The author, Renáta Bláhová, is tax advisor and Partner at BMB Partners TAXAND.
I hope that the recent media shoot-out between the German and Slovak prime ministers will be resolved diplomatically and that a reasonable approach will prevail. Germany is our most important trading partner. At the same time, the Visegrad Four, including Slovakia, is as important to Germany in terms of volume as trade with the US.
A good example of cooperation is the extension of the German-style short-time working scheme (kurzarbeit), which was approved by the government last month. This would help Slovak carmakers to pay out wages if they do not have enough orders due to global trade wars. The mood among investors in Slovakia remains subdued, according to a survey by the Slovak-German Chamber of Commerce, but despite the current challenges, about two-thirds of respondents would decide to invest in Slovakia again. Slovakia even leads in productivity - it has the most productive workforce in the V4 region with the lowest unit labor costs as well as a very high quality network of domestic suppliers and technological infrastructure.
At the same time, however, the tax environment in our country has been deteriorating significantly in recent years and the tax as well as social security burden have been rising. Although this is not the only factor influencing the reduced appetite for investment, even large Slovak companies are already pressing the government as a reaction to the tax squeezes.
It is useful to recall 2004, when Slovakia joined the EU and adopted deep economic reforms. The most significant was the introduction of the flat tax - a simple, pro-growth tax system with a 19 percent rate for individuals and corporations, with no taxation on dividends and no unnecessarily bureaucratic taxes on gift, inheritance or property acquisitions. This reform brought us a period of dynamic growth (2004-2012) and we were proud that foreign investors called Slovakia ‘the Tatra Tiger’. At that time, Germany became and has still remained our biggest investor. So far.
According to a survey of the Slovak-German Chamber of Commerce, a favorable tax system was one of the reasons why German companies invested in Slovakia in 2005. The situation has deteriorated dramatically in the meantime. The tax area is now one of the worst-rated factors, along with unpredictable economic conditions and corruption.
This is probably one of the reasons why the share of companies that would be willing to invest again in Slovakia has decreased.
German companies are still among the largest taxpayers in Slovakia, accounting for about a quarter of Slovakia's total tax revenues. That is why the country's new economic policy vision should be based on the restoration of an attractive tax system and close trade cooperation. What could a new tax reform in Slovakia look like? In addition to the abolition of the financial transaction tax, which is contrary to EU rules, the overall tax and social security burden should clearly be reduced and simple incentives that are in the drawers of the Finance Ministry officials should be added, including group taxation for Slovak holdings or accelerated depreciation to restart the economy, similar to what they have in Germany.
Revenue shortfalls should be compensated primarily by cuts in spending; last month the Republican Union of Employers presented measures that could bring up to EUR 6.5 billion to the budget, and announced that real consolidation is only possible by cutting spending and not by further tax increases.
Slovakia has a number of strengths that can appeal to investors - for example, a relatively young population and a productive workforce. Moreover, some reforms, such as specialized administrative courts and more flexible construction law, are already starting to bear fruit.
The vision remains simple - Slovakia should clearly bet on the West, including Germany as its main trading partner, not the East. President Peter Pellegrini reminded politicians of this when delivering his first State of the Republic address to the parliament. In it, he called on the parliament and the government to address Slovakia's real problems and stressed the need for cooperation with the EU.
