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CORPORATE TAX SLASHED FROM 40% FOR 30% AS OF JANUARY 1, 2000

Cabinet approves 2000 budget

Under pressure to approve the state budget for 2000 in time for the necessary parliamentary approval, the Slovak cabinet finally passed a draft version of the bill at its November 11 meeting.
The draft budget sets a deficit of 18 billion Slovak crowns for next year, or 2% of gross domestic product (GDP). Revenues are expected to be 183.6 billion crowns, and expenditures are set at 201.6 billion crowns.
As part of the budget package, cabinet also passed an amendment to the income tax act lowering corporate tax from the current 40% to 30%, effective January 1, 2000. This amendment also has to be approved by parliament.


Finance Minister Brigita Schmögnerová defends last year's budget in parliament. Analysts say she may have more reason to celebrate in 2000.
photo: Vladimír Hák

Under pressure to approve the state budget for 2000 in time for the necessary parliamentary approval, the Slovak cabinet finally passed a draft version of the bill at its November 11 meeting.

The draft budget sets a deficit of 18 billion Slovak crowns for next year, or 2% of gross domestic product (GDP). Revenues are expected to be 183.6 billion crowns, and expenditures are set at 201.6 billion crowns.

As part of the budget package, cabinet also passed an amendment to the income tax act lowering corporate tax from the current 40% to 30%, effective January 1, 2000. This amendment also has to be approved by parliament.

Finance Minister Brigita Schmögnerová expressed guarded optimism after the cabinet session that the budget targets would be met. "We don't expect risks on the income side, but the exercise of state guarantees [on loans held by state-owned companies] represents a risk on the expenditure side," she told journalists.

The budget includes, for the first time, a so-called 'memorandum chapter,' where expected revenues from privatisation would be stored. Although the government has not explained the purpose of the memorandum chapter, a Bratislava analyst who asked not to be identified said that the new addition to the budget would serve as a place where the government could deposit - but not use - the approximately 25 billion crowns it expected to receive from privatisation sales in 2000.

The International Monetary Fund had recommended in its October mission that the government use these revenues to pay off its debts, rather than treat them as budget income.

General approval

Domestic economic analysts generally said they approved of the budget, especially the cut in corporate tax. At 30%, Slovakia's corporate tax burden will make the country more competitive in the fight to attract foreign direct investment (FDI) with other central European nations. Poland currently has a 34% corporate tax, but wants to cut this to 22% in 2004. The Czech Republic is at 35%, and means to lower its rate to 32% effective January 1 next year. Only Hungary is far ahead, with 18%.

Kamil Katrenič, an equity analyst at Tatra Banka, said that "this is a positive budget, particularly from the point of view of FDI." Foreign investors, he said, had been put off by Slovakia's 40% rate; "this is a good psychological move on the part of the government," he said.

Katernič also said that state budget revenues might actually increase as a result of the tax cut, since many companies had simply refused to pay the 40% burden in the past.

The Slovak Tax Office revealed on November 10 that only 35.2% of Slovak companies had been paying taxes in 1999.

The tax cut may also smooth hard feelings that foreign companies were getting preferential tax treatment from the government because of an investment promotion package that the cabinet approved last April. "This is a more egalitarian way to attract FDI, and it is much less politically controversial," said Matthew Vogel, a senior economist at Merrill Lynch investment bank in London. "It also sends a good signal to the foreign business community that the government is serious about promoting FDI."

Budget glitter isn't all gold

In the end, however, the corporate tax cut may not actually benefit companies doing business in Slovakia as much as it would seem. In order to secure the 30% figure, Deputy Prime Minister for Economy Ivan Mikloš had to accept a compromise from Finance Minister Brigita Schmögnerová - that businesses would not be allowed to write off as many expenses per year as previously proposed.

Schmögnerová had suggested in October that corporate tax be cut to 35%, but that the amortization period for business expense write-offs be shortened. Ivan Chodák, an equity analyst for CA IB Securities, explained that this would mean that if a company bought a car for business purposes, it could write off a greater percentage of the purchase price in each of the following tax years.

In exchange for the 30% rate, however, Schmögnerová said that the tax amortization periods would not be shortened as planned. "This may mean, in the end, that corporations will pay about as much tax at the 30% rate as they would have under the 35% proposal," Chodák said.

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