Government changes tax policy

Entrepreneurs perceive proposed changes, except reduction of the corporate income tax, negatively.

(Source: Sme)

To meet its promises from the programme statement Prime Minister Robert Fico’s government is presenting a package of tax changes including a reduction of the corporate income tax. But entrepreneurs say they see no sign of promised measures that would make their lives easier and point to plans to target certain sectors to harness more revenue.

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The Finance Ministry proposes to reduce the corporate tax from the current 22 percent to 21 percent. But the package does not contain a proposal to abolish tax licences as of 2018 and increase the caps on flat-rate expenses for sole proprietors, even though these are also in the government’s programme statement. It also proposes to abolish health insurance levies on dividends and replace them with income taxes.

Moreover, it proposed extension of payment of special taxes and levies paid by regulated sectors and financial institutions.

Economic analyst Viliam Páleník from the Slovak Academy of Sciences said the package lacks a clear vision of how to tackle the main challenges of Slovakia’s society with tax policies, including “an ageing population, financing of health care and old-age pensions, long-term care as well as addressing of nature protection and environmental issues,” he said in a discussion programme on the news channel TA3.

The business sector and analysts perceive the reduction of the corporate tax as the only positive measure.

“I perceive the drop in rate positively, but the space is much bigger,” Martin Vlachynský, analyst with INESS think tank, told the Sme daily.

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The Finance Ministry says that there is still time for abolishing the tax licenses while it is now analysing a change to the caps on flat-rate expenses for sole proprietors.

Proposals for tax changes are now under inter-departmental review.

Main tax changes

The corporate tax will drop to 21 percent as of 2017. This will reduce budgetary revenues by €132 million in 2017.

The government has been promising to slash this tax for some time, but even the new rate is well above what it once was, 19 percent. The first Fico government increased it to 23 percent but within one year it decreased to 22 percent. The cut was compensated with the introduction of tax licenses.

The 21-percent rate will remain one of the highest in the region, Vlachynský told Sme.

The ministry proposes to extend and increase a special tax paid by businesses in regulated industries like companies active in energy, insurance, public health insurance, telecommunications, postal services or aviation sectors. The levy was to be temporary and end in 2016 but the ministry proposes to prolong it and double the rate from 0.00363 percent to 0.00726 percent. As a result, the budgetary revenues should increase by €76 million annually.

“The companies will probably reflect this in higher fees or prices,” prognosticator with the Slovak Academy of Sciences Vladimír Baláž told Sme.

Vlachynský warned that this higher tax may reduce the appetite to invest.

While the Finance Ministry wants to secure consolidation of public finances, employers continue to perceive this tax as problematic. Martin Hošták from the National Union of Employers (RÚZ) would like to see the consolidation of public finances on the side of expenditures and “not on the side of revenues as it was so far and how it is proposed also in this tax package”.

The Finance Ministry also proposes to change the current law on the bank levy in a way that doubles the special tax banks should pay in 2017.

The government imposed the special tax levy on banks to collect money for tackling a potential crisis in the banking sector. Banks have been paying it since 2012. The levy was designed to be a temporary measure and should end once banks have paid a total of €1 billion.

The payment scheme was proposed as degressive. Now, the Finance Ministry proposes keeping the rate banks pay, 0.2 percent on corporate and private individuals’ deposits, while it was scheduled to decrease to 0.1 percent as of 2017 as banks would have already contributed more than €750 million. The ministry also proposes to keep the levy until 2020.

The Slovak Banking Association (SBA) questions the policy.

“The increase of the so-called bank levy represents a potential risk for the stability of the domestic banking sector, endangers the ability of banks to finance the growth of the economy and worsens the competitiveness of Slovak banks on the EU single market,” said Ladislav Unčovský, SBA executive director, as cited by the SITA newswire.

Citizens will also pay more for their vices as the government increases excise taxes on cigarettes and introduces a special tax on gaming machines.

The government proposes to increase taxes on tobacco products, which may increase the price of one package by 6 cents or more. The tax should gradually increase until 2019. By 2020 the state should receive €200 million more than now from such taxes.

“The aim is to stabilise the tax incomes from tobacco products, prevent their drop and achieve balance with the goals of health protection,” the ministry said.

Gaming machines in Slovakia will be taxed by €1,500 what should bring additional €9.9 million. The state will collect as much as €145 million from taxing gambling this year.

Taxing dividends

In addition, the draft tax changes propose to abolish the levies from dividends to health insurers which currently amount to 14 percent. Instead, the ministry proposes to introduce a new 15-percent tax.

Baláž considers taxing of dividends a good step as the current rules favoured financial groups and foreign monopolies. Health insurance levies are paid only from dividends up to €50,000.

INEKO analyst Peter Goliaš, however, warns the new measure will decrease the attractiveness of Slovakia in the eyes of investors and will also slow economic growth, Sme wrote.

In case of dividends to be paid out to a company or individual from so-called non-contracting state, the tax should be as high as 35 percent. These are mostly countries that can be considered tax havens. Among non-contracting states are countries with which Slovakia has not signed agreements for the avoidance of double taxation or are not signatories of the international agreement about exchange of tax information.

The ministry perceives taxation of dividends also as an instrument to combat tax evasion and the fight against shell companies.

Experts warn that the change may not bring the desired change. Tax advisor Marcela Bošková specified for the Hospodárske Noviny that typical tax haves like the Seychelles islands, British Virgin Islands, Cayman Islands or Cyprus belong among contracting countries and thus the higher tax rate does not apply to them.

The business sector does not like taxing of dividends when Peter Kremský, head of the Business Alliance of Slovakia (PAS) points out that this means second taxing of profit.

Milan Seliak of Bisnode pointed for the Hospodárske Noviny that abrupt and massive changes may cause outflow of companies from Slovakia into countries without such taxes.

The new tax should bring into state coffers €226.2 million annually. Revenues from health insurance levies were less than €20 million last year.

Slovakia had taxed dividends also in the past. This kind of tax was scrapped during the second Mikuláš Dzurinda government between 2002 and 2006. Dividends started being burdened by health insurance levies during the Iveta Radičová government between 2010 and 2012.

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