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BUSINESS FOCUS - TAX AUDIT & FINANCE&LTBR>TAX REFORM LESS ATTRACTIVE FOR INDIVIDUALS WITH LOWER INCOMES

More space for investments

FOREIGN investors and business circles should consider the lower income tax rate and the absence of taxation on dividends and profit shares the most attractive changes in Slovakia's prepared tax reform.
According to analysts, the new tax legislation will be more beneficial to corporations than to individuals with lower incomes.
For corporate entities, the tax reform will lower the tax rate to 19 percent. For individuals, the flat rate will, on one hand, abolish the progressive taxation of their income, but, on the other hand, unify the value added tax (VAT) rate at 19 percent, making goods more expensive in most cases.

FOREIGN investors and business circles should consider the lower income tax rate and the absence of taxation on dividends and profit shares the most attractive changes in Slovakia's prepared tax reform.

According to analysts, the new tax legislation will be more beneficial to corporations than to individuals with lower incomes.

For corporate entities, the tax reform will lower the tax rate to 19 percent. For individuals, the flat rate will, on one hand, abolish the progressive taxation of their income, but, on the other hand, unify the value added tax (VAT) rate at 19 percent, making goods more expensive in most cases.

"The tax system switches the main tax burden from production onto consumption. In production, a bigger space for the accumulation of capital and a larger means for investments could thus be created," underlined Michal Džadžovský, analyst with the private rating agency Slovenská ratingová agentúra (S.R.A.).

He continued, "the decreased tax rate will definitely support the business community. Slovakia is already seen as a positive example of tax reform. Our reforms have inspired other countries to consider revising their tax systems.

"The flat tax rate, together with the abolishment of taxation on dividends and profit shares should be alluring for foreign investors."

There have been a number of discussions about whether the tax rate should be lower than the proposed 19 percent. A 15-percent rate, which some analysts consider optimal, had been intensely discussed. Other analysts, however, claim that the government has to be watchful, as such a rate would be risky with respect to public finances.

"A lower tax rate would probably fill up the state coffers, but because of the Maastricht criteria [for adopting the euro], Slovakia cannot afford such a risk," explained Róbert Prega from Tatra banka.

Marek Gábriš, an analyst with Československá obchodná banka (ČSOB), has not ruled out the chance of further income tax cuts.

"If a positive trend [in public finances] is confirmed, the finance ministry might prepare a bigger income tax cut," Gábriš said.

As a whole, the tax reform will not significantly ease the tax burden, but analysts agree that it will simplify the process and make the country's tax system more transparent.

"A simpler tax system will motivate taxed entities to avoid tax evasions, while the transparency of the system is sometimes more important than a tax rate cut.

"We remember Forbes, who has compared the US tax laws to a book thicker than the Bible. In such cases, people become discouraged when trying to orient themselves in the system," Gábriš explained.

Simplifying the tax legislation will eliminate some negative factors, such as vague interpretation of tax laws, that could lead to confrontation between the taxpayers and tax authorities or the tax offices themselves.

"[The present existence of] various interpretations of the law can lead to the companies moving under different tax offices that might attach a more convenient interpretation to these laws," noted Džadžovský.

Prega, however, added that whether or not the tax system really becomes more transparent will be seen later, after its implementation.

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