New tax raises mixed emotions (The Slovak Spectator)

Martin Vlachynský komentoval 21.10.2016 zavedenie dane z dividend pre The Slovak Spectator

New tax raises mixed emotions (The Slovak Spectator)

The planned changes to taxes will only increase the already high tax and payroll tax burden of companies. This is how critics evaluate the latest changes adopted by the government, including the controversial tax on dividends. While the state claims that the measure should reduce payments from smaller firms, critics warn it will not bring the desired effect.

“We perceive it as a loss of the last competitive advantage of Slovakia and the last motivation of entrepreneurs not to be dependent on banks and to have cheaper sources for investments and their further development,” Tibor Gregor, executive director of Club 500, an association uniting the biggest employers in Slovakia, told The Slovak Spectator.

Under the rules adopted by the government in late September, companies will pay a new 7-percent tax on dividends which will in fact replace current contributions to public health insurance, the rate of which is set at 14 percent.

The new tax will impact about 2,500 owners of companies. The ministry expects that it will increase revenues to the state budget by some €51 million, its spokesperson Alexandra Gogová told The Slovak Spectator.

Miriam Galandová, deputy chair of the Slovak Chamber of Tax Advisors, however, criticises the way the state wants to impose such important tax changes. It should have been preceded by an in-depth analysis of advantages and disadvantages, contributions, and also discussion with experts.

“The submitter of the amendment has not introduced any analysis or idea of new concept on income tax law,” Galandová told The Slovak Spectator, adding that the plan has not even been part of the government’s manifesto.

There is also a possibility the tax may increase in the future, admitted Martin Vlachynský, analyst with economic think tank INESS.

Concerns remain
The proposed rules for tax on dividends, however, has already been changed. The Finance Ministry originally proposed the rate at 15 percent and sought to enforce the tax retroactively. The rules adopted by the government however changed that. The ministers also propose to exempt landowners from paying the tax if their annual revenues amount to less than €500. Even if their revenues are higher, they will pay the tax only from the sum exceeding this cap, the SITA newswire reported.

Moreover, the tax should substitute levies from dividends paid by the owners or shareholders of companies as part of contributions to public health insurance. Under the current rules, there is a cap for the paid sum set at about €60,000 a year which may cause representatives of small and medium-sized companies to contribute more than big firms, according to the Finance Ministry.

Under the new rules, the smaller shareholders may pay half the sum they pay now, Finance Minister Peter Kažimír said, as reported by the SITA newswire.

Though observers welcome some of the changes, they point to several problems the tax will bring. It will impact mostly people who benefited from the cap on health transfers, but also ordinary people who invest their money in global stock exchanges, opines Vlachynský.

Despite the reduction of rate for tax on dividends, the Business Alliance of Slovakia (PAS) considers it a double taxation of the same profit without any cap.

Moreover, the state will probably not receive as high incomes as it expects as the companies’ owners may avoid the tax by not paying dividends, optimisation, higher reinvestment of profits or moving their shares abroad where they are not subject to taxation, PAS warned.

In this respect it pointed to the results of its recent survey which revealed that most respondents would solve the situation by keeping profits in the companies and not paying dividends. They would also try to pay out the money in other ways.

“It is another activity of this government which forces small and medium-sized entrepreneurs to adopt speculative and alternative solutions to protect their (and in this case properly taxed) money,” one of the respondents claimed in the survey.

Big firms object
Also representatives of businesses in Slovakia remain rather critical.

Before the coalition partners agreed to changes to the tax on dividends, the Slovak Chamber of Commerce and Industry (SOPK) and Club 500 summoned a press conference at which they voiced their concerns.

Aside from the fact that the state increases the already high tax and payroll tax burden of entrepreneurs, it will only affect Slovak investors, Gregor said, explaining that only some 10 percent of all dividends remain in Slovakia. The rest belong to foreign investors and, thanks to the current EU regulations, avoid taxation, he added.

Moreover, the proposed measures may result in Slovak companies leaving the market, warned Peter Mihók, head of SOPK.

“We have notifications also from foreign firms, active especially in the insurance and financial sectors, which have started perceiving the situation negatively,” Mihók said, as quoted by SITA.

The Finance Ministry, however, disagrees with such criticism. The tax on dividends is standard in other countries.

Regarding the neighbouring countries, all of them have higher rates than the one proposed in Slovakia: in the Czech Republic and Hungary it is 15 percent, in Poland 19 percent and in Austria 25 percent, the ministry wrote in the statement.

However, observers say that the comparison of the tax rates alone is inaccurate. It is necessary to look at the concept of taxation as a whole and just then compare it with other countries, Galandová said.

“This is particularly why we are calling for an in-depth analysis of impacts and professional discussion before implementing such significant changes,” she added.

Slovakia should rather follow the example of countries like Estonia which does not have a tax on dividends, and has zero corporate tax on reinvested profit, according to Vlachynský.

Health ministry and insurers
The Health Ministry and the health insurers also disagree with the planned changes, claiming that scrapping the payments will have a negative impact on the public health insurance system. They all have called on the Finance Ministry to find ways to compensate the loss.

But the Finance Ministry does not have such plans. It claims that about 50,000 new jobs should be created in Slovakia which will also impact the collection of payroll taxes.

“So the development of the labour market indicates that the collection of payroll taxes from economically active citizens will grow significantly and will fully compensate the loss [from health levies paid from dividends],” Gogová explained.

Fighting tax havens
The state, meanwhile, proposes a special 35-percent tax rate that should be applied on entrepreneurs who will either send money to tax havens or receive money from them. The rate will concern countries with which Slovakia has not signed an agreement to avoid double taxation.

The measure is intended to combat tax evasion and shell companies, according to the Finance Ministry.

The tax may reduce the level of cross-border tax optimisation, but the state has already introduced a 35-percent tax on transfers to some countries for the same reason, Vlachynský says.

“Though it helps tax officers, it complicates legal business with countries like Egypt, Saudi Arabia and other non-contractual countries,” he added.

Galandová opines it would be more effective to introduce rules for exemption of profits from the sale of shares that exist also in other countries.

“This would significantly decrease motivation of domestic investors to ‘structure’ their investments via tax havens or jurisdictions with more favourable tax regimes, like Cyprus, Malta, the Netherlands and Luxembourg,” she said.

Radka Minarechová
The Slovak Spectator, 21.10.2016

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