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EXPERTS SAY CUTTING CORPORATE TAX FROM 40% TO 35% IS NOT ENOUGH TO LURE INVESTMENT

Tax reform package makes tentative cuts

A tax reform package presented by the Ministry of Finance on September 23 proposes to cut both corporate and personal income taxes, and radically lowers the tax burden on small businesses. But economic professionals and labour leaders say the reform gives little incentive to foreign investors to settle in Slovakia, and does not sufficiently compensate Slovak workers for the effects that recent price hikes have had on their wallets.
The draft package contains four items. Corporate tax is set to fall from 40% to 35%, while various tax breaks for foreign investors will be introduced and remain valid through the year 2002.

A tax reform package presented by the Ministry of Finance on September 23 proposes to cut both corporate and personal income taxes, and radically lowers the tax burden on small businesses. But economic professionals and labour leaders say the reform gives little incentive to foreign investors to settle in Slovakia, and does not sufficiently compensate Slovak workers for the effects that recent price hikes have had on their wallets.

The draft package contains four items. Corporate tax is set to fall from 40% to 35%, while various tax breaks for foreign investors will be introduced and remain valid through the year 2002.

The lowest personal income tax bracket, which previously included people making between zero and 60,000 Slovak crowns ($1,430) a year, will be expanded to include those earning up to 90,000 crowns ($2,145) a year. People in this bracket will pay a basic 12% tax rate. Personal income tax rates for higher brackets will also be adjusted slightly downwards.

Perhaps the most significant provision in the draft law is the establishment of a separate income tax policy for self-employed citizens whose annual income does not exceed 1.5 million crowns ($35,700) a year, and who are not employers. Their incomes will be taxed between 2.5% and 3.5% annually.

Few FDI incentives

The draft law falls far short of the expectations of economic experts and the Economy Ministry, which had called for corporate income tax to be halved to 20%. "If Slovakia doesn't significantly decrease the tax burden on the corporate sector, it may completely lose its competitiveness," warned Ján Oravec, director of the Economy Ministry's Strategy, Business Support and Legislation Section.

At 40%, Slovakia has one of the highest corporate income tax rates in central Europe; the Czech Republic offers a 35% tax rate, Poland 32%, Slovenia 23% and Hungary a mere 18%. According to Oravec, Slovakia already lags far behind its neighbours in attracting foreign investment, and must slash its corporate income tax rate if it hopes to catch up.

Martin Barto, a senior economist at state bank SLSP, suggested that the Slovak corporate tax rate be decreased from 40% to 30% in the first phase, and reach 20% in the second. "Slovakia would thus approach the corporate tax rates of other transforming countries," Barto said.

The Finance Ministry has argued that greater cuts in corporate income tax would reduce the state budget income, something the government can't afford if it hopes to meet its stringent fiscal deficit targets. But Barto disagreed with the ministry's logic, saying that cutting corporate income tax would actually increase the amount of money that the state budget receives from the corporate sector.

"High corporate income tax goes hand in hand with a decrease in state budget income, because it reduces the number of profitable companies in the country," he said. "The less profitable companies try to find ways to cheat the state and pay lower taxes, which obviously influences the flow of money into the state budget."

Ivan Chodák, an equity analyst with CA IB Securities, said the draft tax law only proves that the government has no clear conception of tax policy. "It [the draft law] does not make any radical changes, and will only help a little, if at all," Chodák said.

Nor have union leaders welcomed the draft, which proposes to ease the tax burden on Slovakia's lowest income groups. "Do you know what this tax cut means [for citizens]?" asked Ivan Saktor, boss of the KOZ trade union umbrella group. "It will put 124 Slovak crowns [$3] in the pockets of the average person. That's [Finance Minister Brigita] Schmögnerová's proposal. We want 300 crowns."

Small business support

Chodák argued that the most important item in the draft law was the establishment of a separate income tax policy for self-employed persons, who will be issued special 'business licences' which they must prepay at the beginning of each tax period, and which replace income tax.

"The issuing of licences is a typical way of reducing unemployment, because it offers special incentives, such as tax holidays, for unemployed people to find work," Chodák said. According to him, the license scheme was ideal for small businessmen with little start-up capital and small overhead. "If a businessman doesn't have an office or any equipment, and therefore little to write off, then he should definitely try it," Chodák said. "If I was for example a freelancer working for a newspaper, I would definitely go for it."

Still, there are some who think that the license provision does not go far enough in encouraging small businesses. Pavol Prokopovič, a deputy with the ruling SDK party and chairman of the Slovak Union of Businessmen, argued that companies with up to four employees should have been made eligible to buy licenses instead of pay taxes.

Prokopovič is the author of a law on small business that closely corresponds with new income tax law. He says that during the preparation of the draft tax law, he lobbied Finance Ministry officials, Economy Minister Ľudovít Černák and Deputy Prime Minister Ivan Mikloš to get his suggestions incorporated into the tax law. Despite assurances his ideas would be adopted, Prokopovič alleges, the draft law's authors ignored his suggestions.

"I think this arrogant approach by the Finance Ministry people is something that hurts small businessmen. Officials at the ministry have been fighting small businessmen for a long time," Prokopovič said.

Despite repeated requests for information, Finance Ministry officials refused an interview with The Slovak Spectator, saying that they could not provide journalists with any information on laws in preparation.

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