LONGER tax holidays, more transparent rules, a level playing field for foreign and domestic investors, and a friendlier approach to small and medium-sized businesses could all soon be employed to lure new investors to less-developed, high-unemployment regions of Slovakia. Proposed changes to the legislation on investment stimuli also aim to make state assistance available to a wider group of investors.
A transparent and understandable system for providing investment assistance will contribute to shaping a credible investment environment for domestic and foreign investors, said the Slovak Economy Ministry in its draft. The ministry, led by Juraj Miškov, a nominee of the Freedom and Solidarity (SaS) party, also aspires to increase higher added value in the country’s industrial sectors as well as transfer of the latest know-how into practice.
Observers welcomed the planned changes, but pointed out that in order to attract investors to certain regions, the state will have to ensure a favourable business environment overall. The statewill never really be able to give high enough subsidies to stimulate investments in less developed regions unless conditions for doing business there are favourable, Markus Halt, spokesman for the German-Slovak Chamber of Industry and Commerce, told The Slovak Spectator.
Nevertheless, Halt finds the idea of extending tax holidays a reasonable move.
“The current practice of granting tax holidays for a duration of five years is not very attractive to foreign investors in comparison with direct subsidies,” Halt said. “Generally, an investment is connected with losses in the initial phase, which already reduces the tax burden. This effectively means there are only three years of tax holidays.”
According to Halt, if the tax holidays are now prolonged to ten years, approximately eight years of effective tax holidays is something investors could really benefit from.
The Ministry of Finance has meanwhile confirmed that it considers tax benefits the least burdensome form of investment assistance in terms of the effect on the public finances. However, the ministry will provide a definite stance only after a full review, the Sme daily wrote.
In terms of the rules for providing investment assistance, the draft differentiates based on the sector to which the investment is destined and the unemployment rate of the region in which it will take place, while preserving the principle of higher assistance for more sophisticated investment initiatives and those with higher added value in less developed regions.
For example, in districts where the unemployment rate is lower than Slovakia’s average unemployment rate for investments falling within the category of industrial production the state will not provide investment stimuli in the form of subsidies for procuring long-term material or non-material property, or a subsidy per created job, according to the ministry.
Halt said that regional distribution of assistance based on the recorded unemployment rate is not flexible enough.
“If an investor settles in a district with average unemployment but next to a district with high unemployment the investment aid is measured according to the lower rate although the investment also provides employment opportunities to the neighbouring district,” Halt said.
“The law on investment support should take this factor more into consideration,” he added.
The Economy Ministry also plans to extend stimuli for small and medium-sized businesses in particular, by halving the minimum investment required to attract state stimuli.
“This initiative is to be appreciated as the current system disadvantages small and medium-sized companies,” Halt said. “In particular, medium-sized producers can be responsible for thousands of employees by giving business to suppliers but may be too small themselves to qualify for investment aid. If the scheme of investment support also aids these entrepreneurs it may effectively enlarge their willingness to invest further.”
The ministry also suggests that direct subsidies are likely to be paid in the case of investments of strategic importance.
As for the type of investment that investors appreciate the most, Halt says that they prefer direct subsidies.
“An investment generates high costs at the beginning but tax holidays come into effect only when it has already begun to be viable,” Halt said. “Put simply: cash now is better than lower taxes in the future.”
As for state aid, Halt also pointed out that the current draft of the law on investment support gives applicants more information about the terms for obtaining support and thus improves the transparency of the whole process.
“This was one of the main disadvantages of the old scheme,” Halt said.
Nevertheless, Halt also said that the poor state of infrastructure in eastern Slovakia has consistently undermined the region’s investment potential.
“Its development should be a top priority,” Halt said.
Furthermore, investors need skilled labour to carry out their plans, which is often hard to find, said Halt.
The Slovak educational system is not noted for meeting investors’ needs and filling the gap, he added.
“A lack of enforcement of the law and corruption are other known barriers to investment,” Halt told The Slovak Spectator. “Good economic policy can prove an effective tool for attracting investors.”
If passed by parliament on schedule, the proposed law will come into force as of June 1.
28. Feb 2011 at 0:00 | Beata Balogová