THE FOUR biggest auditing firms in Slovakia, often referred to as "The Big Four", commented on the current business environment, the transparency of the tax system, and tax reform in a survey conducted by The Slovak Spectator.
1. Will the tax reform simplify the current business environment in Slovakia, particularly the transparency of the tax system?
Deloitte & Touche:The proposed tax reform will not greatly simplify the tax system in Slovakia, nor will it provide more transparency. Simply reducing the number of words in the tax legislation and attempting to simplify the calculation of taxable income will not provide tax transparency.
The positions taxpayers take with respect to certain transactions often depend upon the definition of a single seemingly insignificant word or whether a string of words is connected by the word "and" or the word "or". It is impossible to simplify tax legislation today to such an extent that all taxpayers would become transparent.
It is a competitive market and as soon as one producer of widgets takes a tax position that reduces its tax bill by a million dollars, all other producers of widgets will do the same simply to remain competitive.
The best way towards tax transparency is to address the Slovak tax administration. This is the main area of complaint from most of our clients.
Currently, not all court cases addressing tax issues are public record, not all rulings from the Tax Authority are published, and there is no concept of precedence. So even if this information is published, taxpayers cannot rely upon it. In this environment, taxpayers are subject to the views of their local tax examiner and often times these views are not supported in the law. This, coupled with the draconian penalty regime, puts taxpayers at a disadvantage and this is what motivates fraud. Make court cases and Tax Authority rulings public information and the Tax Authority and the court system will be under scrutiny from the public and the community of tax professionals. Then the law will be interpreted more uniformly and taxpayers will feel that they are all competing on a level playing field.
Ernst & Young: From a short term perspective - let's assume yes, as it will be more simple in certain areas, i.e. it will allow fewer exemptions and fewer alternative treatments. However, as it will be a new law, it will take time for people to get familiar with it. In the long term, as the economic and commercial relationships become more sophisticated and complex, it can be expected that the legislation will expand again, and thus become more complex.
KPMG: One of the objectives of the tax reform is to simplify and clarify the tax system. While this would seem very desirable, in practice this could be difficult to achieve.
One reason is that tax systems around the world inevitably tend to grow in complexity for a number of reasons.
Firstly, the need to incorporate new provisions aimed at dealing with international business (such as transfer pricing rules).
Secondly, to incorporate international agreements - specifically in the case of Slovakia's EU accession.
Thirdly, to eliminate specific tax avoidance opportunities. As noted below, we also see the sheer volume of new legislation as giving rise to practical problems in interpretation of the law.
PricewaterhouseCoopers: We have to look at the tax reform from the point of view of each type of tax and each type of taxpayer. The tax reform should provide simpler income tax rules for legal entities by removing some of the rules and restrictions.
The tax reform will not make it easier to obtain interpretations of unclear issues because the tax reform does not significantly change the process of tax administration.
The income tax rules for individuals should not be simplified significantly under the tax reform. The tax reform should not have a significant impact on transparency in respect of income taxes.
As for value added tax (VAT), the unified 19% VAT rate will simplify the application of the law by avoiding the need to classify goods and services into the higher and lower rate categories. This will provide more transparency by reducing opportunities for tax avoidance. Specific industries and socio-economic groups could suffer from the increase of the lower VAT rate.
The abolition of gift tax and the eventual abolition of real estate transfer tax would make it an easier business environment in Slovakia, as these tax laws are often ambiguous.
2. What do you consider to be the greatest disadvantages and shortcomings of the tax reform?
Deloitte & Touche: As alluded to above, my main concerns and also the concerns of many of our clients, is with tax administration. I do not feel the proposed legislation adequately addresses the problems in this area. Again, until this area is improved, taxpayers will continue to push the system.
Ernst & Young: Although only its application will provide the answer to this question, we believe that the major drawback of the reform is that it is not as radical and complex as it was originally intended to be.
There are still many exemptions, tax non-deductible items, etc. and only very few principal changes (withholding tax, one rate for taxation of individuals). With respect to corporate tax law, it's hard to refer to the changes as 'Tax Reform'.
KPMG: No comments on this subject.
PricewaterhouseCoopers: Overall the tax reform is a positive step in the right direction. The greatest shortcoming of the tax reform is the lack of reform of the tax administration system. In addition, the tax legislation often ties into and makes reference to other legislation, for example the accounting law and the commercial law.
The proposed tax changes are likely to be a step ahead of other laws, i.e. there is no indication the tax law changes will be properly reflected in other legislation.
3. What could cause the greatest problems to firms in implementing the tax reform, or in putting it into practice?
Deloitte & Touche: The changes in the tax law may hit certain businesses harder than others, and perhaps changes in the VAT legislation will require taxpayers to change certain fundamental administrative functions. Other than that I do not anticipate taxpayers having undue difficulty in adapting to the new tax reform.
Ernst & Young: In the area of indirect taxes, it could be the implementation of the new harmonized VAT legislation with its various new reporting and administrative requirements, which will be the crucial element with which businesses will struggle from the beginning, facing a number of practical problems. In the corporate income tax area, it could be the enlarged rules on related parties as well as the application of some other provisions - more time would be needed to become familiar with the Corporate Income Tax Act, due to the changes in its structure.
KPMG: We see the biggest problems occurring due to the sheer volume of laws being passed. In addition to the tax reform package, there are also major changes in accounting law, which will impact the tax position of companies and the tax changes required for EU entry - both VAT and customs and also direct tax.
Tax law cannot deal specifically with all situations and it is likely that there will be many areas of uncertainty and different interpretations of the law, which will need to be investigated and discussed with the authorities.
PricewaterhouseCoopers: The major problem could be lack of time for taxpayers to prepare for the changes, particularly if the tax laws pass through the parliament at the very last moment. Preparing administration and information systems to meet the new tax requirements can be a very time consuming process, as it usually requires consultation with a range of tax, accounting, and IT specialists. The biggest challenge should be implementing and understanding the new VAT laws, many of which must be interpreted in accordance with EU case law.
Deloitte & Touche: Steve Gawronski, Partner in Charge, Tax Department
Ernst & Young: Peter Chrenko, Country managing partner and head of tax services
KPMG: Mark Gibbins, Tax partner
PricewaterhouseCoopers: Todd Bradshaw, Tax Senior Manager
