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The end of crisis mode?

Improved tax collection, state administration reform and measures to support economic growth will lead the government to unfreeze the salaries of approximately 340,000 public servants, while keeping the public finance deficit under 3 percent as required by the European Union and dropping corporate income taxes from 23 to 22 percent, Prime Minister Robert Fico said when introducing the draft state budget approved by his government on October 10.

The government aspires to tame the budget deficit; unfreezes salaries for public servants.(Source: TASR)

Improved tax collection, state administration reform and measures to support economic growth will lead the government to unfreeze the salaries of approximately 340,000 public servants, while keeping the public finance deficit under 3 percent as required by the European Union and dropping corporate income taxes from 23 to 22 percent, Prime Minister Robert Fico said when introducing the draft state budget approved by his government on October 10.

Even if Slovakia escaped recession in 2013, the growth of its economy, standing in the second quarter of 2013 at 0.9 percent, appears too feeble to support serious job creation, leaving the country’s double-digit unemployment rate among the greatest of the challenges facing Fico’s government.

Slovakia’s jobless rate hit a nine-year high, just under 15 percent in the spring, making discussion on the country’s business environment and labour market even edgier. The parliamentary opposition blames the cancellation of the flat tax, increased general and payroll taxes as well as what they called reduced flexibility in the revised Labour Code, in place since January 2013. International rankings have signaled in 2013 that Slovakia’s business environment has been losing steam, but government politicians allege that businesspeople’s criticisms are political and biased.

THE PROGNOSIS

Corporate taxes might drop if the country’s economy heads in the right direction, Fico said, shortly after the European Commission (EC) published its autumn prognosis for economic developments in 28 EU-member states on November 5.

Real GDP in Slovakia is projected to grow by 0.9 percent in 2013, “supported by recovering household demand, with net exports driving growth through a strong positive contribution,” said the EC in its prognosis. While the EC estimate matches the numbers tabled by Slovakia’s central bank, it is slightly more optimistic than the Finance Ministry’s 0.8 percent forecast.

The country’s economy in the second quarter of 2013 posted 0.9 percent growth on an annual basis. In the first quarter of this year, the economy grew by 0.6 percent, the statistics authority said. The modest second quarter growth numbers nonetheless surpassed forecasts by market watchers with commercial banks, who had predicted 0.7 percent growth.

In 2014 and 2015, the EC expects Slovakia’s economy to walk what it called a “firmer recovery path, with real GDP growing by 2.1 percent and close to 3 percent, respectively”, with the Finance Ministry forecasting 2.2 percent.

Fico said he is convinced that these numbers are realistic, boasting that “next year we will probably have the third highest economic growth in the eurozone, and still have one of the lowest [levels of] debt”, as quoted by the TASR newswire.

While this year the EC estimates the general government deficit to stand at 3 percent of GDP, for 2014 the commission projects the deficit to increase to 3.2 percent. Nevertheless, the Slovak government in its draft state budget, which is awaiting parliament’s approval, aspires to trim the public finance deficit in the upcoming years, and for 2014 plans a deficit at 2.83, down from this year’s 2.98 percent. In 2015, the deficit is planned at 2.57 percent, while in 2016 it should be a mere 1.5 percent of the GDP.

If the EC does not change its opinion before spring, Slovakia might be taken off the list of countries with excessive deficit and thus avoid sanctions, the Sme daily wrote on November 7, while quoting Finance Minister Peter Kažimír as saying that “the risk is certainly here but we have a further six months to persuade the commission”.

THE BUDGET


The draft budget, which the cabinet has advanced to parliament but which had not passed by the time the Investment Guide went to print,seems likely to pass given the dominance of Fico’s Smer party. It estimates the deficit at €3.39 billion next year, with revenues standing at €13.84 billion and spending planned at €17.22 billion. Along with introducing a tax license system, the draft also looks to cut the corporate income tax rate from 23 percent to 22 percent. The cabinet expects these measures to have a positive impact on the budget estimates of an additional €84.2 million, while a special levy applied in regulated industries is expected to bring in €78.7 million.

“The main risk of the state budget is the uncertain development in the eurozone, which has a significant impact on the performance of our economy and filling the tax purse,” Ján Dinga, analyst with the Institute of Economic and Social Studies (INESS), told The Slovak Spectator. “The government thus should have a crisis scenario prepared for budgeting in case public revenues will not develop in line with expectations.”

CORPORATE TAXES AND TAX LICENSE


The Fico government has announced a plan to introduce tax licenses to be collected from limited liability or joint stock companies regardless of whether or not they make a profit. While the government views the introduction of licenses as a preventive measure compensated by the planned reduction of corporate taxes from 23 to 22 percent, employers and market watchers warned of its potential negative impact on small and medium-sized companies. The media reminded the prime minister in October of his promise made earlier in 2013 that his government will not introduce higher or new taxes. Analysts have also said that the planned tax cut, while positive, is still too minor to compensate for the tax licenses.

“Decreasing the corporate tax rate is a move in the right direction, however the proposed rate is still far from the original 19-percent rate,” said the INESS’s Dinga. “The problem is that the government plans to compensate for this drop through the introduction of tax licenses.”

When defending the concept of tax licenses, Peter Kažimír cited Austria, where limited liability companies pay €1,750 for licenses annually. The minister is proposing licenses of €1,000 per enterprise. Yet, it is possible that the payments for different types of companies will be differentiated.

The new tax licenses are likely to become valid as of the spring of 2015. However the minister said that the details of the measure are to be clarified after negotiations with employers. Tax licensing fees would be tax deductible.

MORE POWERS TO UNIONS

The revision to the law on collective bargaining, which grants powers to unions and representatives of employees to enforce pay hikes, even in firms which disagree with such hikes hit a raw nerve with foreign chambers of commerce, an association of employers as well as the political opposition, and the changes may yet end up at the Constitutional Court.

The binding nature of higher level collective agreements will be automatically extended to additional firms employing more than 20 people in a given sector without the consent of the individual firms, according to the revision prepared by the Labour Ministry, led by Ján Richter of Smer. Until now, the agreement of the employer was necessary in order to apply collectively bargained agreements to the given enterprise.

The National Union of Employers (RÚZ) said that the Smer-designed legislation “will increase costs of the affected companies and influence their ability to compete in the prevailing negative economic situation”, while the German-Slovak Chamber of Commerce (SNOPK) suggested that it violates the freedom in collective bargaining and worsens conditions for medium-sized companies. The American Chamber of Commerce has called on President Ivan Gašparovič to veto the law, which sailed through parliament on October 29, suggesting that it might have a potentially negative impact on Slovakia’s employment rate and its overall competitiveness in Europe.

TAX EVASION: SUPER-COMMANDO AND LOTTERY

After acknowledging that tax evasion costs Slovakia billions of euros each year, General Prosecutor Jozef Čižnár, Interior Minister Robert Kaliňák and Police President Tibor Gašpar agreed to create a specialised unit of prosecutors, police officers and Financial Police workers, called the super-commando. Within this unit, eight prosecutors specialising in tax evasion will handle new and old tax evasion cases.

The state is also to introduce a number of other changes in this area. For example, Slovakia’s Financial Administration is to introduce a mandatory electronic VAT record for VAT payers, which the state views as a potentially effective tool of fighting carousel fraud, in which fraudsters import goods to an EU country VAT-free, and then charge VAT to the buyers, according to Sme. This means that tax offices will be accepting monthly and quarterly VAT records from VAT payers only in electronic form.

To address VAT evasion, the government has even reached for a rather unorthodox solution: a receipt lottery. As of September, Slovaks have been encouraged to collect retail receipts from their purchases in shops, restaurants and services, and enter them into a National Receipt Lottery, as the VAT lottery has been officially named. There is a possibility of winning thousands of euros.
Two days after its launch, Slovak consumers had registered 1.16 million receipts with Kažimír calling it a “giant success”. The first drawing took place on September 30.

Collection of VAT in September and October exceeded the government’s expectations. It is €130 million, or one-fifth, higher than what was projected, Sme reported. The government does not yet know whether the higher amount is due to increased spending by households in shops or a drop in occurrences of tax fraud. Economists believe that if government measures are behind the improved result, then credit should go to the national receipt lottery.

GAS DEAL AND FAILED NO-CONFIDENCE MOTION


The Slovak government green-lighted the takeover of the 49-percent stake and managerial control in the natural gas utility Slovenský Plynárenský Priemysel (SPP) from the Energetický a Průmyslový Holding (EPH) on September 4. Fico described the move as the “state gaining total control over gas prices for Slovak households and small and medium-sized enterprises”.

In exchange for the 49-percent stake, the government will take on half of the company’s debt, €59 million, from EPH. The SPP generated losses because of gas price regulation for households, Fico said, as reported by the SITA newswire.

Yet, claims that the major gas deal between the state and a financial group was masterminded by the latter led to an attempt to sack Fico for what the opposition insisted were signs that his government is beholden to oligarchs. But the dominance of Fico’s Smer party in parliament saw the government easily survive a September 19 no-confidence vote, which the prime minister called “absurd”.

Even with the result of the no-confidence vote never in doubt, the parliamentary discussion, which Fico mostly ignored, produced physical clashes with one deputy sustaining light injuries alongside accusations of excessive alcohol consumption by Smer deputies.

OWNERSHIP CHANGES

EPH is going to acquire a 49-percent stake in the regional electricity distributor Stredoslovenská Energetika (SSE) from Electricité de France, with managerial control, allegedly for €400 million. The general assembly of SSE approved the entry of the new shareholder into the company in early September.

The state plans to sell its minority share in Slovak Telekom (ST), but not this year, said Economy Minister Tomáš Malatinský after the October 16 government session. He added that the working group is currently dealing with comments to the memorandum, which will specify the conditions of the sale, including individual steps and a time schedule, TASR reported.

One of the possible buyers is the company Deutsche Telekom, which owns a 51-percent share and wants to keep its right of first refusal. Yet, there are also other interested firms, including financial groups, the ministry told SITA.

As for privately owned companies, the ownership change of the Czech and Slovak branches of the mobile operator Telefónica is one of those significant deals emerging on the market: the financial group PPF led by Czech billionaire Petr Kellner is finishing the acquisition of these branches of the mobile operator Telefónica, which provides telecom services and internet connections under the brand O2.

Also, one of the largest pharmaceutical producers GlaxoSmithKline is purchasing cosmetics producer De Miclén in Levice, central Slovakia, which according to Trend Analysis in 2012 was one of the biggest companies in the chemical industry, according to Trend.sk.

PROJECT DELAYED

Enel has confirmed that one of the biggest investment projects in Slovakia will be delayed. The units will be completed as late as 2014 and 2015. The state, which co-owns the power producer Slovenské Elektrárne with Enel, which is building the extension of the Mochovce NPP, will thus not see any dividends from the company until after 2015. Revenues from the sale of electricity generated by the new blocks will come later. Moreover, the construction of the new blocks will be more expensive. Slovenské Elektrárne covers costs from its own resources, without relying on any government funding or state assistance.

CORRUPTION AND THE JUDICIARY: WOES CONTINUE

Throughout 2013 businesses continued being the most dissatisfied with the ineffectiveness of law enforcement, which stems from the poor state of the country’s judiciary and insufficient application of the principle of equality in the face of the law, according to the findings of a survey done by the Business Alliance of Slovakia (PAS).

“Slovakia’s judiciary and the inefficient enforcement of law over the long term is among the most criticised areas in Slovakia,” PAS said on August 27, adding that lengthy court trials, problems enforcing claims and issues with fraud have a direct negative impact on doing business in the country.

Yet, according to PAS, the fact that the new general prosecutor was appointed even though the Constitutional Court has yet to deliver a verdict in the case connected with the post, does not help increase the credibility of the judiciary as a whole.

President Ivan Gašparovič formally appointed Jaromír Čižnár, a former law-school classmate of Fico, as Slovakia’s general prosecutor on July 17. This filled a position that had been vacant for nearly two and a half years. The move came just a month after Čižnár was chosen by MPs in a parliamentary vote orchestrated by the ruling party, Smer. While Gašparovič said he saw no reason not to appoint Čižnár, the opposition parties said the president should have waited until the Constitutional Court decided on a complaint lodged by Jozef Čentéš, who was elected to the general prosecutor post by MPs in June 2011. The president has refused to appoint him, and presented what the opposition has derided as insubstantial reasons for his refusal.

The saga around the election and the appointment of the new prosecutor general was one of the most politically charged issues of 2013.

BUSINESS ENVIRONMENT


New rules embedded in Slovakia’s revised tax legislation and modified Labour Code, which became valid at the beginning of 2013, lowered Slovakia’s attractiveness as an investment location, a survey conducted by seven foreign chambers suggested.

The survey, which indicated dissatisfaction with the country’s ability to fight against corruption, crime and lack of transparency in public procurement, was prepared by the British Chamber of Commerce, the French-Slovak Chamber of Commerce, the Dutch Chamber of Commerce in Slovakia, the Austrian Embassy’s commercial attaché, the German-Slovak Chamber of Commerce and Industry, the Swedish Chamber of Commerce and the Slovak-Austrian Chamber of Commerce, with 187 local firms surveyed.

In September, Slovakia saw its seventh consecutive drop in the Global Competitiveness Report while the country’s rating in the 2014 Doing Business report dropped as well, placing Slovakia 49th out of 189 countries in its 2014 edition, six spots lower than the previous year.

Slovakia’s worst ranking was in the investors’ protection category, 115th, while Slovakia placed 108th in the category of starting a business, a 28-spot decline and the country’s most significant drop compared to its ranking in the 2013 edition.

STIMULI


As part of its efforts to keep manufacturing jobs in the country, Fico’s government provided state-backed incentives to companies: among the biggest were some €19.8 million in incentives to help Samsung upgrade its facilities and maintain about 750 jobs. The paper maker Mondi SCP, with about 750 workers in Ružomberok, received some €25.4 million in incentives and U.S. Steel in Košice – which employs more than 13,000 people – received some €15 million in the form of emissions taxes that were returned to buy new, more environmentally-friendly equipment.

The trend continued at a government session in Košice on October 2, when IBM received €1.6 million in state benefits and T-Systems Slovakia €5.1 million in assistance for expanding its IT centre. IBM is expected to generate 150 new jobs by 2015 and T-Systems some 350 by 2016, according to the government.

The final hurdle to keep one of Slovakia’s largest companies, aluminium-maker Slovalco, operating was cleared on September 26 as shareholders from power-producer Slovenské Elektrárne agreed to an eight-year contract for providing electricity at discount rates. The firms have declined to provide details about their agreement, but the deal replaces a 20-year contract set to expire this year under which Slovalco, Sme has claimed, paid about one-third of market electricity rates on average. That contract was negotiated when Slovenské Elektrárne was fully state owned, which it no longer is.

For more information about the Slovak business environment please see our Investment Advisory Guide.

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