New rules raise questions

Tax experts point to several problems caused by revisions.

Tax returns, illustartive stock photoTax returns, illustartive stock photo (Source: Sme)

BUSINESSES are following new rules for depreciation as of the beginning of the year. While some will reduce the period of depreciating their property, others will prolong it and some modifications will also cap the amount by which they can reduce their tax bases. The Finance Ministry expects higher incomes to flow into state coffers, but experts warn of an increase in administrative burdens on companies.

“The changes were adopted without any compensation [for businesses],” Róbert Kičina, executive director of the Business Alliance of Slovakia (PAS), told The Slovak Spectator, suggesting that this could have taken the form of lower corporate taxes or a better-functioning public administration.

The revision, adopted via an amendment to the income tax law, increases the number of depreciation groups from four to six, shortens depreciation of production technologies from 12 to eight years and prolongs depreciation of non-productive real estate from 20 to 40 years. It is expected that the latter measure will affect developers and hoteliers the most.

As depreciation reduces the tax base and thus the final tax paid, a longer period of depreciation means higher taxes paid.

The revision also caps the price of motor vehicles that business entities buy to do business, thus affecting depreciation. While currently there are no limits, the revision introduces a limit of €48,000 for business entities with a low tax base.

Moreover, it introduces a possibility to choose between flat expenditures of 80 percent in case the asset is used also for private purposes or provable expenditures depending on the real usage of the asset for private purpose and doing business.

The changes to depreciation rules will increase the administrative burden as it will be necessary to re-calculate the tax depreciation due to new depreciation groups and methods of depreciation even for property which was acquired before the end of 2014, said Peter Pašek, managing director of consulting company Accace.

“To be frank, we perceive part of the amendment concerning depreciations negatively,” Pašek told The Slovak Spectator, “there are nearly no positive changes.”

Finance Minister Peter Kažimír, however, denies the government is increasing the tax burden on businesses.

“When we collect more from any tax, this does not mean that we are increasing the tax burden,” said Kažimír back in November 2014, as cited by the TASR newswire. “We are endeavouring for a fairer distribution of this burden. We are living in an environment where it is a habit to avoid tax laws.”

Tax experts, however, also see some positive changes in the revision, especially concerning the shorter depreciation of production technologies which will “support manufacturing companies”, according to Martina Zabáková of consulting firm Consultare.

Some changes questioned

Bart Waterloos, partner of VGD – AVOS Bratislava, listed among the significant negative changes the decision that costs incurred for consultancy, legal services, marketing and so on will be tax deductible only once paid. According to him, this would lead to “extra administration, without even a real benefit for the government, because in the end they will be tax deductible anyway”.

He also sees the extra rules that will limit the depreciation of cars and the costs related to cars as being only categorised as populism whereas the real effect could be surprisingly small.

Ladislav Kozmon of Consultare also perceives a change with a huge impact on businesses to be the introduction of limiting depreciation on assets that a business person can also use privately. Based on the new rules, business entities can choose between flat expenditures of 80 percent or provable expenditures depending on the real usage of this asset for private purpose and doing business.

Originally, there was a list of assets to which this measure should have applied, but in the end the parliament did not adopt it. What Kozmon sees as a problem is the fact that it would be up to the taxpayer to persuade the tax administrator that he or she uses the given assets only for doing business. He expects that to avoid problems and increased administration and costs, businesses would use the flat expenditures of 80 percent also for those assets which they fully use for doing business.

Experts point to retroactivity

The biggest criticism, however, targeted the prolongation of depreciation of non-productive real estate. While the Smer government plans to take in €70 million this year due to this measure, businesses and tax experts dislike that it applies also to assets which businesses acquired before January 1, 2015 when the new rules came into force.

Zabáková of Consultare says that the changes will impact the decision-making of entrepreneurs when investing, especially into non-productive buildings.

“In our opinion they will limit this sphere of business-making as when investing into real estate they often think about refinancing considerable amounts of money,” she told The Slovak Spectator. She added that it is important to plan the cash flow which is affected by the payback of invested funds.

She also pointed to the increase in administrative burden as the companies will have to prove for which purpose they use the building every year.

Pašek also dislikes the limits on depreciation of property offered to let. If an entrepreneur buys an office building in 2015 and begins leasing the spaces, while the rent will not cover the sum of annual tax depreciation, he or she will only be able to ask for the unclaimed sum after 40 years. This sum will, however, be limited too – to the amount of rental income.

“We cannot even imagine keeping such information in mind for such a long time,” Pašek said.

Both Zabáková and Pašek say the changes are retroactive and that they will affect companies’ financial plans.

A group of opposition MPs, meanwhile, has turned to the Constitutional Court to decide whether the prolonging of the periods for depreciation is in compliance with the constitution.

The Finance Ministry, however, says that depreciations that have already been made will not change, which means that this will only be false retroactivity which is allowed by law, as reported by the Hospodárske Noviny daily.

Andrej Leontied from TaylorWessing e/n/w/c law firm shares the ministry’s opinion.

“The amendment will apply on future depreciations, not on depreciations made in the past,” he said, as quoted by the SITA newswire, adding that the motion filed by the MPs will probably not be successful.

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