I would like to respond to the article "Government defends shifting tax breaks" (By Miroslav Karpaty, Vol 8 No 30, August 12-18). There is no doubt that Slovakia has to harmonise its law with European Commission standards if it wants to enter to the European Union. However, recent amendments to the Slovak Income Tax Law changing the rules for tax holidays, ostensibly to harmonise them with EC norms, has drawn strong reactions from investors and specialists, as the way these rules were changed is very questionable.
Under these amendments new rules were introduced under which tax holidays for investors are deemed a form of indirect state aid. Businesses claiming tax holidays henceforth will have to submit an application that has to be approved by several state institutions. Unlike the previous rules, the legal entitlement to a tax holiday is not automatic. Thus, even if a business meets additional requirements to get a tax holiday, such as stricter investment conditions, state representatives still have the right not to approve the tax holiday.
Furthermore, according to the old rules, an investor was entitled to a 100 per cent reduction of taxes for five years and a 50 per cent reduction of taxes for a further five years. Now, according to the new rules, the size of the tax reduction will be limited according to the State Aid Law.
For these reasons I cannot agree with the statement of Finance Minister František Hajnovič that "an unimportant change has been introduced" to the tax holidays, or with the statement of Willy Siegl, the European Commission's pre-accession adviser with the Slovak State Aid Office, that "there is no change whatsoever".
EC law, similar to Slovak law, is based on the principles of legal certainty and non-retroactivity. Under these principles, individuals or companies are aware of their rights and duties. If the rules change, they can be sure that the new rules do not apply to their past duties, and that they will never be punished for following the old rules that were valid at the time. Furthermore, Slovakia has assured its investors that it will protect their investments and create a favourable environment for investing while the country enters the EU.
Slovakia's decision to introduce tax holidays only for foreign investors was a questionable one. However, it should not now change these rules, based on which foreign businesses have already made investment decisions. This is simply not done anywhere in the civilised world, which included both Slovakia and the EU.
In addition, the state officials who prepared the law relating to the tax holidays certainly knew of Slovakia's ambition to enter to the EU. I simply don't understand why investors following Slovak tax law should be punished for the 'mistakes' of these officials.
Given the above, foreign investors who have invested substantial money into Slovak companies in the past with the expectation that these companies will automatically get 10-year tax holidays under certain rules may now feel that Slovakia has cheated them.
When two parties agree on some rules, they should follow them. If one side later wants to change the rules, the other side should either agree, or should receive compensation from the former. I would thus expect Slovakia to either follow the rules under which investors have already put their money into Slovak companies, or offer them compensation for having changed these rules.
Former Finance Minister Brigita Schmögnerová said something of this sort one year ago, that if the Slovak government followed the requirements of the European Commission, it would risk claims from investors for damages. In Schmögnerová's opinion, this would put a great burden on the state budget.
Siegl, on the other hand, said: "Investors, and particularly foreign investors, have the opportunity to receive tax holidays as in past years. The change was actually one sentence, and this sentence was not even a change of the system, it was only for clarification." The tax authorities are now using Siegl's argument and forcing all companies that applied for tax holidays in the past to follow State Aid Law rules.
I cannot agree, either with Siegl's statement or with the approach of the tax authorities. The first tax holidays, which are still valid, were introduced in 2000 (under section 35 of the Income Tax Law). The second tax holidays were introduced with effect from January 1, 2001 (under section 35a of the Income Tax Law). The amendment to the State Aid Law, under which tax holidays are deemed a form of an indirect state aid, has been valid since November 1, 2001. This proves that the Income Tax Law and the State Aid Law were treated as two separate and independent laws. This changed on January 1, 2002, when tax holidays under section 35a of the Income Tax Law were connected to the State Aid Law's provisions.
In addition, the provisions of both laws are different and sometimes contradictory. For example, state aid can be provided for the purpose of developing regions, educating employees, supporting employment, research and development, environment, small and medium entrepreneurs, to rescue and re-structure businesses, to support the steel, shipbuilding and automobile industries and the production of synthetic fibres.
However, the Income Tax Law sets different requirements for how to use the taxes saved. Thus, the provisions of both laws could not apply together unless they were "bridged" via amendments to the Income Tax Law.
My opinion is also supported by Act No. 472/2002 Coll., under which the State Aid Law condition relates only to those businesses that incur profits and apply for tax holidays for 2002 for the first time. This provision is very clear and does not leave room for any other interpretation.
Schmögnerová also noted that tax holidays provided under the Income Tax Law are part of Slovak economic policy, and that no State Aid Law provisions should apply.
Despite these facts, the tax authorities are calling on taxpayers that had taxable profits subject to tax holidays before January 1, 2002, and forcing them to submit applications to obtain state aid, as well as to provide statements that they will also meet the conditions set in the State Aid Law.
I think that the tax authorities' approach is illegal, as they are not following the Slovak Constitution, under which Slovak state institutions have to act within the scope of their powers stipulated by law.
In addition, if the state aid rules were applicable to tax holidays in the past, why did the tax authorities start asking taxpayers to submit applications according to State Aid Law only now?
Siegl said that the new rules are an additional benefit for investors, as they can now be sure that they meet EC criteria for state aid. He should probably discuss this 'benefit' with investors themselves. He might discover they see it in an entirely different light.