NOBODY questions the need to occasionally update tax legislation. But tax experts in Slovakia say that the tax laws here are changed too frequently, preventing corporate taxpayers from making accurate forecasts, increasing their administrative burden and signalling low legal certainty affecting the country as a whole.
“I could say, ironically and narrow-sightedly, that the more changes to tax laws, the more demand for the services of tax advisors,” Ladislav Pompura from audit consulting firm Monarex told The Slovak Spectator when asked how he perceives the frequency of changes to Slovakia’s tax-related laws. “Changes in laws usually increase the administrative burden for companies as well as ordinary people and too-frequent changes make financial planning for companies more complicated.”
Bart Waterloos, a partner at VGD - AVOS Bratislava, Renáta Bláhová, a partner at BMB Leitner and Peter Pašek, the head of advisory at Accace, all share the opinion that tax-law changes in Slovakia are too frequent and that they are often adopted hastily.
“Frequent changes are certainly a problem; especially combined with their late adoption and thus the too-short preparation time [which remains],” Waterloos told The Slovak Spectator.
Bláhová added that changes are made without sufficient preparation, at the very last moment and thus to a very low standard, something that she said is confirmed by regular surveys.
“We are at the level of Romania and Bulgaria; maybe only Hungary is in a worse position,” said Bláhová. “The often-changing legislation is a signal of low legal certainty. Especially by the scrapping of the flat tax we have spoiled our image abroad.”
According to Pašek, citing information from his colleagues abroad, other countries in central and eastern Europe typically change their tax laws every two years, on average.
“We understand that the current changes are required to consolidate the public finances, but the number of revisions to individual laws, for example since 2004, indicates that the frequency of some changes in Slovakia is often shorter than one year,” Pašek told The Slovak Spectator adding that he perceives the frequency of changes to income taxes, VAT, tax administration as well as the health and social insurance contributions systems as excessive.
According to Waterloos, it is not only the frequency of the changes that is problematic, but also the postponement of decisions already taken, like the obligation to file tax statements electronically.
Pompura added that, paradoxically, positive changes tend to receive major media coverage despite actually taking place only over years or even decades.
Here he cites changes to the tax administration and electronic communication with the state administration which have been in the pipeline for years but are still not up and running. He said it is sad that the state is unable to keep to its own deadlines in the multi-year process of upgrading to electronic filing, while at the same time requiring businesses to observe tax changes which it publishes in December and which come into effect in January, for instance.
According to tax experts, the high frequency of changes in tax legislation has a negative impact on planning by clients.
“Certainly, it [the frequency] makes long-term planning very complicated,” said Waterloos. “One [must] constantly monitor and review procedures or systems to make sure they remain in line with the new laws and requirements.”
Pompura agrees, adding that while each business entity is naturally exposed to market uncertainty, the frequent changes to regulations imposed on businesses by the state impose additional uncertainty.
“This means that even though a businessperson can estimate the profit he can achieve, he does not have a chance to estimate how much he will pay in taxes and levies, i.e. what will remain as his net profit,” said Pompura. He adds that assumed net yields from dividends, for instance, have been depressed by up to 18 percent over the past two years thanks to tax hikes and the application of health insurance deductions to dividends.
Pašek also sees proposed changes in health insurance rates on dividends as problematic, with a potential impact on companies’ dividend and investment policies. Due to these changes companies might prefer to pay dividends to their owners before the end of 2012 instead of investing the resources into the growth of their company or using them to eliminate the possible negative impacts of the persisting crisis.
According to Bláhová, one of the consequences of excessively frequent changes in the law in Slovakia is that companies are sometimes unwilling or unable to follow the ever-changing tax legislation.
“How should our clients follow-up that they knew, could have known or should have known that a supplier would not pay tax and thus that he becomes jointly liable for the unpaid output VAT of that supplier?,” asks Waterloos. “Following this up, putting in place systems to monitor this will be very complicated.”
When identifying tax legislation perceived by clients as pointlessly complicated and which is making them opt to use tax advisors, Bláhová pointed to changes in VAT legislation coming into force from October 1 that will tighten conditions for claiming exemptions on cross-border supplies, as well as the introduction of liability on the part of buyers for tax not paid by suppliers at a previous level in the transaction chain.
“Failure to meet new conditions for exemption or insufficiently checked suppliers may lead to negative impacts in the form of imposing additional VAT on a significant portion of your turnover as well as criminal prosecution,” said Bláhová, adding that there are no exceptions from these rules because the state is currently not able to combat VAT evasion by other means.
Pompura perceives the complication of tax law as counterproductive for the state, given that the private sector can cope with it and even use it to its benefit, despite there being an associated cost in doing so.
“Companies are forced to spend their money on advisory services and I’m not sure whether the state has enough experts for proper controls at the highest levels,” said Pompura, seeing the current remuneration system in the tax administration, where the average monthly wage is about €850, as a factor.
Pompura believes that the state administration’s switch to electronic communication and curbs on the scope of personal political nominations may help the state most.
But he warns that one thing even more damaging than the complication of the current laws is their ambiguity, noting that even with the best will in the world those reading the law can’t tell what the authors of the legislation wanted to achieve, said Pompura. The business person or the tax advisor then has to analyse the situation and adopt a decision about next steps before the deadline for submission of tax returns.