WHILE laws which increase income taxes and reverse labour legislation are regarded as problematic, with a risk of slowing Slovakia’s economy down, there are other laws perceived as having a negative impact. However, sometimes it is the frequency of the changes, rather than the changes themselves, which is regarded as the main problem.
The Slovak Spectator spoke with Přemysl Marek from Peterka & Partners; Daniel Futej from Futej & Partners; Martin Magál and Juraj Gyárfáš from Allen & Overy; Tomáš Rybár from Čechová and Partners; and Peter Šuba from Havel, Holásek & Partners about the problematic legislation and laws ripe for amending.
TSS: Which legislative changes or new laws adopted in 2012 do you consider controversial or problematic and why?
Přemysl Marek (PM): We think that the most problematic for the general economy from a long-term perspective is the dismantling, following a recent amendment to the Income Taxes Act, of the flat tax system, which was considered one of the biggest strengths and competitive advantages of the Slovak economy and was widely acknowledged both at home and abroad for its simplicity and transparency. We also think the re-establishment of progressive taxation for certain tax payers is both problematic and a step backwards. Finally, establishing new levies in selected areas, such as on energy companies, utility providers, insurers, health services and so on, does not represent a systematic approach to consolidating public finances, but rather a stealth tax to be shifted to final consumers. To be fair, it is worth noting that similar legislation was adopted by the previous government of Iveta Radičová regarding banks.
We also think that further reducing flexibility in employment relationships, increasing the costs connected with terminating employment, and reinforcing the unions during the current economic slowdown are also improper.
Regarding the second pension-saving pillar, we see its systematic and continuous weakening, and too-frequent changes to the system, as problematic.
Daniel Futej (DF): Certain changes in the Commercial Code will create some inflexibility in business relations. Until the amendment came into effect, a change of ownership interest between shareholders was effective as of the date of signing of the share transfer documentation. Pursuant to the changes in the amendment the new majority member of a limited liability company will not be able to participate in a vote at general meetings until the changes are registered in the commercial registry.
Effective from October 2012, voluntary VAT registration is more stringent for companies wishing to be registered as VAT payers – they must now provide security by depositing funds into the accounts of the tax authorities, or by providing the bank a guarantee. The tax office will determine the amount of the security via the decision it will issue after the registration application has been submitted. A minimum security amount of €1,000 is laid down and may not exceed €500,000.
This legislation has in fact allowed financing of the state budget through innocent entrepreneurs. If the tax authority does not use the security to cover the tax arrears of the registered person, it must return the security within 30 days of the end of the 12 month period from the time the security was provided. However, no interest on the amount of such a hidden “loan arrangement” will have to be repaid by the tax office.
Another disputed change brought about by the amendment is the introduction of a liability VAT payer who was or will be supplied with goods or provided with services within the territory of the Slovak Republic and shall guarantee for VAT from the previous instance determined by the invoice in the event that the supplier shall fail to pay such VAT or become incapable of paying it, and provided that at the time of the occurrence of the tax duty the VAT payer knew or reasonably could have known or should have known that VAT or part thereof would not be paid. It is not clear whether there will be a proportional liability or if one buyer will pay for all. In this connection the Tax Authority is drafting a register where the entrepreneurs are able to verify the credibility of their business partners whereby the credibility of the business partners will depend on the evaluation carried out by the Tax Authority.
The creation of the unitary health insurance system as announced by the government seems legally pretty controversial. To prove public interest in the event that the government decides to expropriate the shares of the private health insurance companies might be extremely difficult, if not impossible. Furthermore, it breaches the principles of fairness and legal expectations in the business relationships. If the state causes certain damage to the third parties, an amendment to the Enforcement Procedure Act states that the enforcement procedure may be exercised solely against those state assets administered by the state organisation from whose activities the creditors’ claim arose.
Martin Magál and Juraj Gyárfáš (MM and JG): Although it may seem a technicality, we believe that one of the most problematic laws adopted during 2012 was changing the procedure of selling shares in limited liability companies, as passed in the framework of an amendment to the VAT Act. Although this change was drafted with the commendable intent of curbing tax evasion, it was done without analysing the practical effects on transfers of businesses and loan financing, and it will ultimately worsen the business environment in Slovakia. Suffice it to say that such laws confirm the old economists’ saying that no law is as powerful as the law of unintended consequences.
Tomáš Rybár (TR): We consider certain changes to the social insurance, labour and tax laws as the most controversial legislative changes in 2012. In the Social Insurance Law, it is the imposition of the duty to pay mandatory insurance contributions for people performing a gainful activity on the basis of work agreements (outside employment), acquisition of certain rights similar to ordinary employees by these persons and the increase of the “minimum assessment base” for the payment of social and health insurance by self-employed people. In the labour law, it is the re-introduction of the concurrence of a notice period and severance payment. In the tax law, it is the abolishment of the flat tax and increase of the corporate income tax from 19 percent to 23 percent.
We consider these changes as most controversial because they are generally viewed as making the country a less attractive place to do business and they generally contribute to a perception that very little is being done to outweigh their negative effects and to make entrepreneurs feel that the state has an interest in creating better conditions for them. In general they reflect a situation where achieving better competitiveness is not a priority.
Peter Šuba (PŠ): When compared to its central European competitors, Slovakia’s position with regard to direct taxes gradually weakened over 2012. This process was topped by an increase of the income and payroll taxes approved in late 2012, which may result in a slowdown of economic growth and employment rate. Furthermore, these austerity measures may adversely affect tax revenues for the state budget – we register an increased demand of international groups for optimising the overall tax burden and money flow, which may finally result in a capital outflow and shifting the performance of some activities from Slovakia to more tax-favourable jurisdictions.
We also consider the Act on Unfair Conditions in Trade Relations whose Subject is Food as controversial. Efforts to balance these relations may lead to an opposite effect - negative impacts on domestic suppliers that may be overlooked by retail chains that may instead turn to foreign suppliers. Furthermore, the regulation may in the end be disadvantageous for consumers, as it may eliminate legitimate price competition. Simultaneously, contracts between suppliers and retail chains have to be harmonised with the new legislation by February 28, 2013, which is an extremely short deadline.
In 2012, a new Energy Act was also adopted, having the ambition of entailing a comprehensive regulation of all energy sectors. However, the Act as a whole primarily focuses on electricity and natural gas, whereas other fields and related rights and obligations of affected entities are defined either marginally or not at all, which may cause problems when resolving specific situations.
We can also see negative effects in the application of an amendment to the Commercial Code adopted last August. The amendment extended the process of the establishment of and transfer of ownership interests in a limited liability company, and in relation to some founders, transferors and transferees, even blocked such processes.
TSS: Which legislative areas or laws do you think need further revision and why?
PM: Law enforcement continues to be one of the biggest problems in Slovakia. Confidence in the Slovak judicial system is very low for various reasons, but mainly because of the rules governing legal proceedings, their overall length and the quality of the decision-making process and judgments.
In general we also think that increased taxes, levies and administrative duties and other recent legislative changes affecting businesses, do not contribute to a favourable business environment in Slovakia, so the need for further revision cannot be ruled out.
DF: Slovakia has for a rather long time been lagging behind in innovation effectiveness and it would be useful to pass a new law setting up the complex legal framework and terms for innovation processes, including creating a management body financed by public funds with strongly and clearly defined authorities, outlining incentives for start-up companies and innovation process as such.
MM and JG: Businesses in Slovakia often complain about poor law enforcement, lengthy court proceedings and unpredictable judgments. Hence, laws on civil procedure and on the judiciary should be amended to improve the duration and predictability of court disputes. Moreover, arbitration that should be a viable alternative for resolving business disputes was recently eroded by arbitration-unfriendly courts. It is up to the legislators to restore arbitration as a viable dispute resolution mechanism.
TR: All key procedural codes, not only to introduce swifter handling of cases, but also to bring in new technologies and abolish the reproduction of documents already available to other public authorities.
PŠ: It definitely is the Civil Procedure Code that must be revised. It is necessary to clearly distinguish between dispute proceedings and non-dispute proceedings, define separate rules and procedures for each of them, and also separate the administrative judiciary into an independent code. It is also necessary to adapt the judiciary to modern trends with the aim of reaching a fast, efficient and fair protection of rights as well as the foreseeability of judicial decisions.
Given our practical experience, we would also welcome a revision of the Commercial Code provisions regulating corporate combinations, for example, the use of standard provisions for cross-border mergers or the introduction of spinning-off.
Tax collection also needs further revisions, as the measures adopted in 2012 are proving not to be efficient enough.
11. Mar 2013 at 0:00 | Jana Liptáková