Tax Reform in the Slovak republic

1
Tax Reform in the Slovak republic

• Ondrej Socuvka
• Advisor to the Prime Minister of the Slovak
  Republic
• for Macroeconomics and Foreign Investments
• Brussels, April 25, 2006

2
Overview

• History of Tax System in Slovakia
• Reform of the Tax System
• Philosophy
• Main Objectives
• Results of the Tax Reform
• Future Challenges

3
LONG-TERM FISCAL SUSTAINABILITY IS BEING
SUPPORTED BY MAJOR STRUCTURAL REFORMS
1989 2005
FUNCTIONING MARKET ECONOMY

• CENTRALLY PLANNED ECONOMY

GOALS OF REFORMS TYPE OF REFORMS

• high and sustainable growth
• long-term competitiveness
• Lisabon strategy goals

• functioning market economy

• privatizations
• price deregulations
• market institutions

• structural reforms

4
History

• Very often changes of legislation
• Income Tax Law -31x, Administration of Taxes and
  Fees -20x
• Too big contents Income Tax Law 4x bigger in 10
  years
• Ad hoc reaction
• Non-univocal explanation of law and potential
  conflicts with Tax Offices
• Need for new complex Tax Strategy
• Taxes should secure funding of public service
• Taxes should have as neutral as possible impact
  for doing business

5
Tax System in Slovakia

• Direct Tax
• Profit
• Flat Corporate and Personal Income Tax
• Equity
• Real Estate Tax
• Motor Vehicles Tax
• Indirect Tax
• General Consumption
• Value Added Tax
• Specific Consumption
• Consumer Alcohol Tax
• Consumer Beer Tax
• Consumer Wine Tax
• Consumer Tobacco and Tobacco Products Tax
• Consumer Mineral Oil Tax

6
TAX REFORM Basic Philosophy

• LIGHT, NONDISTORTIVE, SIMPLE, FAIR
• AND TRANSPARENT TAX SYSTEM
• create business and investment friendly
  environment for both individuals and companies
• eliminate existing weaknesses and inefficiencies
  in the tax law
• eliminate distortive roles of tax policy as
  instruments for achieving non-fiscal goals
• improve tax fairness by taxing all types and all
  amounts of income equally

7
TAX REFORM Main Goals

• Taxation of consumption, not production
• Cancellation of all special treatments
• Create business and investment friendly
  environment
• Eliminate existing weaknesses and inefficiencies
• Improve tax fairness

8
TAX REFORM Specific Changes

• radical simplification of the tax system
• elimination of virtually all exceptions,
  exemptions, deductions, special rates, and
  special regimes
• elimination of dividend, inheritance, gift taxes,
  and real estate transfer tax
• introduction of low nominal rates
• 19 flat individual income tax
• 19 corporate tax
• 19 unified VAT on all goods and services -
  without any exceptions
• shift from direct to indirect taxes

9
TAX REFORM Politics

• Strong and Clear Political Will
• Weak Opposition Arguments
• Experts on Top Gov. Positions
• Media (facilitator)
• Timing (difficult reforms in the beginning
  first VAT, than 19 and excise tax)
• Coordination of Reformist Steps (Tax, Pensions,
  Decentralization, Healthcare)
• Communication to Citizens

10
TAX REFORM Allowances

• Tax free threshold 3.623 USD per year
• Other
• Dependent spouses
• Refundable credit for dependent children
  (changing into tax bonus)

11
TAXATION IS STILL PROGRESSIVE AND LOW-INCOME
PEOPLE PAY LESS TAXES THAN BEFORE
Poverty Line
Source Ministry of Finance of the Slovak Republic
12
TAX REFORM Results

• no decrease in tax revenues
• increased revenues from indirect taxes
• less scope for tax evasion and tax avoidance
• more motivation to pay taxes
• better incentives for investment and work
• thanks to lower marginal rates
• thanks to more transparent and equitable taxation

FASTER CATCH-UP LESS REVENUES FROM EU FUNDS!
13
TAX REFORM Numbers

• Higher Tax revenues (overall 10 more)
• Increased nr. of new registered companies (29)
• Employment growth (100,000 new jobs created from
  2002)
• Private business on GDP 90 in 2005
• Productivity of labor growth (4,4)

14
TAX REFORM Numbers

• Real wages growth 6,3
• GDP growth 6
• Inflation 2,7
• Household consumption increase (2-3,5)
• Overall FDI growth (76increase)
• Stimulating for activity and higher earnings

15
Net Personal Income Tax
Note Figures are for illustration purposes. The
actual numbers may slightly differ due to
rounding and exchange rate fluctuations. Source
Delloite Touche
16
TAX RATES FACED BY INVESTORS
17
Challenges

• Continue reforms (healthcare, education)
• Keep positive results from reforms
• Decrease social and health insurance
  contributions
• Cancellation of tax allowances on dependent
  spouse (not motivating)
• Assignment of 2 for benefit
• Investment Incentives
• Lower taxation of low income groups (cancel
  health insurance and transform it into tax system)

18
MINERVA Slovak National Lisbon Strategy

• IT
• Education
• Business Environment
• RD