAZIR concentrate on attracting and assisting foreign direct investment. Under SARIO, the responsibilities would expand to include that of export issues.

"We would be consolidating financial sources and concentrating on marketing activities and actively finding foreign partners for trade and for investment. We will co-ordinate all active marketing, such as fairs, missions, mailings and promotion in Europe, the USA and Canada," said Naďa Haberová, deputy secretary general of SNAZIR.

Other organisational implications of the new legislation law are wrapped around working in accord with the Organisation for Economic Co-operation and Development (OECD). The law's compliance to the rules set down by the OECD was integral to its development, Jursa said, although he downplayed Slovakia's co-operation with the organisation itself.

"The OECD has a specific declaration for investment dealing with incentives, where a member country may ask for consultation in the case that a specific incentive in the area of foreign investment may cause an inconvenience for [other] member countries. But, primarily, we are not obliged to go to the OECD to decide or discuss any policy measures," he said, adding that the OECD's role is mainly that of being an arbitrator that decides whether incentives would cause any particular problems for other member countries.

One part of the whole

Although all involved agree the new law is a step in the right direction, the general sentiment remained that this was only a part of improving the business environment in Slovakia, which would be the ultimate factor in furthering investment.

Blahová mentioned such determinants as social insurance contributions, taxation of employees, value added tax, the image of a country and political and economic stability as just a few of the factors that worked into the whole equation for investors. There are still overly-stringent conditions in other areas, she said, such as in deductions for assets.

Haberová agreed, stating that SARIO played a minor role in the grand scheme. "In order to significantly increase foreign investment into Slovakia, we need to adopt a new environment for the investors, new incentives. The institution of SARIO is only one part of the whole. We have to solve this problem with a complex strategy and creating this agency is only a small part of this."

Last month Austrian investors stressed that the stability of the business environment was paramount to attracting foreign investment - something that dented the hopes of the government that its much-vaunted tax incentives scheme was not the high priority for potential investors it had believed.

Jaroslav Ružička, president of the Austrian-Slovak Chamber of Commerce, told the Slovak Spectator at the time: "Many companies see the paradise of tax holidays and the like, but they forget that the tax holiday is only one of many factors in the whole business environment attracting foreign investors."

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