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TAXATION AND BUDGETARY POLICIES IN THE

COUNTRIES OF THE EUROPEAN UNION AND


OF THE WESTERN BALKANS

Taxes

BUDGET

Sarajevo, October 2015.

TAXATION AND BUDGETARY POLICIES


IN THE COUNTRIES OF THE EUROPEAN UNION
AND OF THE WESTERN BALKANS

This document is the result of a three- year PERC/LO-N Regional Project Tackling Taxation, Informal
Economy and Corruption in the Western Balkans towards better governance and democratic process,
supported by the Norwegian government and carried out with joint efforts of LO Norway, the Pan European Regional Council and experts from SEE trade unions.

Contents

Original:
Taxation and budgetary policies in the countries of the European Union
and of the Western Balkans
Authors:
Mr. Martin Hutsebaut EU expert, and
SEE TRADE UNION experts
Editor:
ITUC / PERC Office for South - Eastern Europe, Sarajevo
Publisher:
Graphic-Car d.o.o. Sarajevo

Introduction

TAXATION AND BUDGETARY POLICIES IN THE COUNTRIES OF THE

EUROPEAN UNION AND OF THE WESTERN BALKANS

GENERAL COMMENTS
1.
AIM OF THIS REPORT
2.
TAXATION POLICY OBJECTIVES
3.
PRINCIPLES OF TAXATION POLICY
4.
THE IMPORTANCE OF GOOD PUBLIC GOVERNANCE IN TAX AND BUDGETARY MATTERS
I.
THE SITUATION IN THE EUROPEAN UNION
1.
THE EUROPEAN BACKGROUND TO BUDGETARY AND TAXATION POLICIES
2.
GOVERNMENT REVENUE AND EXPENDITURE
3.
FUNCTIONAL CLASSIFICATION OF GENERAL GOVERNMENT EXPENDITURE
4.
TOTAL TAX REVENUE (INCLUDING SOCIAL CONTRIBUTIONS)
5.
TAX STRUCTURE
5.1.
Tax revenue by type of tax
5.2.
Tax revenue by tax base
5.2.1.
Consumer taxation
5.2.2
Taxation of labour
5.2.3
Taxation of capital
5.2.4
Environmental taxation
5.2.5
Taxation on property
6.
SPECIAL FEATURE : FLAT RATE TAXES
7.
POLICY CONCLUSIONS
8. RECOMMENDATIONS
II.
TAXATION AND BUDGETARY POLICIES IN THE COUNTRIES OF THE WESTERN BALKANS
1.
BOSNIA AND HERZEGOVINA
1.1
CURRENT SITUATION
1.1.1
Basic division of taxes in BiH:
1.2
TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM IN BiH
2. CROATIA
2.1
CURRENT SITUATION
2.1.1 General government revenue and expenditure
2.1.2
State budget
2.1.3
Structure of taxes of the general government
2.2
TAX REFORMS
2.3
TRADE UNION VIEWS AND DEMANDS CONCERNING THE CROATIAN SYSTEM OF TAXATION
3. KOSOVO
3.1
CURRENT SITUATION
3.1.1. Revenue of General Government , 2010-2012 in euro milion
3.1.2 Expenditure of General Government
3.1.3
General government expenditure by function
3.1.4
Revenue of Central Government
3.1.5
Expenditure of Central Government
3.1.6
Revenue of Local Government
3.1.7
Expenditure of Local Government
3.1.8
Pension fund system
3.1.9
Types of taxes
3.1.10 Accounting practices
3.2
TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND THE BUDGETARY POLICY IN KOSOVO (BSPK)
3.2.1
Budget sources
3.2.2
Allocation of the budget per sector
3.2.3 Macro economic policies
3.2.4 Taxation system and taxation policy
3.2.5 The pension system.
3.2.6
Employment and Social policies - Poverty
3.2.7
Social protection system
4.
REPUBLIC OF MACEDONIA
4.1
CURRENT SITUATION
4.1.1
General government revenue and expenditure
4.1.1.1 General government revenue
4.1.1.2 General government expenditure
4.1.1.3 General government deficit
4.1.1.4 Classification of general government expenditure
4.1.2
Tax structure
4.1.2.1 Tax structure by type of tax (in% GDP)
4.1.2.2 Tax structure by type of tax base (in% of GDP)
4.2
TAX AND BUDGETARY REFORMS
4.3
TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND BUDGETARY POLICY IN MACEDONIA
5. MONTENEGRO
5.1
CURRENT SITUATION
5.1.1 Budget of the general government
5.1.2 Budget of the Central government of Montenegro
5.1.3 Tax rates

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

5.2
5.2.1.
5.2.2.
5.2.3.
5.2.4.
5.2.5.
5.2.6.
5.3
6.
6.1
6.1.1
6.1.2
6.1.2.1
6.1.2.2
6.1.2.3
6.1.3
6.1.3.1
6.1.3.2
6.1.3.2
1.2
III.
1.
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IV.
V.
1.
2.
3.
4.
5.
6.

TAX AND BUDGETARY REFORMS


Continued enforcement of measures aimed at reduction of tax debt
Continued enforcement of measures aimed at suppression of grey economy and increase of taxation discipline
Improvement of the taxation system in Montenegro
Harmonization of legislation with EU legislation through:
Continued enforcement of fiscal measures introduced in 2012 and 2013:
Continued enforcement of austerity measures, through:
TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND BUDGETARY POLICY IN MONTENEGRO
REPUBLIC OF SERBIA
CURRENT SITUATION
The Republic of Serbia budget system
Financing of the general level of the state (sector)
Public revenues and expenditures
Structure of public revenues and income
Structure of public expenditures and costs
Financing the competences of the Republic of Serbia
Sources for financing the competences of the Republic of Serbia
Budget of the Republic of Serbia for 2013
Financing of competences of organizations for mandatory social insurance
TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM IN SERBIA
COMPARISON BETWEEN THE COUNTRIES OF THE WESTERN BALKANS AND OF THE EU
General government revenue and expenditure
Types of taxes and tax rates
TAX AND BUDGETARY REFORMS IN THE COUNTRIES OF THE WESTERN BALKANS
REFORM PROPOSALS FORMULATED BY THE TRADE UNIONS OF THE COUNTRIES OF THE WESTERN BALKANS
Budget policies
Tax administration
Tax structure, types of taxes and tax rates
Tax and social fraud, tax evasion and corruption
Social protection / social assistance
Attracting new investments (FDI)

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Introduction
This report on Taxation and Budgetary policies in the countries of the European Union and of
the Western Balkan has been finalised in 2015. It is part of a three-year project of ITUC, PERC
and LO-N on Taxation, Informal Economy and Corruption.
The report has been elaborated in close cooperation with experts of all Western Balkan countries.
The objective of this report was to examine the state of play of the budgetary situation and of
the taxation system and to formulate a series of reform proposals from a trade union perspective in order to arrive at a fair and efficient budgetary and taxation system.
In general we found that the taxation systems in the countries of the Western Balkan were
unfair and inefficient, because of the design of the systems (too high share of indirect taxes in
the total revenue of the general governments) and also because of the inefficiencies in the tax
collection (tax fraud and tax evasion, low financial discipline and social contribution fraud). The
wide spread application of flat-rate income taxes is responsible not only for fiscal injustice but
also for low income from direct taxes.
The countries of the Western Balkan need urgently to rebalance their tax systems and to reconsider their flat rate tax policies in order to make their tax systems more fair.

Martin Hutsebaut

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

TAXATION AND BUDGETARY POLICIES IN THE COUNTRIES OF THE


EUROPEAN UNION AND OF THE WESTERN BALKANS

GENERAL COMMENTS

1.

AIM OF THIS REPORT

Today, the governments of the Western Balkan countries are confronted with huge financing
problems due to very low employment rates, high levels of undeclared work, low financial discipline and a lack of equity and efficiency in tax matters. As a consequence these governments
depend to a certain degree on support of European and international financial institutions to fix
their budgets. Such a situation is unsustainable in the long run.
The main aim of this report is to examine the budgetary and taxation policies in Europe from the
viewpoint of equity, efficiency and sustainability. We will also examine how good governance in
tax matters and the fight against tax fraud and tax evasion can help to raise domestic revenue.
2.

TAXATION POLICY OBJECTIVES

Adequate tax revenue is necessary to guarantee democracy, public order and the operation of
the legal system.
Modern taxation should be more than just a source of revenue for the operation of the State:
taxation must also enable the public authorities to contribute actively to the pursuit of economic, social and environmental policy goals.
A proper road network, an efficient public transport system, a modern health service and hospital provision, an appropriate system of education, protection of the environment and active employment and vocational training policies require the injection of large doses of public finance.
Taxation is also an important springboard for a redistribution of income among citizens. Ensuring solidarity and social cohesion in society requires major social transfers and taxation needs
to play a significant role too.
Taxation is also an instrument for influencing human behaviour, e.g. in the environmental field
or related to active ageing (work bonus).
Taxation policy should not be an instrument of competition among governments in order to
attract investment. A policy of this kind leads to tax dumping and undermines the basic goals
of tax policy.
Three important prerequisites for the achievement of these tax policy objectives are an efficient
management of public resources, an efficient operation of public services and the provision of
quality services for the consumers of these services.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

3.

PRINCIPLES OF TAXATION POLICY

Taxation policies must meet a series of important criteria.


First of all, taxation should be a subject for concertation with the social partners at all levels, including at European level. In particular in view of the heavy tax burden borne by them, workers
wish to have their say in defining tax policy.
Secondly, taxation should be conceived in a fair manner so as to ensure tax equity. Currently,
labour income is too heavily taxed in comparison with consumption and income from capital.
Furthermore, salaried labour is too heavily taxed in comparison with self-employed labour as a
result, in particular, of the considerable leeway enjoyed by the self-employed and members of
the professions in determining their taxable earnings.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Good public governance in the field of public budgeting and financial management requires :
a)
Fiscal transparency, meaning an open fiscal process (with e.g. info on de-budgeting of expenditure or on mandates given to sub-central government) and information on the economic
assumptions used to construct the budget (often governments use overly optimistic economic
growth estimates);
b)
accountability, meaning independent control on expenditure, financial management and
respect of procedures (e.g. public procurement) in order to avoid abuse of power by individuals
or groups;

Thirdly, closely linked to the question of tax equity is the question of tax efficiency. It is not
enough that the tax system should be equitably devised : it must also operate efficiently and the
levying of taxes must be guaranteed by procedures that actually work.

c)
responsiveness, meaning the capacity to respond in a flexible way to unforeseen national
or international changes (e.g. lower than expected economic growth);

Fourthly, taxation must also be functional, i.e. the tax maeasures must be concieved in such a
way that they lead to the achievement of the goals pursued.

d)
future oriented, meaning taking fully into account future costs (public debt, ageing populations) and recognizing the future fiscal consequences of current policies (e.g. in the field of
public employment) and behaviour (e.g. environmental degradation) in order not to overburden future generations.

Fifthly, the tax system must be simple and transparent, easy to administer, enabling the tax authorities to concentrate their efforts on the work of checking and control. Transparency must
be such as to enable taxpayers to understand the logic and mechanisms of the system.
Sixthly, the tax system must also be consistent with the other policies conducted.
Seventhly, taxation should respect the principles of specificity and subsidiarity, that is, the different levels of government should each be given their own powers to levy taxes in accordance
with their responsibilities and the nature of the problems. Taxes which directly affect, or are
directly affected by, other Member States behaviour should be the subject of basic rules agreed
at European or international level. Examples of this kind of taxes are e.g. corporation taxes and
taxes on income from savings (interests, dividends).

Good governance in the field of budgets and taxation policies - at the political, institutional and
bureaucratic level - can only work if there is a supportive culture for rule compliant behaviour
oriented towards the public interest.
Achieving this culture requires a lengthy, continuous and gradual process of change in attitudes
and values. In the absence of such a culture there will be no trust in governments and it will be
difficult to convince the citizens to pay the taxes due.

4.
THE IMPORTANCE OF GOOD PUBLIC GOVERNANCE IN TAX AND BUDGETARY MATTERS
The design and successful implementation of a sustainable tax system requires sound and stable public budget governance practices.
According to Alex Matheson (OECD) 1 good governance refers above all to the settings within
which public policies are decided and executed, not to the public policies per se.
Effective public governance should provide
- coherence between different policy objectives;
- an environment in which people are treated fairly and equitably.

1
Matheson A., Better public sector governance : the rationale for budgeting and accounting reform in Western Nations, in Models
of Public Budgeting and Accounting Reform, OECD Journal on Budgeting, Volume 2, supplement 1

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

I.

THE SITUATION IN THE EUROPEAN UNION

1.

THE EUROPEAN BACKGROUND TO BUDGETARY AND TAXATION POLICIES

Since 2008 Europe has been faced with a financial and economic crisis. What started as a bank
crisis became soon a fiscal crisis. In the beginning most EU governments mobilized considerable financial resources through economic stimulus programmes (e.g. public investments)
and automatic stabilizers (e.g. social welfare) for counter-cyclical policies. Social expenditures
increased whilst revenues (taxes and social contributions) diminished. Public budgets came
under high fiscal stress : deficits grew and debts exploded.
In 2009, the budget deficit was -6.8% on average in EU 27 ( - 6.3% in the Eurozone), in 2010 the
deficit was on average 6.4% in EU 27 ( 6% in the Eurozone). Between 2007 and 2012 public debt
(as % of GDP) increased on average by 24.3 % in EU 27 ( and by 22.3% in the Eurozone).
For 2013, the European Commission expected the average debt rate in the Eurozone to increase
to 95% of GDP.
The EU (together with the ECB and the IMF) reacted by granting aid to countries in difficulties
(via the European Financial Stability Facility - EFSF - and the future European Stability Mechanism
(ESM) and especially by the introduction of the new European economic governance (European
Semester, six pack, Euro Plus Pact and the Treaty on Stability, Coordination and Governance)
which increased the European supervision of national economic and fiscal developments.
The European Semester aims at the ex-ante coordination of national economic and labour market policies.
The Euro Plus Pact is intended to improve competitiveness and employment, public budgets,
the financial situation of the social security systems and the stability of the financial sector.
The Treaty on Stability, Coordination and Governance is known as the European Fiscal Compact.
This intergovernmental treaty, concluded outside the EU legal framework, is signed by 25 EU
Member States (not by UK and Czech Republic) and is implemented as from 1st January 2013.
This treaty introduces the golden rule of the balanced budget.
Important provisions of this Treaty include :
a)
coordination : the obligation for governments to submit for ex-ante discussion every important economic policy reform;
b)
governance : institutional novelties like the informal Euro-summits and the Euro-governance meetings,
c)
stability : - budgets should be balanced or in surplus

- general budget deficit < 3% GDP and

- structural deficit limit of 0.5% GDP (if debt is < 60% GDP , 1% GDP)

- public debt < 60% GDP

- if > 60%, yearly cut of 1/20 th of surplus

- if excessive deficit, structural reforms are imposed by EC

- if reforms are not implemented, eventual financial sanctions.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Following the new European agenda oriented towards fiscal consolidation1 stimulus policies
were replaced by austerity programmes, the size of which was estimated at 0.9% of GDP in EU
27, both in 2010 and 20112.
Most fiscal adjustment programmes, especially in the Eastern and Southern European countries
and Ireland, focus on public spending reductions in investment, social welfare, health and unemployment benefits, pensions, public sector employment and wages and on revenue increase,
mainly via a rise of consumption taxes but also via higher personal and corporate income taxes,
less tax expenditures and by improving tax compliance3.
The first experiences with the European Semester indicate an acceleration of public deficit reductions (from -6.8% GDP in 2009 to -3.8% in 2012 in EU 27) and an increase of the effective
retirement age. As a consequence of the austerity packages and the falling investment and
growth rates the pressure on the labour markets increased. Unemployment rates went up
from 7.1 % in 2008 to 9.0% in 2009 (average EU 27); in the Eurozone the figures were 7.6% in
2008 and 9.6% in 2009. For 2013 the EC expects a further increase to 11.8% in the Eurozone.
The unemployment is especially dramatic amongst young and poorly qualified workers.
Given the further deepening of the economic crisis European Commissioner Olli Rehn wrote in
mid February 2013 to the Finance Ministers of the Eurozone announcing that the rebalancing of
their budgets may go more slowly than originally planned. This is also a modest concession to
the trade unions who had criticised for years the quasi unilateral austerity approach of the EU
and the governments in the fight against the crisis. The trade unions have argued since the beginning of the crisis for a more balanced approach with also room for investments in economic
growth.
2.

GOVERNMENT REVENUE AND EXPENDITURE

In the Eurostat statistics general government revenue and expenditure covers all levels of government : central, state, provincial and local government, as well as social security funds.
In 2011 total government revenue in EU 27 amounted to 44.7% of GDP and expenditure to
49.1% of GDP (weighted averages). In the Eurozone revenue reached 45.4% of GDP and expenditure 49.5%4 . The difference between total revenue and total expenditure equals net lending/
net borrowing.
The main components of government revenues are taxes and social contributions.
In 2011 taxes made up 58.2% of total revenue in EU 27 ( 55% in the Eurozone). Social contributions amounted to 31.1% of total revenue ( 34.6% in the Eurozone).
There are big differences amongst Member States : the Danish government gets 84% of its
revenue from taxes whilst in Hungary, Czech Republic, Slovakia and Slovenia taxes make up less
than 50% of governments revenue.
1
Fiscal consolidation is defined as concrete policies aimed at reducing government deficit and debt accumulation.
2
Theodoropoulou S. and Watt A. (2011) , Withdrawal symptoms : an assessment of the austerity packages in Europe, ETUI working
paper, 2011.02, Brussels.
3
Bieling H-J, (2012), EU facing the crisis. Social and employment policies in times of tight budgets , Transfer, vol. 18, nr. 3, ETUI,
Brussels.
4
Eurostat, Government finance statistics. From Statistics Explained, data from October 2012

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

As to the general government expenditure we find the highest rate in % of GDP in 2011 in Denmark with 57.9%, followed by France,1 (55.9%), Finland (54.0%), Belgium (53.3%) and Sweden
(51.3%). Norway spent 44.6%. The lowest expenditure was registered in Bulgaria (35.2%),
Slovakia (37.4%), Lithuania (37.5%) and Romania (37.7%)2.
General government expenditure can be classified by economic function or by type/nature.
The functional classification is based on ten main categories (division known as COFOG 1 level
- which stands for Classification on the Functions of Government). The classification by nature
uses a list of four ESA 95 categories (ESA 95 is known as the European System of Accounts). In
this paper we will limit ourselves to the most relevant classification, namely the functional one.
3.

FUNCTIONAL CLASSIFICATION OF GENERAL GOVERNMENT EXPENDITURE

In all EU Member States the social protection function is the most important : its spending
reached 19.9% of GDP on average in EU 27 in 2010 (as compared to 18.2% in 2002). This function alone represents 39.4% of total government expenditure. Spending on health (medical
and pharmaceutical products, outpatient and public health services, etc) was 7.5% of GDP in
2010 in EU 27 (6.4% in 2002). This represents 14.7% of total expenditure. That means that
social protection and health together were responsible for 54.1% of total public expenditure on
average in EU 27 in 2010.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Education expenditure goes for more than 60% to the compensation of employees. The top
5 includes Denmark (8.1% of GDP), Cyprus (7.5%), Sweden and the UK (both 7%) and Estonia
(6.8%). On the bottom we find Romania (3.4%), Bulgaria and Greece (both 3.8%), Germany
(4.3%) and Italy together with Slovakia (both 4.5%).
Low expenditure on education indicates in general a relative public under-investment in either
pre-primary or tertiary education facilities or in both.
Norway spent 5.9%.
4.

TOTAL TAX REVENUE (INCLUDING SOCIAL CONTRIBUTIONS)

It is fair to say that the EU 28 area is a high tax area with an average overall tax ratio of 39.4%
of GDP (weighted average) in 2012. This is more than 50% higher as in the US (24.7% of GDP),
but lower than in Norway (42.2%).
Inside the EU the differences in global tax levels between Member States are quite significant.
In Denmark (48.1%), Belgium (45.4%) and France (45.0%), the global tax burden is 60 to 75%
higher than in Lithuania (27.2%), Romania (28.3%), Latvia (27.9%) and Bulgaria (27.9%). All new
Member States have a global tax ratio which is below the EU average. These large differences
depend mainly on social policy choices : public versus private service provision in the field of
pensions, health insurance, etc. and more or less developed welfare states. 1

Spending for the other functions was (on average) : general public services : 6.5% of GDP; education : 5.5%; economic affairs : 4.7%; public order and safety : 1.9%; defense : 1.6%; recreation,
culture, religion : 1.2%; housing : 1% and environmental protection : 0.9%.

5.

Over the period 2002-2010 average spending (as a % of GDP) increased for all functions in EU
27, except for general public services (slight decrease) , housing and defense (status quo). The
highest increases were noted for economic affairs (+ 17.5%), health (+ 17.2%) and social protection (+ 9.3%).

Tax systems rely on three pillars : by type of tax we distinguish : - direct taxes which include
personal income tax, corporate income tax and other income and capital taxes (inheritance and
gift taxes); - indirect taxes, including VAT, excise duties, consumption taxes, taxes on products
and production; - social contributions of employees, employers and the self-employed.

Major differences exist amongst Member States as to the importance attributed to different
functions (figures for 2010 as % of GDP).

Taxes can also be classified by tax base : then we distinguish between consumption, labour
(employed) and capital taxes.

As to social protection, the top 5 in terms of spending are Denmark ( 25.4% of GDP), France
(24.2%), Finland (23.9%), Austria (21.7%) and Sweden (21.6%). The bottom 5 is reserved for
Cyprus (11.7%), Slovakia (12.3%), Bulgaria (13.5%), Czech Republic (13.7%) and Latvia (13.8%).
Norway spent 17.8%.

And finally a subdivision is possible by level of government : central, state, and local government, social security funds.

As to health, the top 5 includes Denmark (8.5% of GDP), Ireland (8.5%), the Netherlands (8.3%),
Austria (8.1%) and UK (8.2%). In the bottom 5 we find Cyprus (3.3%), Romania (3.6%), Latvia
(4.3%), Bulgaria (4.8%) and Luxembourg (4.9%). Norway spent 7.5%.
General public services include expenses related to executive and legislative bodies (except defense, police, courts, prisons and fire brigade services) and interest payments on government
debt. The top 5 includes : Greece (11.1% of GDP), Cyprus (10.7%), Hungary (9.3%), Belgium
(8.4%) and Italy (8.3%). At the bottom are represented Estonia (3.2%), Ireland and Bulgaria
(both 3.9%) and Latvia, Luxembourg and Romania (all 4.5%). Norway spent 4.7%.
1
2

10

In 1880, France spent only 11.2% of its GDP on public expenditure; in 1960 this had increased to 34.6%
Eurostat, General government expenditure : analysis by detailed economic function, Statistics in focus, 33/2012.

TAX STRUCTURE

Specific statistics are also available for environmental taxes (including excise duties on energy
products, taxes on transport vehicles and pollution taxes) and for taxes on property (on the
basis of OECD data).
5.1.

Tax revenue by type of tax

Direct taxes allow greater redistribution than indirect taxes : therefore they tend to be more
important in countries with a more pronounced redistribution objective. In these countries the
top personal income tax rates tend to be higher too.
1
These figures are based on the report Taxation trends in the European Union, edition 2014, published by Eurostat. The Eurostat series statistics explained gives slightly higher rates due to the use of a different methodology. The overall tax ratio is calculated by Eurostat
on the basis of a denominator (GDP values) that includes estimates of production by the informal sector. This explains why low overall tax
ratios can be due to low tax rates but also to high tax evasion

11

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

In the EU 28 indirect taxes, direct taxes and social contributions have today more or less the
same weight in total tax revenue : each of them counts for approximately 13% of GDP. However, the new Member States have a different tax structure compared to the old Member States :
the new MS rely much more on indirect taxes whilst the old MS (and Norway) have higher shares
of direct taxes. Compared to 1970 (EURO 6) direct taxes have considerably increased from 8.9%
of GDP to 13.2% in 2012 (EU28). Social contributions increased from 11.7% of GDP in 1970 to
12.7% in 2012. Indirect taxes increased slightly from 13.0% of GDP in 1970 to 13.6% in 2012.
The lowest shares of direct taxes are recorded in Croatia (only 17.1% of the total tax revenue),
Lithuania (18.0%), Bulgaria (18.8%), Hungary (19.2%) and Slovakia (19.7%): all of these countries
have adopted a flat rate system.
The Nordic countries, UK, Ireland, Belgium and Italy all have high shares of direct taxes (between 34.7% and 63.6% of total tax revenue) (EU28 average is 33.4%).
High shares of indirect taxes are mainly found in new Member States: Bulgaria 55.3%, Croatia
50.8%, Romania 47.2% and Hungary 47.1%. Low shares of indirect taxes apply only in old Member States: Germany 29.2%, Belgium 29.4% and the Netherlands 30.4%. The EU28 average is
34.5%.
As to social contributions, the picture is more diversified : here we find old and new MS amongst
the top 5. A remarkable feature is that France and Germany have a high share of social contributions (above 39%) and a relatively low share of direct taxes (below 30%). The majority of new
MS have shares above the EU 27 average.
The European Union has been very active in the field of indirect taxes by setting minimum rates
for VAT (6 th directive). Efforts have also been made to harmonise corporate taxes (rates and
tax base) , but until now only limited progress could be made on the question of the corporate
tax base.
5.2.

Tax revenue by tax base

5.2.1. Consumer taxation


The economic and financial crisis has had a strong impact on consumption taxation : revenue
raising measures since 2009 were indeed heavily concentrated on consumer taxes (VAT and
taxes on energy, tobacco and alcohol). After two years of decrease the Implicit Tax Rate (ITR)
on consumption increased again sharply in 2010 and further in 2011 and 2012: in 2012 the ITR
was 19.8% in EU27 and 29.4% in Norway. In 2012 consumer taxes represented 28.5% of total
tax revenue in EU27 (25.7% in Norway) and 11.2% of GDP (10.9% in Norway).
VAT is the largest component of consumer taxes (>50%). Taxes on energy, tobacco and alcohol
make up around one quarter of revenue from consumer taxes in EU 27. Bulgaria raises about
five times as much revenue from alcohol and tobacco excise duties (in % of GDP) as the Netherlands, which is greater than the difference in tax rates.
VAT standard rates have often increased since 2009. The average standard rate has increased
by 2 points over six years and stands currently at 21.5% on average in EU 27. No less than 20 EU
Member States have increased their standard VAT rates in the period 2008-2014 and Hungary
went up to a top rate of 27% over six years. Croatia, Denmark and Sweden apply a high rate of
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25.0%.
Tax compliance on VAT is low in EU 27. In 2010, exemptions, reduced rates and evasion resulted in only around 50% of the theoretical VAT revenues being collected. This phenomenon is
known as the VAT gap. The VAT revenue ratio1 was as high as 92% in Luxembourg and as low
as 36% in Greece.

5.2.2 Taxation of labour


The tax burden on labour is essentially composed of personal income taxes (PIT) and social
security contributions. In 2012, labour taxes accounted for 51.0% of total tax revenue in EU 27
(41.5% in Norway) and 20.1% of GDP (17.5% in Norway).
Despite the broad consensus in the EU on the need to lower the tax on labour and to shift the
burden to other production factors, the ITR on labour decreased only by 0.1% points in EU 27
between 2000 and 2012 (from 36.3 to 36.2 %). (In Norway the rate was 36.4%). The 12 new
Member States decreased their tax burden on labour more. In 2011 the downward trend was
reversed and the tax burden on labour started to rise again. In 2012, the lowest ITR on labour
was found in Bulgaria (24.5%) and in the UK (25.2%); the highest tax burden on labour is registered in Italy (42.0%) and Belgium (42.8%). (The ITR on labour in Norway is 36.4 %)
The top personal income tax (PIT) rate in EU28 amounts to 39.4% on average in 2014. Within
the Union, the rate varies from 10.0% in Bulgaria to 56.9% in Sweden. Most new MS have below average top rates (exception is Slovenia). The lowest rates are observed in Bulgaria (10.0%),
Lithuania (15.0%), Hungary (16.0%) and Romania (16.0%), all of which have flat rate taxes.
Since 1995 there has been a quasi general downward trend in top rates : between 1995 and
2009 the average top rate in EU27 went down by more than 10 % (from 47.4% to 37.2%). Since
2010 the top rates went up again. The biggest reduction of the top rate took place in Bulgaria,
(- 40.0%), Hungary (- 28.0%), Romania (-24.0%) and the Czech Republic (- 21.0%).
Besides the top rates, the income level at which they are applied also matters for the final tax
burden. The effective tax burden depends also on the progression of the PIT rates and on the
tax allowances and tax credits applied.
The PIT accounts for only one third of labour taxes. In EU 27 on average about two thirds of the
ITR on labour consists of non-wage labour costs paid by employers and employees (mainly social contributions). In 2009 36.7% of social protection receipts in EU 27 came from employers
and 20.1% was paid by employees (governments contributed 39.1%).
In order to boost the employment of low wage earners, governments have often reduced the
tax wedge for low skilled workers. For workers at two-thirds of average earnings the tax wedge
was reduced by 3.0% on average in EU 27 between 2000 and 2010 (from 39.0% to 36.0%).
Since 2011 the tax wedge went up again: in 2013 it stood at 36.8% on average in EU27. Over
the period 2002-2013 reductions were largest in Sweden (- 6.0% points) and in the Netherlands
(- 7.0%).
The degree of progressivity of the personal income tax system can be assessed by comparing
the tax burden faced by single persons earning 67% of average wage with that faced by their
1
The VAT revenue ratio compares the actual VAT revenue with the theoretical one, which would arise if the standard VAT rate was
applied to total final consumption.

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counterparts earning 167% of the average wage2. The Netherlands have a strong progressivity
with 5.1 % tax burden on gross wage earnings for a person with 67% of average earnings and
28.8% burden for someone with 167% of average earnings (2012).
The figures for Norway are respectively 17.8% and 28.0%, indicating a less progressive system.
Countries with a flat tax system have in reality also a progressive system due to the (basic) tax
free part of the earnings : e.g. in the Czech Republic the burden is 7.7% for persons with 67% of
a.e. and 15.1% for those with 167% of a.e.

5.2.3 Taxation of capital


In 2012 taxation of capital delivered on average 20.8% of total tax income in EU 27 (32.8% in
Norway). Taxes on capital include taxes on corporate income (6.5% of total tax income in EU
27 and 13.3% in Norway), taxes on capital income from households (2.2% of total in EU 27 and
2.3% in Norway), taxes on the income of the self-employed (5.0% in EU 27 and 2.4% in Norway)
and taxes on stocks of capital and on wealth (7.1% in EU 27 and 14.7% in Norway).
From 1995 until 2007 the ITR on capital in EU 25 increased from 26.3% (weighted average) to
32.4%. By 2010, the ITR went down to 28.3%. In 2011 and 2012 the ITR on capital showed an
upward trend again. In Norway the ITR on capital was 39.3% in 2012.
Taxation of corporate income is a major component of capital taxation. Its share in total tax
income in EU 27 grew from 5.9% in average in 1995 to 8.7% in 2007 and decreased to 6.5% by
2012.
Most countries have two statutory rates for corporate income : a standard rate and a reduced
rate for small business. In 2014 the standard statutory tax rate on corporate income varies between a minimum of 10% (in Bulgaria) and a maximum of 38.0% (in France). The new Member
States have in general low(er) rates. Since 1995 the average EU 27 statutory rate came down
from 35.3% to 23.5% in 2014.
Besides the statutory rate there is the effective rate. The effective average tax rate on corporate
income (EATR) was 21.1% in 2013 in EU 28. The EATR was the lowest in Bulgaria (9.0%) and the
highest in France (34.3%). In the 13 new MS the EATR is on average significantly lower (7.9%
points in 2014) than in the 15 old MS. As is the case for the statutory rates, the effective rates
also showed a significant downward trend over the last two decades.
One of the major reasons for this decrease in corporate tax rates is the competition amongst
governments to attract foreign investments. The enlargement of the EU has only reinforced
this tendency, given the absence of any corporate tax harmonization in the EU and the fact that
the new MS often introduced (flat rate) taxes at a very low level. This stimulated the race-tothe-bottom in the EU.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

The OECD, the G20 and the EU realize that this legal tax evasion can no longer go on and that
the loopholes have to be closed.
As for the taxation of capital income of households (2.2% of total taxation income in EU27), it is
important to indicate that the EU Savings Directive established an automatic exchange of information between tax authorities of the EU Member States with regard to interest payments to
citizens of other Member States.
Finally it is worth mentioning that 11 MS of the EU decided on 22 January 2013 to introduce a
common Financial Transaction Tax (Tobin tax). The plan was to introduce this tax as from 1st
January 2014 and to set the tax at 0.1% on the transaction value of shares and bonds (0.01% on
derivatives).

5.2.4 Environmental taxation


Environmental taxes are the taxes of the future. Originally, energy and transport taxes (the
two main environmental taxes) have been introduced purely as revenue raising instruments
without any environmental purpose. Today, policy makers realise that environmental taxes can
deliver a double dividend : boosting employment by shifting the tax burden away from labour
and improving the quality of the environment by influencing the behaviour of consumers and
producers ( the polluter pays principle). The EU is promoting environmental taxes.
Environmental tax revenue statistics have to be interpreted with care because of an important
implicit paradox : indeed, countries with a large share of renewable energy may have a lower
ITR on energy than countries that rely largely on carbon-based energy sources, simply because
renewable energy sources are often subject to lower tax rates. Countries with high revenues
from eco-taxes can be the most polluting whilst on the other hand low income from environmental taxes can be an indication of a strong care of the environment.
In 2012 environmental taxes generated 6.1% of the total tax revenue in EU 27 (5.6% in Norway), which is 2.4% of GDP, as in Norway. Compared with the revenue in 1995 (2.7% of GDP),
the income from environmental taxes had decreased by 0.4% of GDP by 2008 and went up
again since 2009 to the current level. The highest share of environmental taxes in total tax
revenue was recorded in Slovenia (10.2%) and Bulgaria (10.1%). In terms of share of GDP, Denmark, Slovenia and the Netherlands headed the ranking with a revenue of 3.6% to 3.9% of GDP.
Energy taxes (including taxes on transport fuels) represented 75.0% of environmental tax revenue in EU 27 in 2012, transport taxes (taxes on vehicles) 21.0% and pollution and resource taxes
4.0%.

5.2.5 Taxation on property

Furthermore, the possibility for companies to carry forward their losses and to compensate
them with the benefits of following years, further reduces corporate tax revenues. If one adds
to that the numerous special tax constructions and relief offered to international companies,
it should not be surprising that in most countries the effective corporate tax rates are lower
than the statutory rates and that the big multinational companies can reduce their tax burden
substantially in a legal way.

Taxes on assets and property include : recurrent taxes on real estate (rates), recurrent taxes on
net wealth, estate, inheritance and gift taxes, taxes on financial and capital transactions3, other
recurrent and non-recurrent taxes on property, such as registration tax.
Assets and property taxes are interesting in the light of the need to shift the burden away from
labour taxes. Taxes on property are one of the least detrimental to GDP growth because of
the immobility of the tax base. Recurrent taxes on property also offer the advantage of a high
stability of tax revenue, which facilitates budgetary planning. And since taxes on property are
relatively low in many countries, there is room for increases.

14

See OECD (2012), Taxing wages 2011-2012.

see point 9.2.3 on the Financial Transaction Tax (Tobin tax).

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On average, in EU 27, taxes on property deliver 5.8% of total tax revenue (2012) (2.5% in Norway), which is 2.3% of GDP (1.1% in Norway). Taxes on property are the highest in the UK
(11.7% of total taxes), France (8.0%), Belgium (7.5%), Spain (6.7%) and Ireland (5.6%). They are
the lowest in Croatia (0.9%), Estonia (1.0%), Austria (1.3%) and the Czech Republic (1.3%).
6.

SPECIAL FEATURE : FLAT RATE TAXES

The issue of flat rate taxes on personal and/or corporate income has been debated since the
publication of the book The Flat Tax by Robert Hall and Alvin Rabushka in 1983. The experiment with flat taxes in Europe started in 1994 with the introduction of a uniform tax rate of 26%
on personal incomes in Estonia. Since then, many Central and Eastern European countries as
well as Balkan countries followed that example.
It is important to mention that the flat tax does not exist : in practice, rates and other characteristics (tax allowances, tax credits) of flat tax systems differ.
Contrary to what people think, flat taxes are not always low taxes : in Lithuania, for example, the
rate is 33% compared to the 10% rate in Bulgaria and Macedonia.
In practice, the flat tax is far from flat : due to the tax-free allowance, the flat tax is progressive
until the flat rate is reached (known as the Bentham progression, named after the philosopher
Jeremy Bentham).
Proponents of the flat tax use several arguments in favour of that type of tax : flat taxes would
reduce the burden on labour and stimulate labour supply, would avoid the move of high-wage
workers by reducing the tax on high wage-earners, would make the income tax system less
complicated, more transparent, easier to administer with lower compliance costs, would automatically result in higher or at least the same tax revenue due to the effect of the Laffer curve
(lower tax rates = more hours work and lower tax evasion and fraud = more tax income), and
last but not least, would attract Foreign Direct Investment (FDI).
However, reality and (rare) empirical studies show that simple taxation is not necessarily good
taxation.
The most interesting feature of flat taxes is indeed its transparency for workers. It is also possible that flat taxes are easier to administer because of the removal in many cases of (complex)
tax deductions and tax credits and their replacement by a general tax allowance.
It should however be noted that the expected savings for the tax administrations are often
over-estimated.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

introduction of the Russian flat tax in 2001 supports this thesis.


In their article Demythologizing the Russian Flat Tax5, C.G.Gaddy and W.G.Gale describe how
Russia faced a huge debt crisis in 1998 due to its very primitive tax system and its weak administration and enforcement. President Yeltsin ordered a report on the extent and reasons of
the payment crisis, the low rate of tax collection in Russia in 1997-1998. It was found that the
largest enterprises of the country paid less than 8% of their tax bill in cash ! 29% of the taxes
were not paid at all and 63% were paid in the form of offsets and barter goods.
On the basis of the available research findings Gaddy and Gale drew five conclusions concerning the effects of the Russian personal income tax reform :
1.
The introduction of the flat tax on personal income (rate of 13%) was part of a comprehensive set of fiscal reforms undertaken after the debt crisis of 1998 (e.g. the tax rate on dividends went up from 15% to 30%; the corporate tax rate of 30% remained but municipalities
were allowed to impose a sur-tax of 5%, increase of excise duties on alcohol and fuel);
2.
The changes in tax administration and enforcement along with other structural changes
were significantly more fundamental and sweeping than the change in tax rates;
3.
Economic growth began well before the reforms were introduced. GDP grew twice as
fast before the reform as it did after the reform (GDP grew 10.6% per annum during the six
quarters before 1st January 2001 and 4.7% per annum in the six quarters after that date);
4.
Microeconomic data suggest that the rate reductions had little if any effect on labour
supply;
5.
Although there was a significant increase in compliance following the 2001 reform, it is
most probably attributable to changes in the administration and stricter enforcement of the
tax law (e.g. by increasing the power of the tax enforcement agencies and of the tax police : in
Moscow, the tax police remitted double the amount in 2001 from tax evaders than in 2000).
As to the effect of a flat tax on labour costs, it should not be forgotten that the effective taxation
on labour depends also on social contributions and these contributions have generally gained
importance in countries having adopted a flat tax structure.
Perhaps the most important aspect of the introduction of a flat personal income tax is the fact
that such tax is not neutral in terms of redistribution and tax revenue for governments. The
impact of the flat tax on income redistribution and on the income of the state depends not only
on the rate, but also on the level of the basic tax allowance at the bottom of the income scale ,
on the amount of the accepted tax credits and on the maintenance or not of a special tax reduction for persons on social benefits.

As to the revenue effect of the introduction of flat taxes, it could be observed that in certain
countries, tax revenues have indeed increased. However, contrary to what proponents of theflat tax argue, research4 has not found Laffer effects or sizeable labour supply effects of the
switch to a flat tax. A large part of the outcome seems to be the effect of the parallel introduction of stricter rules to combat tax fraud and to improve compliance. The experience with the

A study by Decoster and Van Camp (university of Leuven)6 examined different scenarios in Belgium. They found that in the case of the introduction of a flat tax rate of 25% without basic tax
allowance and only a reduction of the tax base for professional expenditure, income redistribution would decrease by 69%. The three lowest income deciles would lose between 20.0% and
23.7% of income and the top decile would gain 12.3%. In the case of the introduction of a basic
tax allowance and 25% flat rate tax, the 4 lowest deciles would lose between 0.9% and 6.2% and

4
Carone, G., Schmidt, J.H. and Nicodme, G. (2007), Tax revenues in the European Union : Recent trends and challenges ahead, E.C.
Economic papers, nr. 280, May 2007, p.18 with reference to Keen M., Kim, Y.and Marsone, R. (2006), the flat tax(es) : principles and evidence,
IMF working paper, nr. 06/218.

5
Tax Notes International, March 14, 2005, p. 983.
6
Decoster, A. en Van Camp, G. (2005), Hoe vlak is onze taks ? Is een vlaktaks fair ?, KUL, Leuvense Economische Standpunten,
2005/110.

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the top 3 deciles would gain between 11.6% and 16.7%. The tax revenue would decrease by
26.8%.
In order to achieve revenue neutrality in Belgium, the flat rate would need to be as high as
39.5% (with a reduced tax for people on social benefits). Even then, the redistribution effect of
the tax would erode with the biggest benefit for the top deciles.
The study by Fuest, Peichl and Schaefer for Germany7 on the effects of a revenue-neutral flat
tax on the German economy arrives at the same results. They found that all scenarios - combining a flat rate and an allowance - yield an increase in inequality and redistribution in favour of
the highest incomes.
And finally there is the argument that a flat tax system would attract Foreign Direct Investment.
Taxation is indeed one of the determinants of investment. However, other determinants are
equally or even more important. The EC enumerates : the existence and quality of economic
infrastructure, the availability of qualified workers, the outlook in different markets and countries, the geographical accessibility of markets, transport costs, environmental standards, wage
levels, social security systems and the overall attitude of government8. And we could add legal
security and the stability of governments and rules.
Our conclusion is that the flat tax is a nice idea, but unfortunately not more than that. There
are better ways to achieve the pretended advantages of the flat tax without violating the equity
principle which characterises progressive taxation.
7.

POLICY CONCLUSIONS

As this report illustrates, the tax systems in the EU Member States (MS) have more differences
than similarities. Differences persist not only concerning the total tax revenue, but also concerning the tax structure, the tax rates and the definitions of the tax bases. The 15 old MS
rely on average much more on direct taxes than the 13 new MS, which rely more on indirect
taxes. Even for those taxes where the EU has managed to harmonise to a certain degree the tax
base and the tax rates (VAT, excise duties), differences remain. Especially in the field of direct
taxes, and in particular corporate and other capital taxes, the EU has made a lot of proposals,
but hardly any progress towards a common tax policy. The fundamental reason for this state
of play is that tax policy decisions in the EU require unanimity in the Council of Ministers and
governments tend to consider taxes (and social protection), and in particular corporate taxes,
as a national economic policy instrument.
In the absence of a pan-European harmonisation in the field of corporate and other capital taxes and of a strong international cooperation between tax authorities in the framework of
OECD, tax competition and tax dumping, tax evasion and tax fraud will continue. Governments
should realise that, without international regulation and cooperation, they will all be the losers
at the end.
Recently, there are indications inside the EU, the OECD and the G20 that action will be taken in
order to strengthen international cooperation in order to reduce international tax evasion and
to make sure that international companies pay their share of the tax burden. It cannot be that
bilateral agreements or EU directives intended to avoid double taxation of company profits end
7
Fuest, C., Peichl, A. and Schaefer, T. (2007), Is a Flat Tax Politically Feasible in a Grown-Up Welfare State? quoted by Carone, Schmidt
and Nicodme, op.cit. p. 18.
8
Communication by the EC to the Council (2001), Towards an Internal Market without tax obstacles, COM (2001) 582 final.

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up by producing no taxation at all.


In the meantime, national governments can do a lot themselves to implement the principles of
good public governance in budgetary and tax matters. The better the governance, the higher
the confidence in government and the greater the willingness of people and companies to pay
taxes. When people get a fair return in public services and social benefits, they will be willing
to pay the price for that. If, on the contrary, they have the impression that their money is not
properly spent, they will be reluctant to contribute.
8. RECOMMENDATIONS
From a social point of view, direct taxes should be privileged over indirect taxes. Taxation of
capital income should be brought closer in line with taxation of labour income. Higher effective capital taxes on big international companies and on personal capital income, together with
environment taxes and a more efficient levy of VAT, could help to reduce the tax on labour.
As far as companies are concerned, this can be done by setting normal corporate tax rates on
a broad tax base, by simplifying the rules and procedures, by taxing capital gains realised on
the sale of companies, by keeping an eye on cross border income flows (OECD transfer pricing
guidelines), especially to tax havens, by regular control of companies accounts by tax authorities and independant auditors, by concluding bilateral tax agreements with other countries,
by imposing proportional penalties in case of tax fraud and finally by avoiding overly generous
special tax regimes. SMEs should be awarded a reduced tax rate.
As far as personal capital income is concerned, recurrent and socially corrected taxes can be
levied on the income from property (houses, apartments, land) and movable assets (interest
and dividends from bonds/shares). Transaction taxes and capital gains taxes on property can
also be implemented. Inheritance taxes, where they exist, should be progressive within reasonable limits and non-discriminatory.
As for the taxation of labour income, a flat rate tax is not fair because it violates the basic principle that the broadest shoulders should bear the heaviest burden. Labour income should be
taxed according to a progressive scale, with a basic tax-free allowance. Tax allowances should
also be foreseen for professional expenditure; limited tax credits can be awarded for social
or environmental objectives (e.g. mortgages, work bonuses for older workers who work until
they reach the legal retirement age, energy-saving investments, etc.). For non-active partners,
splitting and separate taxation of labour income (and of extra-legal pension capital) can be important. For dependent children most governments offer tax relief, besides child allowance.
Instead of this relief, an increased social transfer could be envisaged which would make financial support for children more visible. The same principle could be applied for eco-investments.
Tax equity should be guaranteed between all professional groups. Abuses of the status of
self-employed and of company statutes should be prevented. Double taxation of frontier workers should be avoided. And in order to protect workers standard of living, regular indexation
or adjustment of tax scales is necessary.
As for indirect taxation, and in particular consumer taxes, they should be conceived as a regulatory instrument to influence production and consumption, to promote qualitative and sustainable economic growth and a healthy environment and way of life. Environmental taxes on
energy, transport and pollution can be introduced or developed in order to reduce the tax on
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labour. Sweden applied this transfer with success. For reasons of social justice, a certain progressivity should be applied in VAT taxes : essential products and services should be taxed at a
lower rate, whilst luxury products should be taxed at a higher rate or be subject to a special luxury tax. In order to protect the living standards of the weakest groups in society, care must be
taken to ensure that indirect taxes do not become too predominant in the national tax systems.
As for social security contributions, they should be high enough to guarantee the adequacy and
the sustainability of the statutory social benefits, taking into account the ageing of societies.
The higher social benefits can be taxed at a reduced rate. The lowest benefits should be taxfree.
In order to increase the effectiveness of the tax system, and also for reasons of social justice,
tax evasion and tax fraud has to be tackled. Different measures can contribute to improve tax
collection and increase compliance, such as e.g. :
-
improve the tax administration capacity (capacity building);
-
invest in the recruitment, training and modern equipment of tax and social inspectors;
-
regular control of company accounts and of banks (as from 2015, EU banks will be obliged
to report their benefits and paid taxes);
-
all salaries and bonuses have to be paid via bank accounts
-
all commercial transactions above 1000 euro must be paid via bank accounts (cf. Italy);
-
promotion of declared work via tax incentives (e.g. deductability of certain goods and
services) and better information of workers on the long term benefits of declared work (decent
pension);
-
data-mining, data-matching and data-sharing : organise the linking of different data-bases, e.g. between declared income and data on spending via creditcard (cf. Italy), between the
employment register and the social security funds, between declared income and the registration of cars or appartments, etc.
-
obligation to register recruited workers before they start working;
-
establishment of a central register of all bank accounts and control of bank accounts in
case of indications of tax fraud;
-
tight control on transactions in certain sensitive economic niches : antiques, art, gold,
jewellery;
-
introduction of electronic cash registers for the catering industry;
-
include in the annual tax declaration form a question asking if the person has a bank
account or insurance abroad;
-
regularisation and amnesty possibilities for the repatriation of capital, with reasonable
financial penalties;
-
mutual automatic information exchange agreements with foreign tax authorities on income of non-residents.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

II. TAXATION AND BUDGETARY POLICIES IN THE COUNTRIES OF THE WESTERN


BALKANS
1.

BOSNIA AND HERZEGOVINA

1.1

CURRENT SITUATION

There are three legal and economic systems in Bosnia and Herzegovina: Republika Srpska, Federation of BiH, and the Brko District.
The taxation system in BiH is based on legislation adopted at different levels of authority and
decision-making: level of BiH, level of entity - Republika Srpska (RS) and Federation of BiH (FBiH),
level of District Brko, level of cantons within FBiH, and the level of municipalities in FBiH and
RS.
1.1.1 Basic division of taxes in BiH:

Indirect taxes (VAT, customs duties, and excise duties): they are regulated at the level of
BiH.

Direct taxes (profit tax, income tax, contributions of pension and disability, health care
insurance and insurance from unemployment, including contributions of child care in RS, property, etc.): they are regulated at the level of entities and Brko District.
Indirect taxes are paid to a single account at the level of BiH and they are distributed between
entities (RS and FBiH) and Brko District in line with the Law on payment to a single account and
distribution of revenues.

VAT is in force in BiH as of 1 January 2006, with one rate : 17%.
Direct taxes are regulated at the level of RS, FBIH and the BD based on legislation, as follows:
Profit tax

Republika Srpska (RS): Law on profit tax (Official Gazette of RS, Nos. 91/06, 122/10, and
57/12), Rulebook on enforcement of Law on profit tax (Official Gazette of RS, Nos. 129/06,
110/07, 114/07, 62/08, 9/09, 122/10, and 73/11)

Federation of BiH: Law on profit tax (Official Gazette of FBiH, Nos. 97/07, 14/08, and
39/09), Rulebook on enforcement of Law on profit tax (Official Gazette of FBiH, Nos. 36/08 and
79/08)

Brko District: Law on profit tax (Official Gazette of BD BiH, Nos. 60/10 and 57/11), Rulebook on enforcement of Law on profit tax (Official Gazette of BD BiH, No. 9/11)
In BiH, at the level of entities and in the BD, the rates of profit tax are 10%.
Personal income taxes and social contributions

Martin Hutsebaut
25 August 2014

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In BiH there are three systems of payment of mandatory social contributions, which are partly
harmonized, yet not identical:

RS applies Law on contributions, based on which the cumulative contribution rate is 33%
of gross salary (contributions for pension and disability insurance is 18.5%, contributions for
health care insurance is 12%, contribution for insurance from unemployment 1.0%, and contribution for child protection is 1.5%), then Law on tax income, based on which the income tax rate
is 10%, and the basis for gross salary is reduced by contributions for social insurance by 33%.
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FBiH applies Law on contributions, based on which the cumulative contribution rate is
31% from the gross salary (contribution for pension and disability insurance is 17%, contribution for health care insurance is 12.5%, contribution for insurance from unemployment is 1.5%),
though that contributions are also paid by employer at the rate of 10.5% from the gross salary
(6% for pension and disability insurance, 4% for heath care insurance, 0.5 for insurance from
unemployment), then the Law on income tax based on which the income tax rate is 10%, and
the basis of the gross salary is reduced for contribution for social insurance by 31%, and additionally by 3,600 KM (1,837 ) of the personal deduction annually.

In accordance with the Law on income tax in the District, the tax rate is 10%, and the
basis of the gross salary is reduced by contribution for social insurance, where the cumulative
contribution rate is 30.5% (pension and disability 17%, health care 12%, unemployment 1.5%);
if the employee is registered with the Fund for pension and disability insurance of F BiH, additional 6% of contribution of pension and disability insurance is paid by the employer from the
basis which represent a gross salary. If the employee is registered with the Fund for pension
and disability insurance of RS, the cumulative contribution rate for social insurance is 31.5%
(pension and disability 18%, health care 12%, unemployment 1.5%). All the employees residents, at the determination of tax basis are entitle to personal deduction of 3,600 KM (1,837 )
annually.
Tax structure by type

In 2012 the net revenue from indirect taxes at the level of BiH amounted to 19% of GDP
of BiH. This amount was distributed according to the legally agreed coefficients between the
entities (RS and FBiH) and the District.

In 2012 the FBiH collected from direct taxes an amount equal to 3.0% of FBiH GDP; social
contributions represented 16.2% of FBiH GDP and the revenue of indirect taxes (distributed by
central government) reached 16.3% of FBiH GDP.

As far as RS is concerned, the distribution was as follows (2012):

Direct taxes :
4.87% of RS GDP

Social contributions:
15.63% of RS GDP

Indirect taxes:
17.22% of RS GDP

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 1 - BUDGET (REVENUES AND EXPENDITURES) OF THE BIH INSTITUTIONS1(for 2012)


BUDGET OF BIH INSTITUTIONS FOR 2012
DESCRIPTIONS

% IN GDP BIH*

% IN TOTAL
REVENUES

I REVENUES (1.+2.+3.+4.+5.+6.)

472.666.303

3,60%

100,00%

1. TAX REVENUES (PART OF REVENUES FROM THE INDIRECT TAXES COLLECTED AT THE LEVEL OF BIH, WHICH REMAIN FOR THE DISTRIBUTION AND
FINANCING OF BIH INSTITUTIONS)

383.468.911

2,92%

81,13%

2. NON TAX REVENUES (2,1,+2,2,+2,3,+2,4,+2,5,+2,6)

67.532.357

0,51%

14,29%

2.1. REVENUES FROM FEES AND CHARGES

17.541.707

0,13%

3,71%

2.2. REVENUES FROM SPECIAL TAXES AND CHARGES

21.365.768

0,16%

4,52%

2.3. REVENUS FROM ITS OWN ACTIVITY

8.738.422

0,07%

1,85%

2.4. REVENUS FROM TAX AND CONTROL STAMPS

1.899.983

0,01%

0,40%

2.5. REVENUS FROM THE CENTRAL BANK PROFIT

14.090.536

0,11%

2,98%

2.6. EXTRAORDINARY REVENUES

3.895.941

0,03%

0,82%

11.284.547

0,09%

2,39%

357.904

0,00%

0,08%

5. REVENUES FROM GSM LICENSES

1.022.584

0,01%

0,22%

6. REVENUES FROM UMTS PERMITS

9.000.000

0,07%

1,90%

II COLLECTIBLES (7+8)

3.920.290

0,03%

202.026

0,00%

3. CURRENT SUPPORT IN MONETARY FORM (DONATIONS)


4. REVENUES FROM FUND FOR THE RETURNASSOCIATED RESOURCES

7. COLLECTIBLES FROM THE SALE OF FIXED ASSETS


8. COLLECTIBLES FROM THE SALE OF THE BARRACKS MARAL TITO

3.718.264

0,03%

III OTHER FINANCING

16.257.548

0,12%

9. TRANSFERRED EXCESS OF FUNDS FROM PREVIOUS YEARS

16.257.548

0,12%

492.844.095

3,76%

IV TOTAL REVENUES, COLLECTIBLES, AND FINANCING AT DISPOSAL TO THE


BIH INSTITUTIONS (I+II+III)

*GDP BIH IN 2012 (CURRENT PRICES) =

DESCRIPTIONS

13.116.835.308
VALUE IN EUR
(1 EUR = 1.95583 KM)

% IN GDP BIH*

% TOTAL EXPENDITURES OF BIH


INSTITUTIONS

TOTAL EXPENDITURES OF BIH INSTITUTIONS (I+20+21)

455.203.036

3,47%

100,00%

I TOTAL EXPENDITURES OF BUDGET BENEFICIARIES (SUM(1:19)

450.581.353

3,44%

98,98%

1. GROSS SALARIES AND EMOLUMENTS

265.090.920

2,02%

58,24%

56.130.595

0,43%

12,33%

3. TRAVEL COSTS

6.069.192

0,05%

1,33%

4. TELEPHONE AND POSTAL SERVICES COSTS

4.696.699

0,04%

1,03%

5. ELECTRICITY AND UTILITY COSTS

9.945.203

0,08%

2,18%

10.793.808

0,08%

2,37%

5.595.696

0,04%

1,23%

13.841.704

0,11%

3,04%

9. COSTS OF CURRENT MAINTENANCE

8.264.715

0,06%

1,82%

10. COSTS OF INSURANCE AND MONEY FLOW TRANSFER

1.733.547

0,01%

0,38%

22.106.587

0,17%

4,86%

2. COSTS OF THE EMOLOYEES

6. PROCUREMENT OF MATERIALS
7. COSTS FOR TRANSPORT SERVICES AND FUEL
8. COSTS OF LEASE

11. CONTRACTED AND OTHER SPECIAL SERVICES


12. PROCUREMENT OF LAND

654.475

0,00%

0,14%

13. PROCUREMENT OF BUILDINGS

6.233.118

0,05%

1,37%

14. PROCUREMENT OF EQUIPMENT

13.039.839

0,10%

2,86%

15. PROCUREMENT OF OTHER FIXED ASSETS

13.294

0,00%

0,00%

16. PROCUREMENT OF FIXED ASSETS IN FORM OF RIGHTS

2.692.197

0,02%

0,59%

17. RECONSTRUCTION AND INVESTMENT MAINTENANCE

516.380

0,00%

0,11%

18. CURRENT GRANTS

21.830.337

0,17%

4,80%

19. CAPITAL GRANTS

1.333.047

0,01%

0,29%

20. SPECIAL PURPOSE PROGRAMS-DIRECT TRANSFER FROM SINGLE ACCOUNT

4.191.380

0,03%

430.303

0,00%

21. RESERVATIONS

22

VALUE IN EUR
(1 EUR = 1.95583 KM)

BiH Parliament adopts the budget of BiH institutions

23

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

1.2 TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM IN BiH

ANNEX 1

1.
Full implementation of Law on taxation procedure, with a special emphasis on control of
calculation of salaries and taxes, including the responsibility of Tax administration to provide
every beneficiary with an annual report on paid social contributions, so that the workers can
have insight into the paid liabilities paid into the funds by the employers. The reason for this is
that the reality shows that the worker, once he meets the requirements for retirement or needs
medical protection or protection from unemployment, finds out that he cannot exercise any of
these rights, although the employer had deducted the collectibles from his gross salary.

CALCULATION OF PERSONAL INCOME TAX AND SOCIAL CONTRIBUTIONS IN FBiH:

2.
No taxation of the lowest salaries, whereby the minimum salary should be increased to
at least 50% of the average salary in Republika Srpska and in the Federation of Bosnia and Herzegovina.
3.
Introduction of progressive taxation rates on salaries, in such a way that the salaries up
to twice the average salary in RS and in FBiH are subject to a tax of 8%; salaries from two to five
times the average salary in RS and FBiH should be taxed at 15%, and all the salaries exceeding
five times the average salary in RS and in FBiH (mainly managerial staff) should be taxed at 25%.
This would mean a fairer tax burden and fairer distribution.
4.
Taxation of personal income should be defined in such a way that it does not affect too
negatively the increase of salaries harmonized with the increase of productivity.
5.
Analyse the effects of exemption of employers from payment of profit tax, if it is invested
into the expansion of production and employment. These effects should be the number of new
jobs, new workers compared with the saving due to the unpaid taxes. Every employer who did
not invest in production and new jobs should pay the profit tax.
6.
To prevent through legislation the abuse by individual employers in terms of appropriation of property and filing for bankruptcy. Laws should ensure that the same owner cannot
register a new legal person until he pays all the tax and other liabilities in the existing company.
Employers have to guarantee for their liabilities with all their property (both personal and of
family members), including their property of other companies.
7.
Active measures should be taken in order to prevent unregistered work and to transform
such work into formal work, so that this work could be registered in the taxation system, and
the workers be insured and protected from the arbitrary behavior of the employer.
8.
In terms of more efficient work of the Inspectorates in RS, adopt a new law on inspections, and if necessary amend other laws to create conditions for inspection to be more efficient, meaning preventive for good employers and repressive for employers who refuse to
apply legislation in the field of taxation system, labor laws and collective agreements.
9.
Introduction of differentiated VAT rates, meaning 0% or low rates for basic consumables,
medications, education, etc., and higher rates for luxurious products and services.

A. From personal income and other income of the insured (contributions from base)
B. Personal income paid by the employer or charged to the payer of income (contributions on the bases)
A. Example of calculation of taxes and contributions from personal income and other
income of the insured (contributions from base)
-
-
-

Net salary = 1000,00 KM (511,29 euro)


Personal deduction = 300 KM (153,39 euro)
The cumulative contribution rate is 31% on gross salary

1.

Calculation of contributions = gross salary x 31%


(net salary personal deduction) /0,90 + personal deduction
Gross salary =
0,69

(1000-300) /0,90 + 300

Gross salary =

Contributions from salary (31%) = 1562,00 x 0,31 = 484,22 KM (247,58 euro)

2.

Calculation of tax = base x 10%

Base for the taxation = Gross salary Contributions from salary Personal deduction

0,69

= 1562,00 KM (798,64 euro)

Base for the taxation =1562,00-484,22-300,00 = 777,78 KM (397,67 euro)


Tax = 777,78 KM x 0,10 = 77,78 KM (39,77 euro)
B. Example of of calculation of contributions to personal income, paid by the employer or
charged to the payer of income (contributions on the basis)
Net salary = 1000,00 KM (511,29 euro)
Personal deduction = 300 KM (153,39 euro)
Contribution on salaries = base (gross salary) x 10,5%
(net salary personal deduction) /0,90 + personal deduction
Gross salary =
0,69
Gross salary = 1562,00 KM (798,64 euro)
Contribution on salaries (10,5%) = 1562,00 x 10,5% = 164,01 KM (83,86 euro).
First version of Report drafted by Bojan Markovi, economist in SSRS
Latest version of Report adapted and updated by Boana Radoevi, KSBiH / SSRS economic expert

24

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 6 - Functional classification: Expenditure in the state budget was 36.3% of GDP, and
breaks down as follows:

2. CROATIA
2.1 CURRENT SITUATION

Budget line

2.1.1 General government revenue and expenditure


The basic task of the taxation system in the Republic of Croatia is financing the central government (state) budget, local administration, and out-of-budget funds. Function of distribution is
only a part of the primary task, and it is not an objective for itself.
In 2012, the general government disbursed around 43.3% of the Republic of Croatia gross domestic product.

Table 4: Balance of the spending of general government in 2012, in % GDP


Title
State budget
Local administration
Funds
General government:
total

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Revenue
33,0
3,7
2,5
39,2

Expenditure
36,3
4,5
2,5
43,3

Deficit
-3,3
-0,5
0,0
-4,1

Revenues of the general government for 2012 suggested the deficit of 4.1% of GDP1. It is covered by the debts in domestic and international financial markets. At the end of 2012, the debt
of general state was 55% of GDP.
2.1.2 State budget

Pension system

33.1%

12.0%

Health care system

17.9%

6.5%

8.3%

3.0%

15.7%

5.7%

Police

4.4%

1.6%

Army and defence

4.4%

1.6%

Agriculture

3.6%

1.3%

Judiciary and prison system

2.8%

1.0%

Other unspecified

9.8%

3.6%

100.0%

36.6%

Social welfare system (including assistance to the unemployed)


System of education, science, sport

TOTAL

Table 7 Expenditure by nature from the state budget based on nature of costs
Budget line

Table 5: Revenues in the state budget were 33.0% GDP, and they consisted of:
37% revenues or 12.1% GDP;
37% revenues or 12.1% GDP;
11% revenues or 3.6% GDP;
5.5% revenues or 1.9% GDP;
2.8% revenues or 1% GDP;
2.8% revenues or 1% GDP;
2.0% revenues or 0.7% GDP;
1.0% revenues or 0.3 % GDP;
1.0% revenues or 0.3 % GDP;

Expenditure in the state budget in 2012 amounted to 16.4 billion .

26

Expenditure as % of GDP

Citizens and households

53.0%

19.2%

Employees central state

20.7%

7.5%

Assistance to citizens

8.3%

3.0%

Interest on public debt

6.9%

2.5%

Subsidies for economy

5.5%

2.0%

Other costs (capital investment)

5.6%

2.1%

100.0%

36.3%

TOTAL

Table 8 Tax structure per type of tax in % GDP


Budget line

Expenditure as % of GDP

Direct taxes (income, profit, capital)

2.5%

Indirect taxes (VAT, excise duties, consumer tax)

24.0%

Social contributions

12.7%

TOTAL

39.2%

Table 9 - Tax structure by tax basis in % GDP


Budget line
Consumer tax
Labour tax including contributions

Expenditure as % of GDP
24%
12.7%

Tax on capital

2.0%

Property tax

0.3%

Environment tax

0.2%

TOTAL

Expenditure as % of total

2.1.3 Structure of taxes of the general government

Revenue of the state budget in 2012 amounted to 14.9 billion .

1. VAT
2. Contributions /mandatory/
3. Excise duties
4. Profit tax



5. Other charges
6. Donations and other
7. Customs
8. Income tax
9. Property tax

Expenditure as % Expenditure as %
of total
of GDP

39.2%

source of data: Ministry of Finance, 2013

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

The above clearly suggests that the indirect consumer taxes are overwhelming in Croatia, making 61% of all taxes, followed by mandatory social contributions. Taxes on capital and property
do not have any redistribution role, and they do not significantly prevent the arrival of foreign
capital to Croatia.

Consumer tax

Basic consumer tax is VAT at 25%, whose taxpayers are all those whose turnover from sale of
products and services in one year exceeds 30,000 .
Other interim rates are: tourism 10%; milk, bread, medicines, books, cinema tickets: 5%
Excise duties are harmonized with EU Directives 12/2010 and 64/2011, and taxpayer is importer
or producer of products subjected to excise duties, and they are paid by consumers who buy oil
derivate, electricity, tobacco products, and alcohol beverages.
Other consumer taxes are: special tax on vehicles, luxury products, vessels, airplanes, nonalcoholic beverages, and automobile insurance premium.
There are some town consumption surcharges, and tax on lottery, betting, and similar.

Direct taxes in the world of labour: Income tax

Personal deduction: 2,200 kuna or 300


Tax scale is:

0 2200 kuna
12%

2200 8800 kuna
25%
8800 kuna + 40%
The maximal tax base for social contributions amounts to six times the average gross salary:
47,646 kuna (6,352 ). It means that the amount of mandatory contributions for a gross salary
of 100,000 kuna is the same in absolute terms as it is for 47,646 kuna; in relative terms the level
of contributions for top salaries is lower than for medium salaries.

Table 10 Implicit tax rates, per category, 2011


State
EU-27*
Croatia**

Implicit tax rate on


labor
35.8
28.6

Implicit tax rate on


consumption
20.1
23.9

Implicit tax rate on


capital
28.9
13.9

* Note: Data for EU-27, Eurostat 2012


** Data for Croatia, 2010-2012, according to Blai, Troelj: International comparison of tax
burden on labor force and Croatian Chamber of Commerce: Results of business operation in
2012, Zagreb, 2013
Table 10 shows that Croatia has a favorable implicit tax rate on capital compared to EU-27, but
a less favourable one on consumption, (the VAT rate was increased in 2012 from 23% to 25%).
The implicit tax rate on labor is smaller in Croatia due to, amongst other things, a reduction of
the contribution rate for health care insurance (from 15% to 13% of the gross salary).

Other taxes

Other taxes include:


-

tax on inheritance and gift of 5% of the value, except for direct blood relatives;

tax on vacation houses of 5-15 kuna per m/2. This tax is revenue of town or municipality;

-
tax on company or name of company of 2,000 kuna annually or 270 - revenue of town
of municipality;
-
tax on sale of real estate` of 5%, except if it is first real estate or in the field of special
state welfare;
-
utility fees, revenue of towns differs, i.e. in Zagreb 0.5 per m/2, and it is a sort of property tax. The procedure to change this with the tax on real estate is ongoing;
-

tax on lease of real estate of 8.4% of the value of lease.

Tax on capital

-
profit tax at single rate of 20% applied to all companies making profit, where the turnover from sale of products and services exceeds 230,000 kuna.
-
other tax on capital, like 12% on dividends, 15% on copyrights, 15% on services of market
research ands other, 15% on interest, tax on other services if e.g. related to tax heavens 12.5%
-
in the field of state welfare (war affected areas), lower profit tax rates
-
capital tax includes also parafiscal burdens for Chambers (mandatory membership dues,
waters, forests, tourism community, fees for monuments and similar). The procedure for their
termination is ongoing.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Implicit tax rates in Croatia

2.2 TAX REFORMS


Tax reforms in Croatia are taking place permanently; as of 1997 the system has been harmonized with the system in EU. Although the tax system was assessed as being among the best 30
systems in the world, it is subject to constant changes of tax rates (particularly VAT), including
new forms of collection (the latest example is so-called fiscalization of sale in open green markets). System of control of collection of tax and contribution used to be arbitrary and inconsistent, inappropriate for functioning of market economy. No tax reform introduced an effective
and fair system of taxation of property; this was due to opposition of various political and
interested parties (the new rich groups after 1990).

Implicit tax rates are good indicators of tax burden, but they have their limitations as they take
into consideration potential basis of possible tax revenue, which is a broad notion.
28

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

2.3 TRADE UNION VIEWS AND DEMANDS CONCERNING THE CROATIAN SYSTEM OF TAXATION
1.
The taxation system is ineffective, as there is a grey area in economy that evades tax payment. It includes at least 15% of the economy in Croatia (some authors claim even 30%).
Tax supervision is partial and often depends on politics, and it is a source of corruption.
Tax administration should be reformed in terms of its efficiency, including the affirmtion of its
position in society.
2.
The main tax burden is borne by the poorest groups of population through the consumer
tax, whereas the property tax goes in favor of the rich and does not constitute significant source
of state financing. Trade unions strive that the policy of income tax has to be more fair, and that
another rate should be introduced: the rate of 50% to income exceeding 15,000 kuna, which
would facilitate better taxation of income several times bigger than the average.
3.
The trade unions are in favour of property tax, particularly among those groups which
became rich thanks to privatization. Trade unions also warn that the specifics of Croatia have
to be acknowledged at introduction of property tax, where about 85% of population has some
kind of real estate which serves them only to satisfy their basic residential needs, and as such it
should not be taxed.
4.
The majority of parafiscal burdens should be terminated, unless they serve to better preserve natural resources (e.g. forests).
5.

The rationale for the existence of the second pillar of pension system should be defined.

6.
A stronger supervision of the banking system should be introduced, as well as the taxation of the extra profits of the banks.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

ANNEX 2
CALCULATION OF THE PIT AND AND SOCIAL CONTRIBUTIONS ON THE AVERAGE GROSS SALARY
OF 7,811 KUNA (1,055 ) IN 2012:



















EXAMPLE: single person, surcharge 10%, exchange rate


7.40 kuna for 1
Gross I 7,811 kuna (1,055)
I pillar pension 15% 1,171 kuna
II pillar pension 5%


390 kuna
A) Contribution from gross
1,561 kuna (211)
Deductions 2,200 kuna
Taxable income 4,048 kuna
tax 12% 264 kuna
Tax 25% 462 kuna
Total tax



726 kuna
surcharge 10%



72 kuna
B) Total tax and surcharge

798 kuna (108)
Gross II (gross I + contributions)
8,998 kuna (borne by employer: 1,215)
Contribution health care 13% 1,015 kuna
Contribution employment 1.7%



133 kuna
Contribution injury at work 0.5%

39 kuna
C) Contribution (health care + employment + injury at work): 1,187 kuna
A + B + C =
3,546 kuna (479)
D) NET SALARY (gross I-(A+B)
5,452 kuna (736 )
Borne by employer: A+B+C+D=
8,998 kuna (gross II) (1,215)

Ratio: borne by employer/net salary = 1.215/736 = 1.66

7.
The taxation system should be easily understandable, simple and stable, but the trade
unions oppose the introduction of a single flat rate in taxation, as there is no evidence that is
helps the economy (it did not contribute to economy in Serbia, Russia, Bulgaria, and elsewhere).

Zagreb, 7 April 2014


Drafted by Boris Feis, M.A. in economics


Executive secretary in SSSH for economic and financial matters
in cooperation with Katarina Litva, Croatian Independent Unions

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

3. KOSOVO
3.1

3.1.2 Expenditure of General Government

CURRENT SITUATION

3.1.1. Revenue of General Government , 2010-2012 in euro milion


The total budget revenues have increased over the years amounting to 1,482.000 million in
2012. While revenues as a share of GDP during 2010 and 2011 remained almost constant, there
was a significant increase in 2012 mainly as a result of domestic and foreign borrowing. Border
Revenues represent: value added tax at the border, the border excise, and various customs
taxes.
The internal revenue present: value added tax, personal income tax, corporation tax, profit tax,
presumptive tax and other unspecified revenues from tax administration and local Government, own source revenues.

Table 11 - Revenues General Government 2010-2012, % GDP


Description
Total revenues
Taxes (1&2)
1.Direct taxes
2.Inderect taxes
VAT
Excise
Customs tax
Tax returns
Other revenue
Foreign borrowing
Internal borrowing
Local Government. own source revenues (OSR)
Grants
One time revenues
Nominal GDP

32

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

2010
(Milion )
1,088.00
803.70
70.50
733.20
420.1
230.6
110.1
-27.6
101.40
22.10
00

2012
(Milion )
1,482.00
1,097.00
154.30
942.60
548.5
303.2
125.7
-34.8
86.00
93.7
74.0

46.10
30.00
85.00
4,291.20

59.40
37.40
35.0
4,916.00

as% of GDP
2010
2012
25.4%
30.2%
18.7%
22.3%
1.6%
3.1%
17.1%
19.2%
9.8%
11.2%
5.4%
6.2%
2.6%
2.6%
-0.6%
-0.7%
2.4%
1.7%
0.5%
1.9%
0.0%
1.5%
1.1%
0.7%
2.0%

1.2%
0.8%
0.7%

Table 2 presents the overall budget expenditure during 2010-2012, according to economic categories (by nature). Total expenditure has increased continuously. Wages and salaries as a category of economic costs have increased from 26% to 28%, while other categories have marked
a sensitive decline in 2012 compared to 2010. The increase in expenditure for wages and salaries is due to a raise of salaries of civil servants and to the transfer of new responsibilities.
Meanwhile, expenditure-GDP ratio has increased from 28% to 29% in 2012. The highest type
of spending was capital spending, at 11%. The high expenditure in this category reflects the
implementation of highway project, large numbers of infrastructure projects that include the
construction of other roads, building schools, hospitals, and additional investment involved in
improving infrastructure.

Table 12 - General Government Expenditure, by nature


Description

2010

2012

2010

In millions of euros

2012

2010

as % of GDP

2012

as % in total

Wages and Salaries

311.4

404.3

7.3

8.2

25.9

28.4%

Goods and Services

182.3

189.0

4.2

3.8%

15.2%

13.3%

Subsidies and Transfers

252.7

280.0

5.9%

5.7%

21.0%

19.7%

In total recurrent (operating)

746.4

873.4

17.4%

17.8%

62.1%

61.3%

Capital expenditures

455.4

550.2

10.6%

11.2%

37.9%

38.6%

1,202.0

1,424.0

28.0%

29.0%

100.0%

100.0%

Total

3.1.3 General government expenditure by function


Regarding expenditure by function, spending on economic affairs are the largest. This relates
mainly to capital expenditure for road construction. From the table it can be seen that expenditure for social protection, education and health also increased.

Table 13 General Government Expenditure by Function


Description

2010

2012

as% of GDP
2010

2012

General Services

264.5

266.9

6.2%

5.4%

Protection

26.5

31.3

0.6%

0.6%

Public Order and Safety

101.7

117

2.4%

2.4%

Economic Affairs

330.1

429.3

7.7%

8.7%

Environment Protection

3.1

2.0

0.1%

0.0%

Housing and Community Affairs

30.0

29.1

0.7%

0.6%

Health

106.8

128.4

2.5%

2.6%

Recreation , culture and religion

15.9

30.4

0.4%

0.6%

Education

162.1

196.8

3.8%

4.0%

Social Protection

161.0

197.9

3.8%

4.0%

Total

1,202.00

1,429.00

28.0%

29.1%

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 16 - Expenditure of Local Government

3.1.4 Revenue of Central Government


The total amount of Central Government revenues in 2012 was 1,429.00 million , which
represents 97.8% of total revenue of General Governmant, and 30.2% of GDP.
3.1.5 Expenditure of Central Government
The expenditure of Central Government in 2012 was 1,060.60 million euros, which represents
79 % of the total expenditure of General Government. The main part of the expenditure was for
gross fixed capital formation, intermediate consumption, current transfers to local government,
and compensation of employees.

Table 14 - Expenditure of Central Government in million


Central
Govt

Wages &
salaries

Goods &
Services

Utilities

Subsidies &
Transfers

Capital expenditure

Reserve

Total

2010

165.0

135.9

11.3

247.4

340.8

00

900.3

2012

209.1

132.7

13.2

272.5

433.1

00

1060.6

3.1.6 Revenue of Local Government


Local government own revenue in 2012 was about 59.4 million euros (excluding current transfers from Central Government). Income received from Central Government in 2012 was larger
than in previous years. In 2012 local government received 307.0 million euros from Central
Government as current transfer for education, health, general services, public order and safety,
etc.

Table 15 - Revenue of Local Government in millions of euros


Revenue Local Governmant 2012

2010

2012

General Grants from government

94.3

123.10

109.30

140.30

Health Grants from government

27.30

43.90

From Own Source revenues /Local Governmant

46.10

59.40

277.00

366.80

Education Grants from government

Total revenues Local Governmant

3.1.7 Expenditure of Local Government


Expenditure of Local Government in 2012 was 363.0 million euros, which represents 21.2% of
the total expenditure of General Government. The main part of the expenditure was for compensation of employees (55.5% of the total expenditure of the Local Government) and for gross
fixed capital formation (34.4%).

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Local Government

Wages and
salaries

Goods and
Services

Subsidies
Utilities and Transfers

2010

146.20

26.90

8.30

2012

195.20

34.90

8.3

Capital expenditure

Reserve

Total

5.30

114.60

00

301.40

7.5

117.20

00

363.00

3.1.8 Pension fund system


Social insurance system is somehow complicated. The pension system consists of 3 pillars; each
of them is different in the way of how they are funded and the population which they cover:
The first Pillar - is a means-tested basic social assistance scheme which also, but not only,
applicable to elderly. This pillar is integrated into Central Government, meaning that it is part of
Government component. Pension outlays under this scheme are considered as social benefits
included in the current transfers to households. This system is financed by General Government.
The second Pillar - is a mandatory pension funded scheme. This scheme was implemented
from August 2002, when big employers and national agencies were mandatory for contribution.
Since 2003 the mandatory saving scheme is expanded in order to cover all the employers of
Kosovo and the self-employed. Mandatory pension savings are administrated and managed by
the Kosovo Pension Saving Trust. KPST receives pension contributions with an amount 10 % of
gross wages from employers and employees (5% + 5%), and from self-employed: 10 % of the
earned income, KPST invests these assets.

Table 17 The main indicators of Kosovo pension pillar II (millions of euros)


Years
Collected Pension Contributions
Investment Return
Fees, Refunds & Other Payouts
Pension Assets Balance

2010
95
26
8
463

2012
113
54
16
715

The third Pillar Is a voluntary scheme funded on adequate and transparent way. This
scheme is optional for business and other financial institutions and can be funded from employers contributions and employees.
It should be stressed that Kosovos main pension system, which is currently in an embryonic
form, will become increasingly important in the following years. This scheme is completely recorded outside the government sector. Contributions and pension payments are flows between
the households and the financial corporate sector. From an economic point of view, it is not
satisfactory that the main mandatory pension system is not reflected at all in the government
accounts.

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

3.1.9 Types of taxes


Kosovo has laid out a taxation system that is simple transparent and with low taxes for individuals and businesses. Furthermore, the Government is introducing tax incentives to support
domestic production.

Corporate-tax
Depending on annual benefit, domestic legal entities and permanent establishments of foreign
legal entities are taxed as follows:
Annual income 0 - 5,000

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process


Property taxes
Property tax was introduced in 2002 and is collected at local government level by the municipal
councils.
The council of each municipality defines the tax rates on property on an annual basis. The
tax rates range between 0.05 -1% percent of the market value of the property for each of the
following property categories; residential property, commercial property, industrial property,
agricultural property, immovable abandoned property and uninhabited buildings.
The rent tax is 9%.

37.5 / quarter

Annual income 5,001 - 50,000

3-10% of income

Annual income 50,000 and more

10% of income

Corporate income tax is paid quarterly in advance, based on quarterly net benefit predictions.

Repatriation of profit
The transfer of profits and invested capital in foreign currency outside Kosovo is free and unrestricted. The law states that subject to tax and other business liabilities, foreign investment may
freely transfer lawfully acquired funds, regardless of their source and without delay to and out
of Kosovo.

Tariff duties
Customs duties: 10% on imports; Excise tax on fuel, tobacco alcohol and luxury goods. No duties and taxes on exports.

Value added tax
Value added tax is applied to all importers and businesses with an annual turnover in excess of
50,000 Euro. The standard VAT rate is 16 percent on all goods and services, with exemption for
certain agricultural and capital goods on which VAT is zero percent. Exporters receive full VAT
reimbursement for goods exported.

Personal income tax
Personal income tax applies to natural persons receiving income from Kosovo sources and also
to foreign incomes, received by Kosovo residents. The rate of personal income tax depends on
annual income and ranges from zero percent to 10 percent.

3.1.10 Accounting practices


Kosovo has a modern financial reporting system based on the International Accounting Standards. In 2001, with the NMIK, the Board on Standards for Financial Reporting was established
and to date 18 accounting standards in conformity with IAS have been issued. According to this
regulation, all business organisations with annual turnover in excess of 100.000 EUR or total assets worth in excess of 50.000 EUR are obliged to prepare four statutory financial statements on
an annual basis (Balance sheet, income statement, cash flow statement, and changes in equity,
and accompanying notes, along with a tax return). Businesses with a turnover below 100,000
EUR are required only to prepare a tax return.

3.2 TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND THE BUDGETARY
POLICY IN KOSOVO (BSPK)
3.2.1 Budget sources
Continue to be the same for years; new sources should be used activly
-
-
-
-

the funds collected from the privatization process,


the funds from the Pension Trust Fund of Kosovo,
the remittances on investment, not only in consumption,
the funds from external donors and EU funds.

Table 18 Personal income tax rates in Kosovo


Monthly income in euros

Rate

80

0%

81-250

4%

251-450

8%

Over 450

10%

Annual income in euros

36

0-960

0%

960-3,000

4% of the amount over 960

3,001-5,400

811.6 + 8% of the amount over 3,000

5,401

273.6 +10% of the amount over 5,400

3.2.2 Allocation of the budget per sector


Given the necessity of budget increase, sectors which would assist in this regard and which deserve a higher share in the budget are:
-

The sector of Economic Development (Investment in production, agriculture, industry and energy),
-
The sector of Education and Science (appropriateness of educational programs to labour market
needs and the training of the staff to for the application of new technologies),
-
The sector of Health and Welfare (the introduction of a health insurance, pensions law, the establishment of the social fund, upgrading the social policy schemes etc.).
-
Capital investments that require larger budgetary funds (highways and regional roads) should be
initiated through concessions, EU funds, and flexible loans from the IMF, World Bank.

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

3.2.3 Macro economic policies


-
Tax policy reforms with the objective to create more favorable conditions for local producers,
-
Creation of favorable conditions for foreign investments,
-
Reduction of informal economics through more favorable systems of taxes and a strict
implementation of the laws,
-
Raising taxes and fees for insurance companies and microfinance banks,
-
Reducing bank interests with the aim of alowing more favorable loans by businesses.
3.2.4 Taxation system and taxation policy
There was a change in the tax system by reducing the personal income tax and the corporation
tax: for corporations the tax was reduced from 20% to 10% and the personal income tax from
0%, 5%, 10 % and 20% to 0%, 4%, 8% and 10%.
As a result, the standard VAT rate increased from 15% to 16% and excise duty was increased for
certain products.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

-
Strengthening labor inspectorate by increasing the number of personnel and their professional development,
-
Monitoring the implementation of laws and acceleration of the procedures of the Economic Court in case of violations of labor law,
-
Creation of new working places by improving the tax climate for business. Suitable fiscal
package, fighting corruption and informality, as well as facilitation of procedures and administrative barriers are some of the conditions that must be implemented for investments, growth
and creation of jobs,
-
Increasing the budget for active measures in the labor market remains one of the other
challenges in respect of the labor and employment. So far, the majority of such measures is
funded by foreign donor organizations.
3.2.7 Social protection system
Kosovo currently has an underdeveloped system of social protection: there is still a need to
regulate and organise unemployment insurance, child allowances, health insurance and many
other social services, which in EU countries are provided by public institutions.


VAT rates:
Basic 5%
Standard 16%
Luxury 21%

Export taxes on minerals were introduced.
These reforms had no positive impact on economic development, employment growth, reduction of poverty, and should be changed.
BSPK proposes;
-
Differentiation in the tax on wages, according to experience and qualifications, lower
taxes for people with children; higher taxes for higher wages;
-
A unique tax system in the entire country;
-
Tax registers for all businesses;
-
Fighting tax evasion by a joint tax force.
3.2.5 The pension system.
According to BSPK, the actual funded scheme should be replaced by a Bismarck System.
3.2.6 Employment and Social policies - Poverty
The main challenges in this field include:
-
Improvement of statistics on employment and the electronic system of their management,
-
Creation of an acurate database for social schemes and permanent monitornig and control of social transfers in order to avoid social fraud,
38

Pristina, 18 June 2014


Ali Vitija
avitija73@gmail.com
+377-45-550704
10000/Pristina
Republic Of Kosova
For BSPK Kosova
39

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 20 - Budget expenditure by nature

4. REPUBLIC OF MACEDONIA
4.1

CURRENT SITUATION

General government revenue

In 2012 the total budget revenue covering all levels of government amounted to 2.245,1 million
representing 29.0% of GDP.

Table 19 - Budget Revenue in 2012 and 1st quarter of 2013


Total In millions

% of revenue

% of GDP

% of GDP 1st quar. 2013

Total revenue

2.245,1

100

29,0

28,3

Taxes

1.245,8

55,5

16,0

15,8

Contributions

662,8

29,5

8,6

9,2

Non tax revenue

204,6

9,1

2,6

2,4

Capital revenues

72,1

3,2

0,9

0,3

Donations from abroad

49,6

2,2

0,6

0,4

Collected revenues

10,2

0,5

0,1

0,1

4.1.1.2

General government expenditure

-
In 2012 the total budget expenditures of government amounted to 2.533.98 million or
32.7% GDP.
-
Current expenditure in the amount of 2.229 million accounted for 88.0% of total expenditure (28.8% GDP)
-
Capital expenditure in the amount of 304,99 million , representing 12% of total expenditure (3.9% GDP).
4.1.1.3

General government deficit

In 2012 the general government deficit was 288.89 million (3.7% GDP).
4.1.1.4

Total in millions

As % of total

As % of GDP

2.229

88,0

28,8

- Transfers

1.552,86

61,3

20,5

Social transfers

1.132,94

44,7

14,6

- Pension and Disability


Insurance

664,93

26,2

8,6

- Employment Service
Agency

36,41

1,4

0,5

- Social aid

91,12

3,6

1,2

- Healthcare

340,49

13,4

4,4

Other transfers

419,92

16,6

5,4

- Salaries and wages


expenses

369,33

14,6

4,8

- Goods and services

236,55

9,3

3,1

- Interest

68,6

2,7

0,9

- Reserves

1,68

0,1

0,02

Current expenditure

4.1.1 General government revenue and expenditure


4.1.1.1

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Classification of general government expenditure

Capital investments

304,99

12,0

3,9

TOTAL EXPENDITURE

2.533,98 in mill

100 %

32,7 % of GDP

Table 21 - Functional classification of the Budget expenditure:


2012 in % of total
expenditure

In % GDP

2013 1st quar. % of


total expenditure
Prognosis

In % GDP

General Public
Services

11,7

3,8

11,4

4,5

Defense

5,0

1,6

4,3

1,7

Public order and


peace

10,7

3,5

9,6

3,7

Economic issues

22,9

7,5

26,1

9,5

Environmental
protection

0,89

0,3

0,7

0,3

Housing and Community development

2,13

0,7

1,8

0,7

Health care

4,3

1,4

4.3

1,7

Recreation, culture
and religion

3,3

1,1

2,99

1,2

Education

17,6

5,8

16,0

6,2

Social Protection

21,5

7,0

22,6

8,8

Total tax revenue (including social contributions) (% GDP)


In 2012 the total tax revenue including social contributions reached the amount of 1.908,6 million , (24,6% GDP) (85.0% of total government revenue)

40

41

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

4.1.2 Tax structure

Social contributions are exclusively paid by the employee in total: 27% of gross salary

Pension and disability insurance -18.0%

Healthcare (primary) -7.3%

Employment - 1.2%

Healthcare (additional) -0.5%

4.1.2.1 Tax structure by type of tax (in% GDP)



Direct taxes 2012


- Revenue from personal income tax (PIT) amounted to 155.33 million , representing
8,14 % of total tax revenue (2.01 % GDP)

- Profit tax revenue, mainly due to the tax collected on the level of monthly advances and
on the basis of chargeable tax on paid dividends and other distributed profits, amounted to 59.4
million and 3.11 % of total tax revenue (0.77 % GDP).

- Other income tax revenue amounted to 53.3 million , accounting for 2.79% of total tax
revenue (0.69% GDP)

- Revenue from tax on personal accounts were 16.23 million and 0. 85% of total tax
revenue (0.21% GDP)

Table 22 - Total tax revenue including social contributions by type of tax (2012 and 1st quarter
of 2013)
2012

Tax revenues and


contributions

Personal
income
tax

Profit tax

VAT

In % of total tax
revenue 1.908,6
mill.

100%

8,14

3,11

32,77

In % GDP 7 742
mill.

24,65

2,01

0,77

In % of total tax
revenue 430,5
mill.

100%

9,20

In % GDP

25,04

2,30

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Excise

Tax
import
duties

Other
income
tax

Revenues
(personal
accounts)

Social
contributions

14,14

3,46

2,79

0,85

34,72

8,08

3,49

0,85

0,69

0,21

8,56

6,11

28,10

11,96

3,83

3,13

0,94

36,71

1,53

7,04

3,00

0,96

0,78

0,24

9,19

1st quarter of
2013

4.1.2.2 Tax structure by type of tax base (in% of GDP)


Taxation of consumption

-
Value added tax (8.08% GDP) is calculated using proportional tax rates on the taxable
supply of goods, services and export as follows:


Standard VAT rate is 18% and


Reduced VAT rate is 5%

o
Excise (3.49% GDP)

o
Customs (0.85% GDP)

Taxation of Labor

-
-
-

Personal income tax (PIT) flat rate of 10% (2.01GDP)


Social contributions- 27% of gross salary (8,56% GDP)
Total wedge: 37%

Taxation of capital

-
Corporate income tax rate is 10%
-
Annual tax on total corporate income in amount of 1%
-
Pursuant to the Law on Corporate income tax companies that have realized total revenue
from any source from (from 48 780.5 to 97,561) annually, may calculate and pay an annual tax
on total income as simplified tax regime for companies, instead of paying corporate income
tax.
-
The selected model / taxation regime companies can not change in the next three years
including the year for which the tax on total income is paid, if in the next three years the total
realized revenue is from 48 780.5 to 97,561 .
-
Companies whose total revenue for the year for which the tax from any source is determined do not exceed the amount of 48 780.5 per year are exempt from paying the annual
corporate income tax.


Indirect taxes (2012)
-
Value added tax amounted to 625.5 million and the share of VAT in total tax revenue
was dominant and accounted for 32.77%. (8.08 GDP)
-
Excise is in the amount of 269.9 million accounting for 14.14% of tax revenues (3.49%
GDP)
-
Revenue from import duties - custom amounted to 66.13 million accounting for 3.46%
of tax revenue (0.85% GDP)

Tax on interests and dividends: the rate is 10%

Property Tax

-
Inheritance and gift tax the rate is proportional and varies depending on the order of
succession. If it is a payer of second range succession it ranges from 2% to 3%, and if the taxpayer is the third range successor or in no kinship with the deceased, i.e. person giving the gift

42

Social contributions (2012)


Social contributions 662,8 million and 34.73 % of total tax revenue (8.6% GDP)

The group of property taxes includes:


-
Property tax the rate is proportional and ranges from 0.10% to 0.20%. Responsible for
determining the rate is the Council of the relevant municipality or city

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

it ranges from 4% to 5%. Heirs of first inheritance are taxfree. The Council of the municipality or
of the city determines the tax rate.
-
Real estate sales tax- The rate at which this tax is calculated is proportional and ranges
from 2% to 4%. The rate is set by the Council of the municipality or the city.
4.2 TAX AND BUDGETARY REFORMS
Given the fact that for a success in business the most important two things are low taxes and
predictable tax policy, but also the fact that Macedonia is a relatively poor country that lacks
domestic capital, the Government decided to implement the tax reform introduced to stimulate business development, to reduce the gray economy and the corruption, and to convince
businesses to invest their money in their own country by establishing or expanding their own
businesses and at the same time to attract foreign capital.
On the other hand the reform was directed towards modernizing and strengthening the institutional capacity of the state for fast, easy and efficient updating of taxpayers and for timely and
efficient collection of taxes from businesses and citizens.
Major reforms of the tax system were introduced before and during the crisis.
In 2007 the Government introduced a flat tax and reduced the previous proportional rates of
the personal income tax (PIT) and corporate income tax (DD).
Proportional tax rates for the personal income tax (PIT) of 15%, 18% and 24% decreased to 10%
in 2008 and the amount of corporate income tax of 15% introduced in 2007 decreased to 10%
in 2008.
At the end of 2008 the Government, in order to limit the consequences of the crisis, decided
on four packages of anti-crisis measures, as well as several other measures depending on the
individual needs that were necessary at a given moment.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

1)
Rebalancing of the budget including a review of the macroeconomic projections and a
corresponding decrease in revenue and expenditure of the budget under the new circumstances
o
Temporary ban of new recruitments in the state administration and the public sector
(savings of 5,32 million ).
o
Delay of a pay rise for employees in the public sector of 10% (savings of 8,63 million ).
o
Reduction of items for current expenditures in all budget lines for around 16 % (saving of
58,54 million ).
o

Reduction of contributions for pension, health and unemployment insurance

2)
Credit support for enterprises through a credit line from the EIB in the amount of 100
million and directed towards:
o
o
o
o

long-term investment loans;


short-term loans for working capital;
the subsidizing of interest rates for businesses and
the issuing of guarantees etc.

3) Other measures to support businesses, including measures to facilitate the export of


goods, costs reduction etc.
The fourth package of anti - crisis measures comprised 23 measures to mitigate the consequences of the economic crisis.
In 2009 the government reformed the system of the calculation and the payment of salaries,
switching to the system of gross salaries. This reform foresaw:

The first package of anti-crisis measures (330 mill ) referred to companies with damaged
liquidity and companies operating well. In order to stop the destruction of companies and the
dismissal of thousands of workers it comprises:

-
that salaries are paid in gross amount; previously untaxed benefits have been integrated
in the salary; the worker became responsible for the payment of the PIT and the social insurance contributions.

-
the gradual decrease of the rate of social security contributions from 32% in 2008 to
27.9% and later to 22%. The current decrease is more moderate and equals 27% in order to
maintain fiscal balance);

- tax release on profits;


- reduction of custom tariffs for certain goods;
- tax cuts for farmers and others in this area.

The second package of anti-crisis measures (8 billion ) was intended to boost economy growth
through support of the construction sector and of other sectors and in the long run to boost
Macedonian economic competiveness.

-
an integrated collection of PIT and social security contributions by the Public Revenue
Office.

An 8 years program of infrastructural projects in the field of:

Table 23 - Review of contribution rates 2008-2013

- roads and railways, energy, building, environment, sports etc. has been adopted.

The third package of anti- crisis measures included 70 anti-crisis measures pertaining to 3
segments:
44

Year

Pension and disability


insurance

Healthcare
(primary)

Employment

Healthcare
(additional)

Total

2008

21,2%

9,2%

1,6%

0,5%

32,5%

2013

18,0%

7,3%

1,2%

0,5%

27,0%

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process


The lowest base for the calculation of social contributions for 2013 is 249 (50% of average paid salary in amount of 498 published in January 2012).

The highest base for the calculation of social contributions in 2013 amounted to 2.988
(six average paid salaries in amount of 498 published in January 2012).
The changes in the tax system, the introduction of an integrated collection of social contributions and personal income tax as well as the increase of the effectiveness of the Public Revenue
Office has led to a more efficient tax administration and a broadening of the tax base.
The zero tax rate on undistributed profits leaves more funds in the companies for investments,
jobs and economic growth.
4.3 TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND BUDGETARY POLICY IN MACEDONIA

Greater transparency in the spending of budget funds.

Participation of trade unions in the drafting of the budget.

More appropriate allocation of budget funds.

- More budget funds for capital investments that will directly affect the improvement of
investment climate and will have an impact on the economic growth, will reduce the unemployment and will increase the employment rate in the country.

- Small, effective and efficient public administration which will not burden the budget.

Although the Government till March 2013 has settled the liabilities to companies and
has adopted a Law on financial discipline, due to lack of adequate information, we deem that
the Government should continue timely to fulfill liabilities towards companies (based on VAT
returns or commitment to a particular service for governmental purpose).


PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

ANNEX 3

CALCULATION OF THE PIT AND THE SOCIAL CONTRIBUTIONS IN MACEDONIA


The lowest base for calculating social contributions for 2013 amounts to 249 EUR (50% of average salary 498 EUR) 249 x 27% = 67.23 EUR.
The highest base for calculating social contributions for 2013 is 2.988 EUR (6 x 498 EUR) 2.988
x 27% = 806.76 EUR
The personal exemption for 2013 based on personal income from wages and pensions amounts
to 118.19 EUR on a monthly base.

Table 24 - Gross salary of 503 EUR


Description
1. Gross salary
2. Salary contributions (total) 27%
3. Deductions (gross salary contributions)
4. Personal exemption
5. Personal income tax base
6. Personal income tax (10% of the base)
7. Net salary (1 (2:6) )

Amount
503.00
135.81
367.19
118.20
248.99
24.90
342.29

Respect and consistent application of the Law on minimum wage.


-
Increased inspection regarding the implementation of this law;
-
The application of this law to be performed by the Public Revenue Office.

Drafted by Ljubica Dekovska

46

47

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

5. MONTENEGRO
5.1

CURRENT SITUATION

5.1.1 Budget of the general government


The structure of the budget of the General government of Montenegro is the budget of the
Central government of Montenegro with its state funds (Pension and disability fund, health care
insurance fund, Compensation fund, Bureau for employment, and Labor fund) and budget of
local self-governments (Capital Cetinje. Capital Podgorica and 19 municipalities). The budget of
the Central government of Montenegro is made of 90% of public finances, whereas remaining
10% applies to local self-government.
Public revenues for 2013 were 1,420.6 million or 42.9% GDP. Compared to 2012, they are
higher by 9.3%, which is a nominal growth of 120.7 million . The growth of revenues is the
result of enforcement of measures aimed at suppression of grey economy, economic recovery
since the beginning of the year, including the introduction of higher tax rates. In percentages,
the biggest growth was observed in VAT by 21.0%, excise duties by 6.4% and fees by 41.2%. It
should be emphasized that the customs were reduced by 23.1% compared to the same period
in 2012, and other taxes by 55.6%.
Public expenditures for 2013 were 1,508.5 million , which is 45.6% of the evaluated GDP (3,311
million ) and they were higher by 1.0% compared to the same period in 2012. The austerity
measures pursued by government in 2013 facilitated this result.
Deficit of public sector at the end of 2013 was 87.9 million , and it is smaller by 105.6 million
compared to the deficit at the end of same period in 2012, whereby missing resources amounting to 396.42 million were not included.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Collectibles from the loan payment and


funds transferred from the previous year

7,56

0,23

5,50

0,17

Public expenditure

1.508,47

45,56

1.493,34

47,42

Current public expenditure

1.399,53

42,27

1.368,98

43,47

Current costs

663,55

20,04

729,68

23,17

Gross salaries and contribution paid by


employer

(402,17)

12,15

407,75

12,95

Other personal income

(14,51)

0,44

13,27

0,42

Expenditure for material and services

(105,45)

3,18

167,22

5,31

Current maintenance

(24,40)

0,74

27,39

0,87

Interest

(70,78)

2,14

59,72

1,90

Rent

(8,36)

0,25

7,43

0,24

Subsidies

(18,19)

0,55

26,61

0,84

Other costs

(7,49)

0,23

6,89

0,22

Transfers for social protection

483,40

14,60

482,09

15,31

Rights from the social protection

(64,47)

1,95

65,64

2,08

Funds for redundancy

(13,09)

0,40

16,13

0,51

Rights from the pension and disability


insurance

(383,19)

11,57

378,96

12,03

Other rights from health care protection

(14,79)

0,45

13,50

0,43

Other rights from health care insurance

(7,86)

0,24

7,86

0,25

Transfers of institutions to some NGO and


public sector

125,26

3,78

63,61

2,02

Capital costs

108,94

3,29

124,36

3,95

Capital budget of Montenegro

(61,79)

1,87

76,04

2,41

Capital budget of local self-government

(47,16)

1,42

48,32

1,53

GDP (in million )

3,311.0

3,149.0

Borrowings and loans

4,13

0,12

2,96

0,09

Budget of General government

2013

2012

Reserves

15,94

0,48

21,54

0,68

Mil.

% GDP

Mil.

% GDP

Payment of guarantees

107,24

3,24

24,72

0,79

Original revenue

1420,59

42,91

1299,91

41,28

Deficit

-87,87

-2,65

-193,43

-6,14

Taxes

863,49

26,08

785,99

24,96

Primary deficit

-17,10

-0,52

-133,71

-4,25

Personal income tax

(124,15)

3,75

109,68

3,48

5,50

1,23

64,02

2,03

308,54

173,09

(40,64)

Payment of debt

9,32

Corporate profit tax


Real estate tax

(18,27)

0,55

14,41

0,46

Payment or principle amount to residents

(124,99)

3,78

66,13

2,10

VAT

(429,20)

12,96

354,71

11,26

Payment of principal amount to nonresidents

(70,72)

2,14

59,87

1,90

Tax to international trading and transactions

(22,27)

0,67

28,97

0,92

Payment of liabilities from previous period

(112,83)

3,41

47,09

1,50

Local surcharges

(62,43)

1,89

50,96

1,62

Other Republic taxes

(5,09)

0,15

11,47

0,36

Missing funds

-396,42

-11,97

-366,52

-11,64

Excise duties

(161,45)

4,88

151,77

4,82

Financing

396,42

11,97

366,52

11,64

Contributions

398,49

12,04

362,25

11,50

Borrowings and loans from national sources

(11,69)

3,37

71,27

2,26

Contribution to Pension and disability fund

(241,95)

7,31

216,50

6,88

(230,54)

6,96

258,13

8,20

Contribution for health care insurance

(134,70)

4,07

125,74

3,99

Borrowings and loans from international


sources

Contribution for insurance from unemployment

(10,77)

0,33

9,99

0,32

Donations

(9,72)

0,29

7,92

0,25

(26,77)

0,81

14,02

0,45

Other contributions

(11,07)

0,33

10,02

0,32

Revenues from privatization and sale of


property

Fees

33,17

1,00

23,50

0,75

Increase/decrease of deposit

(17,69)

0,53

15,18

0,48

Compensations

68,16

2,06

73,75

2,34

Other revenues

49,72

1,50

48,92

1,55

48

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

5.1.2 Budget of the Central government of Montenegro


In early 2013, a set of crisis measures related to fiscal adjustment was introduced in Montenegro
with the sole purpose to stop the trend of deterioration of fiscal parameters, primarily decline
of collection of revenues, and subsequent growth of deficit and level of public debt. Set of fiscal
measures, directed towards the increase of Budget, meant the introduction of crisis tax of
15% to income exceeding the national average and increase of VAT rate (from 17% to 19%). Ever
since the signing of SAA with EU, the excise duties are in a gradual process of harmonization, so
that the excise duties were increased in order to be harmonized with European regulations. On
the revenue side, the collection of fees was enforced following its introduction during the mid
2012, and they pertained to SIM cards, electric meters, smokers areas, and cable television.
Throughout the year, the measures were pursued aimed at reduction of grey economy, which
affected the spreading of tax basis and improvement of fiscal discipline. Thanks to successful
enforcement of these measures, there was an increase in collection of revenues, compared to
the planned, in 2013, and also compared to 2012, which has positive effects on fiscal consolidation and stabilization of public finances.
Collectibles in state budget [1] for 2013 were 1,587.1 million , of which original revenues
amounted to 1,235.1 million , while 351.9 million were collected from other sources (loans,
privatization, and donations). Original revenues were higher compared to previous year by
114.1 million or by 10.2%. Increase in revenues can be mainly attributed to collection of taxes and contributions, which in the structure of revenues, has the biggest share, yet it should
be emphasized that, compared to previous year, the other revenue items were also increased
(fees, compensations, other revenues).
Revenues based on taxes amounted to 755.7 million and they were by 9.9% higher compared
to previous year. The biggest growth of revenue, compared to previous year, was achieved in
VAT 74.5 million or 21%, and in total it amounted to 429.2 million . This growth of revenues from VAT is the result of measures aimed at suppression of grey economy, including the
increase of VAT rates from 17% to 19%. The growth was also achieved with excise duties in the
value of 9.7 million or 6.4%, and this can be explained by the increase of excise duties in 2013.
Also, the collection of income tax was increased by 13.4 million or by 16.2%, compared to
2012. Revenues based on contributions are 398.5 million and they are higher by 36.2 million
compared to the same period of 2012.
As for the expenditure side of budget, set of measures of fiscal adjustment was reflected in
freezing the increase of pensions, balancing of income in public sector, suspension of additional
payments for the work in commissions and working groups of the Government of Montenegro,
reduction of all expenditures in companies in which the Government had the majority share
reduction of expenditures in local self-governments.
Total expenditures in budget of Montenegro in 2013 amounted to 1,363.5 million or 41.2% of
the evaluated GDP for 2013, which financed the current budget expenditure in the amount of
1,301.7 million and capital investments in the amount of 61.8 million .
In the structure of budget expenditure for 2013, transfers for social protection have the biggest
share around 35.4% of the total expenditure, then gross salaries 26.9% and guarantees 7.9%.
Other purposes participate with 26.8% of budget expenditures. Developing part of budget, that
is, capital budget participates with 4.9% and subsidies with 1.3% of budget expenditure.
As the result of the changes in revenues and expenditures in 2013, deficit in state budget was
128.3 million and it is smaller by 84.5 million than the deficit in 2012. Payment of debt was
241.8 million and it was increased as compared to the previous year by 123.6 million .
The missing funds in the budget amounted to 370.1 million and they were mainly financed
from borrowings and loans (international sources in the amount of 230.5 million , borrowings
and loans from national sources in the amount of 102.8 million ), and on smaller portion from
donations, privatization revenues in the amount of 11.9 million .
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process


Collectibles in the budget include original revenues (direct, indirect taxes, and not-tax
revenues), borrowings, donations, revenues from privatization and sale of assets.

Table 26 Revenue and expenditure of the central government


GDP (in million )

3,311.0

3,149.0

Budget of the Central government of Montenegro

2013

2012

Original revenues

Mil.

% GDP

Mil.

% GDP

1.235,15

37,30

1.121,02

35,60

Taxes

755,70

22,82

687,44

21,83

Personal income tax

(95,62)

2,89

82,26

2,61

Corporate profit tax

(40,64)

1,23

64,02

2,03

Real estate tax

(1,44)

0,04

1,44

0,05

(429,20)

12,96

354,71

11,26

(5,09)

0,15

4,28

0,14

(161,45)

4,88

151,77

4,82

Tax to international trading and transactions

(22,27)

0,67

28,97

0,92

Contributions

398,49

12,04

362,25

11,50

Contribution to pension and disability fund

(241,95)

7,31

216,50

6,88

Contribution for health care insurance

(134,70)

4,07

125,74

3,99

Contribution for insurance from unemployment

(10,77)

0,33

9,99

0,32

Other contributions

(11,07)

0,33

10,02

0,32

Fees

27,07

0,82

18,00

0,57

Compensations

13,23

0,40

12,71

0,40

Other revenues

33,09

1,00

35,12

1,12

7,56

0,23

5,50

0,17

Costs

1.363,47

41,18

1.333,88

42,36

Current budget expenditures

1.289,46

38,94

1.244,45

39,52

600,29

18,13

667,00

21,18

(366,13)

11,06

374,65

11,90

Other personal income

(12,02)

0,36

10,34

0,33

Expenditures fro material and services

(90,44)

2,73

150,39

4,78

Current maintenance

(20,42)

0,62

22,37

0,71

Interests

(67,43)

2,04

56,86

1,81

(7,93)

0,24

7,11

0,23

VAT
Other Republic revenues
Excise duties

Collectibles from payment of loans and


funds transferred from previous year

Current costs
Gross salaries and contribution paid by employer

Rent
Subsidies

(17,43)

0,53

25,85

0,82

Other costs

(6,28)

0,19

6,05

0,19

Capital costs in current budget

12,22

0,37

13,39

0,43

Transfers for social protection

482,97

14,59

481,63

15,29

Rights from social protection


Redundancy funds
Rights from pension and disability insurance
Other rights from health care protection

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Other rights from the health care insurance

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Local surcharges

(62,43)

1,89

50,96

1,62

Fees

6,10

0,18

5,50

0,17

Compensations

54,93

1,66

61,04

1,94

Transfers from institutions to some NGO and


public sector

94,31

2,85

31,51

1,00

Capital budget

61,79

1,87

76,04

2,41

2,75

0,08

1,78

0,06

14,13

0,43

18,08

0,57

Fee for utility connections and construction


ground

107,24

3,24

24,72

0,79

Fee for local roads

-128,32

-3,88

-212,86

-6,76

Other fees

Primary deficit

-60,89

-1,84

-156,00

-4,95

Other revenues

16,63

0,50

13,80

0,44

Payment of debt

241,78

7,30

115,57

3,67

Costs

146,49

4,42

160,31

5,09

(112,70)

3,40

60,64

1,93

Current expenditure of local self-government

99,33

3,00

111,99

3,56

Payment of debt to nonresidents

(68,80)

2,08

54,87

1,74

Current costs

63,27

1,91

62,67

1,99

Payment of liabilities form previous period

(60,28)

1,82

2,62

0,08

1,09

33,10

1,05

-370,10

-11,18

-328,43

-10,43

Cross salaries and contribution paid by employ- (36,04)


er

370,10

11,18

331,00

10,51

Other personal income

(2,48)

0,08

2,94

0,09

Borrowings and loans from national sources

(102,83)

3,11

63,45

2,02

Expenditure for material and services

(15,00)

0,45

16,84

0,53

Borrowings and loans from international sources

(230,54)

6,96

258,13

8,20

Current maintenance

(3,98)

0,12

5,03

0,16

Interest

(3,35)

0,10

2,86

0,09

(6,62)

0,20

5,04

0,16

Rent

(0,44)

0,01

0,32

0,01

Revenue from privatization

(11,95)

0,36

3,48

0,11

Subsidies

(0,76)

0,02

0,75

0,02

Increase/decrease of deposit

(18,16)

0,55

0,89

0,03

Other costs

(1,21)

0,04

0,84

0,03

Transfers for social protection

0,44

0,01

0,45

0,01

Transfers from the institutions to some NGO


and public sector

32,44

0,98

32,94

1,05

Capital budget of local self-government

47,16

1,42

48,32

1,53

Borrowings and loans

1,38

0,04

1,19

0,04

Reserve

1,82

0,05

3,46

0,11

Surplus/Deficit

40,45

1,22

19,43

0,62

Primary deficit

43,79

1,32

22,29

0,71

Payment of debt

66,76

2,02

54,95

1,75

Payment of principal amount to residents

(12,30)

0,37

5,49

0,17

Payment of principal amount to nonresidents

(1,92)

0,06

5,00

0,16

Payment of liabilities from previous period

(52,55)

1,59

44,46

1,41

Missing funds

-26,32

-0,79

-35,52

-1,13

Financing

26,32

0,79

35,52

1,13

Borrowings and loans from national sources

(8,86)

0,27

7,82

0,25

Borrowings and loans from international sourc- 0,00


es

0,00

0.00

0.00

Revenues from privatization and sale of property

(14,83)

0,45

10,53

0,33

Donations

(3,10)

0,09

2,88

0,09

Borrowings and loans


Reserves
Payment of guarantees
Deficit

Payment of debt to residents

Missing funds
Financing

Donations

LOCAL SELF-GOVERNMENT
Pursuant to Article 74 of the Law on financing local self-government, the municipalities have
the responsibility to provide the Ministry of finance with the reports on planned and collected
revenues, planned and executed expenditures and budget loans on a quarterly basis, within 30
days following the expire of the relevant quarter.
Costs of the local self-government for 2013 were 146.5 million or 4.4% GDP, which is smaller
by 8.6% compared to the same period of the previous year. The most significant decline as
compared to the previous year was observed in expenditures for material and services, capital
expenditures, and net increase of liabilities.
Spending was financed from the tax in the amount of 107.8 million , fees 6.1 million , emoluments 54.9 million and other revenues in the amount of 16.6 million . Total original revenues
of local self-government for 2013 were assessed in the amount of 185.4 million .
Surplus of the local self-government for 2013 was assessed in the amount of 40.4 million or
1.2% GDP.

Table 27 Revenue and expenditure of the local government

Fee for use of natural resources

GDP (in million )

3,311.0

3,149.0

Use of deposit of local

Budget of local self-government

2013

2012

self-government

(-0,47)

-0,01

14,29

0,45

Transfers from the budget of Montenegro

(1,49)

0,04

0,85

0,03

Mil.

% GDP

Mil.

% GDP

Original revenues

185,45

5,60

178,89

5,68

Taxes

107,79

3,26

98,55

3,13

Personal income tax

(28,53)

0,86

27,42

0,87

Real estate tax

(16,83)

0,51

12,97

0,41

52

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

5.1.3 Tax rates

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Personal income tax is divided into two levels. For up to 720 euro gross a month, the tax rate
is 9%, and for the amounts above it is 15%. Every part which enters the calculation is taxable.

The proposal envisaged that an independent body Senate of the State Audit Institution carries
out the assessment of respecting the elements of fiscal responsibility, and informs accordingly
the Assembly. The Institute of budget inspector shall be established with a view of enhancing
the control of budget consumption.

Social contributions paid by the employees are 33% (for gross up to 720 euro), and 39% (for
gross above 720 euro).

To reach the fiscal sustainability, Montenegro pursues the fiscal policy directed primarily at the
consolidation of the budget of the general government, which contributes to:

Personal income tax (payroll tax) paid by the employer is 15%, while social contributions
paid by employer are 25%.

Profit tax rate is single, and it amounts to 9% (corporate profit tax, tax on SME, company income tax).

Guided by this principle, the Government of Montenegro implemented or is in the process of


implementation of measures, which may be divided into two groups, such as:

VAT rate is 19%. The VAT for basic living consumables is 7%.


measures of consolidation (increase of VAT rates, introduction of crisis tax, intensified
combatting grey economy, temporary halt of indexation of pensions, rationalization of expenditures in public administration through reduction of costs for salaries and emoluments, official
vehicles, lease,...), and

Tax rate on real estate is determined by local self-government, which prescribes the legal minimum of tax rates (depending on the type of real estate, such as residential buildings, business
premises, production premises or units of local self-government). Average tax rate for residential buildings is 0.26%, for business premises 0.46%, production premises 0.32%. The lowest tax
rate is in Bar 0.19%, and the highest is in Pluine 0.62%. Legal maximum is up to 1%.
Tax rate on the sale of real estate is proportional and amounts to 3% of the tax base, and if
a newly built residential or business building is purchased directly from the investor, only VAT
is paid (19%).
Self-employed (entrepreneurs) pay income tax based on a decision issued by the unit of
local self-government, which define precisely all their liabilities (tax calculation), while the individuals working for the entrepreneur pay the tax at the tax rate applicable to employees in the
public administration.
Tax on dividend is calculated at the rate of 9%.
5.2 TAX AND BUDGETARY REFORMS
Government of Montenegro drafted the proposal of the Law on budget and fiscal responsibility, aimed at further improvement of the total system of public finances, fiscal discipline, and
harmonization with European standards, which in comparison to the existing organic Law on
budget introduces several novelties related to fiscal responsibility, inspection supervision, measures of accountability, and the penal provisions.
Elements of fiscal responsibility are based on criteria applied to planning and enforcement of
fiscal policy, including the planning of annual consumption and loan taking. Criteria are primarily reflected in a need to acquire annual primary surplus, which is a fiscal anchor and general
indicator of the quality of public finances management. New law defines the need for harmonization of current expenditures and transfers with total current revenues, including the
enforcement of responsible policy of loan taking aimed at securing fiscal sustainability. In line
with the Maastricht criteria, the limit of maximum deficit is defined at 3% GDP, that is, the limit
of maximum level of indebtedness at 60% GDP.
54

- reduction of the biggest fiscal vulnerability (deficit and public debt), and
- expansion of space for further enhancing of competition.


measures of incentives (tax incentive for new companies and new employment in the
northern municipalities in Montenegro, in terms of exemption from personal income tax and
profit tax for 5 years, granting discount to taxpayers how pay one-off payables for profit tax,
granting writing off of the interests in case of one-off repayment of principal amount of the tax
debt, granting higher standard costs (from 30% to 70%) to those who rent private accommodation in the sector of tourism, which reduces the risk of business operation in grey area,...).
In addition to these incentives, the Budget for 2014 envisaged 500,000 euro for subsidies for
production and creation of new jobs, with a possibility to increase these funds in case of bigger
interest, while the Investment Development fund will provide significant financial support for
the implementation of projects, particularly projects in a less developed areas, accompanied by
significant benefits (longer grace period, longer repayment term and lower interest rates).
Also, the fiscal policies influence economic activities through ensuring funds for developing
projects, so that the following mid-term period plans the increase of investment to capital budget.
Measures of consolidation will as a priority be directed to:

5.2.1. Continued enforcement of measures aimed at reduction of tax debt, through:


One-off repayment of principal amount of debt which means one-off repayment of the principal amount of debt from previous periods by taxpayers, whereby the interest is written off.
Collection of tax debt in form of property of debtor The call was published through tax administration, which informed all the debtors of tax, whose debt exceeds 100,000 , that they may
reduce the debt by the amount of assessed property value of the debtor.

5.2.2. Continued enforcement of measures aimed at suppression of grey economy and


increase of taxation discipline, through:
55

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

More severe sanctioning of repeated offenders in a way to make the penal policy more strict
in relation to repeated offenders and introduce more severe sanctions for such legal/natural
persons in form of multiple time bigger sanctions and prohibition to carry out economic activity
for a period of time or, ultimately, to revoke the license.
At the same time, the strengthening of institutional and personnel capacities of the state authorities, competent for control and collection of revenues, was planned.

tion and growth of salaries. It is also necessary to find new forms for financing pension system,
with the objective to achieve better protection of pensioners and ensure reduction of deficit in
the Pension and disability fund, thus the sate deficit.

5.2.3. Improvement of the taxation system in Montenegro

Measures for incentives will be primarily directed towards:

It is planned to increase the property tax rates for some types of property (property, which
is not in function; illegally built apartments; unsold apartments. It is also planned to increase
the property tax rates for the facilities, which do not serve the function of making profit on the
grounds of property or property rights).


Stimulation of employment and balanced regional development aimed at stimulation
of growth in less developed municipalities in Montenegro, the taxation incentives shall be proposed to stimulate new companies and new employment in northern municipalities in Montenegro, in terms of exemption from personal income and profit tax for 5 years.

5.2.4. Harmonization of legislation with EU legislation through:


Granting higher standard costs (from 30% to 70%) to those who rent private accommodation in the sector of tourism, which reduces the risk of business operation in grey area.


Harmonization of the rates for excise duties the excise duties are gradually reaching
the European level. To increase the transparency and foreseeability of this part of the taxation
system, the introduction of excise duties calendar was envisaged to facilitate the legal persons
to adapt their business operation to the dynamics of the increase of excise duties rates.

Harmonization of VAT rates.

5.2.5. Continued enforcement of fiscal measures introduced in 2012 and 2013:


Example of crisis tax based on Analysis of the model of taxation of citizens suggested that
the crisis tax is to be used in 2014, while the return to the previous model of proportional taxation is planned for the next mid-term period.
Enforcement of fees It was planned to terminate the enforcement of fees for electrical meters in 2014, given that the electricity does not fall under the scope of wealth that can be treated as luxury. Fees for SIM cards, smokers areas, and cable TV shall be in force in 2014. Some
changes were also planned in this part, in terms that the catering facilities have to be categorized as smokers or non-smokers area, and in case they continue operating as a facility that
permits consumption of tobacco products, they will pay additionally 1/m2, calculated for the
entire facility. Considering the relevant deviation in collection of this type of fee from the plan,
the future steps shall be directed towards identification of these facilities and collection of debt
on the grounds of this type of fee.

5.2.6. Continued enforcement of austerity measures, through:


Rationalization of costs in public administration through cuts of expenditures for salaries and
emoluments, official vehicles, lease, and all other forms of discretional spending. Organization
of the system of earning in public sector the activities related to preparation of Draft law are
in process, which will apply to the entire public sector, which among other things introduces the
correlation between the expenses for gross salaries and financial results. The objective of this
Law is to increase transparency in the part of salaries, and acquiring the principle of equality in
salaries, in line with the responsibilities in the public sector.
No harmonization of pensions and greater level of sustainability of pension system Pensions
will remain at the same level in 2014, that is, they will not be harmonized with the rates of infla56

Rationalization of public procurement In addition to improvement of regulatory framework,


the focus will be on the economic aspect, that is, the justification of public procurements.

5.3 TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM AND BUDGETARY POLICY IN MONTENEGRO
The shortcomings in the existing system are reflected in the following:
-
The amount of capital investments is insufficient and represents a bad indicator for foreign investors;
-
Infrastructure is insufficiently developed;
-
Misbalance between the rates of direct and indirect taxes;
-
Role of local self-governments in the system of taxation is unsatisfactory (system should
be centralized or adequate system of control should be introduced);
-
There is no single database and automatic exchange of information (for all users);
-
Control mechanisms related to the collection of tax payment should be improved;
Considering the economic crisis, which we all face, the crucial solutions for its overcoming are
based on fiscal and financial discipline.
It is beyond comprehension that the tax evasion is tolerated, including the payment of other
duties to the state, while the state often does not react.
Taxes are collected from ordinary citizens, who have almost nothing, while those who have a
lot, even too much, intentionally perform tax evasion, to the detriment of all citizens and the
state itself.
The trade unions require the government to collect the tax from all those who have several
apartments, villas, weekend houses and luxurious vehicles.
There are around 120 thousand vacated, temporarily vacated apartments in Montenegro, which
are mainly rented, while the state loses annually on tax around 32 million euro. If the average
price of a rented apartment is taken to be 250 euro, and the Law on personal income tax provided a duty of natural persons to pay tax on renting real estate at tax rate of 9%, the monthly tax
for one rented apartment which should be paid to the state budget would be 22.5 euro or 270
euro annually. If the state collected the tax, as it should, from all those who rent apartments,
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

around 2.7 million euro a month would be collected in the state budget, which is 32.4 million
euro annually. According to the information of Monstat from the latest census, there were 59
thousand unsold apartments in Montenegro, of which 11 thousand were in Podgorica. The state
collected the tax in 2012 from all the sold and unsold apartments at the rate of 0.56%.

6.

REPUBLIC OF SERBIA

6.1

CURRENT SITUATION

The trade unions also insist on enhancing the control function of the state in terms of enforcement of laws related to tax policies, and severe sanctioning of those who do not respect these
legal provisions.

6.1.1 The Republic of Serbia budget system

It is beyond comprehension that the state, particularly local self-government, tolerates thousands of illegally built buildings houses, which use the infrastructure financed by legitimate
constructors and state.
The trade unions advocate the development of tourism (Montenegro has around 1.5 million
tourists during the summer season), and it remains a general fact that the houses and apartments are rented during the summer season, which ore owned by nationals of Montenegro
and foreign citizens as well, while the state does not have any records of them. Let alone any
financial benefit. Huge amounts of money are lost from the budget of the central government
of Montenegro due to the unregistered guests, particularly in terms of unregistered revenues
from accommodation. Around 60% of accommodation capacities are illegal and that is huge
money. Experts for tourism believe that this is around half a billion financial damage annually.
Grey economy creates unfair competition and investors avoid such destinations.
The trade unions propose the introduction of strict inspection controls aimed at identification
of illegal visitors, collection of taxes and resident fees, severe penal policies for all those who
violate the legal provisions.
The introduction of a progressive system of taxation would be useful, because:
-
Progressive taxation ensures bigger funds in the state budget, which facilitates adequate
policy of distribution. It is possible in this way to introduce different taxation benefits and exemptions, aimed at acquiring more fairness in taxation, and at the same time reduction of differences in incomes acquired by different individuals. But, this is not only dependent on the tax
rates and the span of tax base, but also on the attitude of the taxpayers.
-
Progressive taxes facilitate better implementation of active taxation policy. Active taxation policy includes use of the taxation instruments aimed at acquiring micro and macro economic effects. As for the micro economic effects, the state influences the current allocations of
economic resources, and from the position of macro aspect, the state influences, through the
progressive taxation, on employment, prices, export, import.
-
Progressive taxation facilitates strong stabilization effects on economy, as the progressive taxes do have anti cyclic effect on economic trends. They alleviate cyclic oscillations and
facilitate in the direction of increasing or decreasing the aggregate demand. Progressive tax is
used as an automatic stabilizer.
-
Progressive taxation is used to compensate effects of regressive taxes, primarily indirect taxes (excise duties and VAT). In this way, the taxation system is getting the proportional
character. The effect of progressive income taxation is neutralized by regressive indirect tax on
consumption.

Lela Perovic,
Tatjana Vukosavovic
Podgorica, 26 March 2014

58

The Republic of Serbia budget system is made up of: 1) the Republic of Serbia budget, 2)
budgets of local authorities, and 3) financial plans of the organizations for mandatory social
insurance (The Republic fund for pension and disability insurance, the Republic fund for health
care insurance, the Fund for social insurance of military beneficiaries, and National employment agency).

General level of the state (sector) in the Republic of Serbia are: 1) units of the government, such

as: Republic of Serbia, Autonomous province, the city of Belgrade and towns, 2) three organizations for mandatory social insurance, and 3) non-market nonprofit institutions, which are
predominantly financed and controlled by the government units, and they fall under the general sector of the state because they pursue the state policies (schools, health care and other
institutions).
6.1.2 Financing of the general level of the state (sector)
6.1.2.1 Public revenues and expenditures
Basic fiscal aggregates are public revenues and public expenditures.
In 2012, in the Republic of Serbia, public revenues in the gross domestic products (hereinafter
referred to as: GDP) were involved with 43.7%, and public expenditures with 49.8%, which
means that the deficit of the state sector (consolidated state) amounted to 6.1% GDP.
For 2013 and coming years, the increase of share of public revenues and reduction of public expenditures in GDP were planned, which also means the reduction o share of deficit of the state
sector in GDP (Table 1). Considering the fiscal changes in the first half of the present year, the
planned expectation will most probably not take place.

Table 28 - Basic fiscal aggregates in 2012 and 2013 in % GDP

Public revenues
Public expenditures
Consolidated fiscal result
State sector debt

2012
43.7
49.8
- 6.1
65.1

2013
44.1
47.7
- 3.6
65.2

6.1.2.2 Structure of public revenues and income


Public revenues in the Republic of Serbia are:

1) taxes,

2) contributions for mandatory social insurance,

2a) non-tax revenues (fees, charges, fines, and revenues incurred by use of public re59

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

sources),

3) self-contribution, and

4) grants and transfers;

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Costs of the state are:



1) costs for procurement of non-financial property;

2) costs for payment of principal amount, and

3) costs for procurement of financial property.

Income of the state is:



1) income from the sale of non-financial property,

2) income from taking loans, and

3) income from the sale of financial property.

Table 30 gives a survey of structure of public expenditures in the Republic of Serbia and the
share in GDP.

Table 30 - Total public expenditures in 2012 and 2013 in % GDP


Tax can be introduced only with the legislation, and they can be tax on consumption, personal
income, profit, property, and transfer of property owned by natural and legal persons.
Law shall introduce contributions to mandatory social insurance for: 1) pension and disability insurance, 2) health care insurance, and 3) insurance in case of unemployment.
Table 29 gives a survey of structure of public revenues in the Republic of Serbia and the share
in GDP.

Table 29 - Total revenues and donations in 2012 and 2013 in % GDP

PUBLIC REVENUES
Current revenues

Tax revenues
Personal income tax of citizens
Profit tax
VAT
Excise duties
Customs duties
Other tax revenues
Contributions

Non-tax revenue
Donations

2012
43.7
43.6
38.2
5.1
1.7
11.5
5.9
1.1
1.3
11.6
5.4
0.1

6.1.2.3 Structure of public expenditures and costs


Public expenditures in the Republic of Serbia are:

1) expenditures for the employees;

2) expenditures for goods and services;

3) depreciation and use of assets;

4) payment of interest and other costs of loan taking;

5) subsidies;

6) social aid and transfers;

7) mandatory social insurance and social protection, and

8) other expenditures (tax, mandatory fees, fines, penalties, and other).
60

2013
44.1
44.0
38.9
5.1
2.1
11.8
6.3
1.0
1.2
11.3
5.1
0.1

2012
PUBLIC EXPENDITURES
Current expenditures
Expenditures for the employees
Purchasing goods and services
Payment of interest
Subsidies
Social aid and transfers
of which pensions
Other current expenditures
Capital expenditures
Net budget borrowings

2013
49.8
45.7
11.5
7.6
2.1
3.4
20.0
14.5
1.1
3.5
0.5

47.7
43.8
11.0
7.1
2.6
3.2
18.8
13.6
1.0
3.6
0.3

6.1.3 Financing the competences of the Republic of Serbia


6.1.3.1

Sources for financing the competences of the Republic of Serbia

For financing competences of the Republic of Serbia, the Republic of Serbia budget is entitled to
public revenues and income, such as:

tax in the part defined in law (VAT; excise duties; personal income tax; corporate profit
tax; tax on use, holding, and carrying certain goods, and tax on international trade and transactions),

fees in line with the law;

reimbursements in line with the law;

donations and transfers;


revenues incurred by use of public assets (revenues from interest: revenue from lease,
that is use of immovable and movable property owned by the Republic of Serbia, used by the
state authorities and organizations and the Army of Serbia; revenues incurred by sale of services
of the Republic of Serbia budget beneficiaries, agreed with natural and legal persons based on
their free will; revenues from fines imposed in the criminal, misdemeanor or other proceedings
conducted before competent state authority and property gain forfeited in those proceedings,
and revenues from assignment emoluments in line with the law), and
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process


income (income from the sale of immovable property owned by the Republic of Serbia,
unless provided otherwise in the law; income from the sale of movable property owned by the
Republic of Serbia used by state authorities and organizations and Army of Serbia; income from
the sale of buffer stocks; income from the sale of valuables; income from the sale of natural
resources; income from loan taking and income from the sale of financial property).
6.1.3.2 Budget of the Republic of Serbia for 2013
In the Republic of Serbia budget, the total revenues and income are defined in the amount
of 873,409,415,819 dinars (7,661,486,104 euro), and expenditures and costs in the amount of
1,051,752,562,000 dinars (9,225,899,667 euro).
The total fiscal deficit of the Republic budget should be 178,343,146,181 dinars (1,564,413,563
euro) or 4.7 % GDP, and the consolidated Republic deficit 5.2 % GDP.

Table 31 - The Republic of Serbia revenues and income and expenditures and costs for 2013
ACCOUNT OF REVENUES AND INCOME, EXPENDITURES AND COSTS
Total revenues and income
Total expenditures and costs
Budget deficit
Costs for procurement of financial property
Total fiscal deficit

in dinars
873,409,415,819
1,040,014,339,000
-166,604,923,181
11,738,223,000
-178,343,146,181

Tables 32 and 33 show the basic structure of planned revenues and income, and expenditures
and costs in the Republic of Serbia budget for 2013.

Table 32 - Basic structure of revenues and income in the Republic of Serbia budget for 2013
DESCRIPTION
Total revenue and income
1. Tax revenues
1.1. Personal income tax
1.2. Corporate profit tax
1.3. VAT
1.4. Excise duties
1.5. Customs duties
1.6. Other tax revenues
2. Non-tax revenues
3. Donations

62

%
100.00
87.18
5.57
5.51
46.29
24.88
3.96
0.98
12.66
0.16

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 33 - Basic structure of expenditures and costs in the Republic of Serbia budget for 2013
DESCRIPTION
TOTAL EXPENDITURES AND COSTS
1. Current expenditures
1.1. Expenditures for the employees
1.2. Expenditures for the use of services and goods
1.3. Expenditures based on payment of interest
1.4. Subsidies
1.5. Fees for international organizations
1.6. Transfers to other levels of authority
1.7. Transfers to the organizations of mandatory social insurance
Republic fund for pension and disability insurance
National employment service
Republic fund for health care insurance
Other transfers
1.8. Other grants and transfers
1.9. Social protection form the budget
1.10. Other current expenditures
2. Capital expenditures
3. Costs for procurement of financial property (aimed at implementation of public policies)

%
100.00
95.69
25.07
8.31
8.72
7.98
0.11
7.06
26.85
25.16
0.96
0.06
0.67
0.14
10.27
1.19
3.19
1.12

Share of expenditures planned for individual ministries in the Republic of Serbia budget for
2012 in GDP is the following: Ministry of finance 21.72%, Ministry of education and science
3.88%, Ministry of labor and social policy 3.30%, Ministry of defense 1.51%, Ministry of agriculture, forestry and energy 0.68%, Ministry of economy and regional development 1.07%, Ministry of culture 0.20%, Ministry of youth and sports 0.12%, etc.
Some of the tax rates in the Republic of Serbia are:
1) VAT
- reduced rate:
10%
- standard rate: 20%
2) Income tax (PIT): 10%
3) Income tax on revenues from entrepreneurship (physical entities):
10%
4) Corporate profit tax (legal entities):




15%
5) Tax on revenues from copyright:
20%
6.1.3.2

Financing of competences of organizations for mandatory social insurance

For financing rights from the field of pension and disability insurance, health care insurance,
and insurance in case of unemployment, organizations for mandatory social insurance are entitled to the following public revenues and income, such as: 1) contributions for mandatory social
insurance; 2) donations and transfers, and 3) other revenues and income in line with the law.
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

The rates of taxes and contributions for the salaries of the employees in the Republic of Serbia
are:
1) paid by employees:
- income tax 10.00%
- contribution for pension and disability insurance
13.00%
- contribution for health care insurance
6.15%
- contribution for insurance from unemployment
0.75%
2) paid by employer:
- contribution for pension and disability insurance
11.00%
- contribution for health care insurance
6.15%
- contribution for insurance from unemployment
0.75%
1.2

TRADE UNION DEMANDS CONCERNING THE TAXATION SYSTEM IN SERBIA

CATUS and UGS NEZAVISNOST, being the only two representative trade union centers in Serbia,
see the following basic problems related to taxation policies in the Republic of Serbia:

express lack of financial discipline in terms of obligation to pay taxes and contributions
for mandatory social insurance;

failure to apply appropriate methods to control the respect of obligation of payment of
the taxes and contributions,

non-existence of appropriate sanctions for negligent tax and contribution payers;

very expressed informal economy (due to: relatively high fiscal burdens on the labor;
non-transparent tax system; inadequately organized tax administration; high level of tolerance
for the grey economy; economic crisis; high unemployment rate; weaknesses in the process of
privatization; high level of non-liquidity; significant share of cash transactions in total payments,
etc.).

high level of corruption.
By indicating basic problems related to the tax policies, the trade unions suggest ways in which
these problems could be solved, which among other things include: combating informal economy, combating corruption, and efficient operation of tax authorities.
For the trade unions it is necessary to:
o
better organize the tax administration;
o
apply appropriate methods of control of the obligation to pay taxes and contributions:
o
apply proportional sanctions for negligent tax and contribution payers;
o
reduce cash transactions in total transactions;
o
enforce preventive, stimulating and penal measures aimed at reduction of informal
economy;
o
pursue National strategy to combat corruption.

The national project team


Rajko Kosanovi
Belgrade, 13 December 2013
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

III. COMPARISON BETWEEN THE COUNTRIES OF THE WESTERN BALKANS AND OF


THE EU
1.

General government revenue and expenditure

General comment: the comparison between the macro-economic figures of the countries of
the Western Balkans and those of the EU countries has to be handled with some reservations
given the importance of the informal economy in the Western Balkan countries.

Table 34 - General government total revenue and expenditure (in % of GDP)

(S) Serbia (2012)


(ME) Montenegro (2013)
(MK) Macedonia (2012)
(BiH /FBiH) Fed. Bosnia/Herzegovina (2012)
(BiH/RS) Republic Srpska (2012)
(K) Kosovo (2012)
(HR) Croatia (2012)
EU 28 on average (2012)

Revenue
43.7 %
42.9 %
29.0 %
40.3 %
42.6 %
26.8 %
39.2 %
45.4 %

Expenditure
49.8 %
45.6 %
32.7 %
40.1 %
41.2 %
29.0 %
43.3 %
49.4 %

Comment: Serbia has a high public revenue and expenditure ratio in terms of GDP which is
very close to the EU average. All other Western Balkan countries have lower values.

Table 35 - Structure of general government total revenue (in % of GDP)


Direct taxes

Indirect taxes

Social
contributions

Other
revenue

(S) Serbia

6.8 %

19.8 %

11.6 %

5.5 %

(ME) Montenegro

7.6 %

18.5 %

12.4 %

4.8 %

(MK) Macedonia

3.7 %

12.4 %

8.6 %

4.2 %

(BiH /FBiH) Fed.


Bosnia/Herzegovina

3.0 %

16.3 %

16.2 %

4.7 %

(BiH/RS) Republic Srpska

4.9 %

17.2 %

15.6 %

4.8 %

(K) Kosovo

3.1 %

19.2 %

0%

4.4 %

(HR) Croatia

2.5 %

24.0 %

12.7 %

0%

EU 28 on average (2012)

12.9 %

13.6 %

14.0 %

4.9 %

Comment: In all Western Balkan countries the governments revenue (in % of GDP) from direct taxes is low, but very low in Croatia, Federation BiH, Macedonia and Kosovo; their income
from indirect taxes is generally high, but particularly high in Croatia, Serbia and Kosovo. Social
contributions are particularly high in BiH/FBiH and RS; in Kosovo there are no social contributions to the general governments budget.

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 36 - Share of direct and indirect taxes and of social contributions in general. government
total revenue
Direct taxes

Indirect taxes

Social contributions

(S) Serbia

15.6 %

45.3 %

26.5 %

(ME) Montenegro

17.7 %

43.1 %

28.9 %

(MK) Macedonia

12.7 %

42.8 %

29.5 %

(BiH /FBiH) Fed. Bosnia/Herzegovina

7.2 %

40.3 %

40.2 %

(BiH/RS) Republic Srpska

11.3 %

40.5 %

36.8 %

(K) Kosovo

11.6 %

71.6 %

0%

(HR) Croatia

6.4 %

61.2 %

32.4 %

EU 28 on average (2012)

28.4 %

30.0 %

30.8 %

(K) Kosovo

8.2 %

11.2 %

(HR) Croatia

7.5 %

2.1 %

EU 27 on average (2010)

11.1 %

2.7 %

Comment: This table, which is more complete than the previous one, shows that besides in
particular Serbia, also Bosnia and Herzegovina spends a lot (more than 10% of the budget) for
the remuneration of civil servants. Capital (public) investments are particularly important in
Kosovo, Macedonia, Serbia and Montenegro. They are low in BiH.
2. Types of taxes and tax rates

Table 39 - Personal Income Tax (PIT) (statutory rates)

Comment: All the countries of the Western Balkans rely mainly on indirect taxes to fund their
public budgets. This is particularly true for Kosovo and for Croatia. This last country has a very
low share of direct tax income: this phenomenon is remarkable since Croatia has the highest
PIT rates of the region. The explanation for this strange phenomenon can be found in the way
tax rules are implemented in Croatia, in the numerous exonerations, tax allowances and tax
credits.

Rates (%)

Basic tax allowance

10

n/s

(ME) Montenegro

9 15

n/s

(MK) Macedonia

10

118.20 eur/month

(BiH /FBiH) Fed. Bosnia/Herzegovina

10

1.837 eur/year

(BiH/RS) Republic Srpska

10

n/s

4 8 10

960 eur/year

12 25 40 (+10% surcharge)

300 eur/month

(S) Serbia

(K) Kosovo

Table 37 - General government total expenditure by main functions (% GDP)

(HR) Croatia

Social
protection

Health

General public
services

Education

Economic
affairs

(S) Serbia

20.0 %

n/s

11.5 %

3.9 %

1.8 %

(ME) Montenegro

14.6 %

n/s

12.6 %

n/s

0.6 %

(MK) Macedonia

7.0 %

1.4 %

3.8 %

5.8 %

7.5 %

(BiH /FBiH) Fed. Bosnia/Herzegovina

15.4 %

n/s

n/s

n/s

3.9 %

(BiH/RS) Republic Srpska

21.0 %

6.0 %

n/s

4.6 %

4.1 %

(K) Kosovo

4.0 %

2.6 %

5.4 %

4.0 %

8.7 %

(HR) Croatia

15.0 %

6.5 %

3.6 %

5.7 %

1.3 %

EU 27 on average (2010)

19.9 %

7.3 %

6.7 %

5.3 %

4.1 %

Comment: Not all countries have data available by function. Social protection expenditure is
most important in nearly all countries, except in Kosovo where the system is still underdeveloped. General public services have a prominent place in the budget in Montenegro and Serbia
(expenditure is nearly double that of the EU). Kosovo and Macedonia invest heavily in economic
affairs.
Table 38 - General government total expenditure by nature (% GDP)
Compensation of employees

Capital (public) investments

(S) Serbia

11.5 %

3.5 %

(ME) Montenegro

12.6 %

3.3 %

(MK) Macedonia

4.8 %

3.9 %

(BiH /FBiH) Fed. Bosnia/Herzegovina

10.2 %

0.1 %

(BiH/RS) Republic Srpska

10.9 %

0.6 %

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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Top rate EU 28 on average (2014)

39.4 %

Top rate Sweden (2014)

56.9 %

Top rate Norway (2014)

39.0 %

Personal income tax (PIT) rates are flat rate and low in all Western Balkan countries, with the
exception of Croatia and Montenegro. In these last countries a progressive income tax rate
applies. As we have seen above, progressive income tax rates alone are not a guarantee of a
reasonable income from direct taxes: other elements also play a role.

Table 40 - Corporate tax rates (statutory rates) (%)


Rates legal entities

Rates entrepreneurs (physical entities)

(S) Serbia

15

10

(ME) Montenegro

n.s.

(MK) Macedonia

0 1 10

0 1 10

(BiH /FBiH) Fed. Bosnia/Herzegovina

10

10

(BiH/RS) Republic Srpska

10

10

3 10

n.s.

20

20

(K) Kosovo
(HR) Croatia
Adjusted top rate EU 28 on average (2014)

23.1

Highest rate in EU: France (adjusted top rate)

38.0

Norway (adjusted top rate)

20.0

Comment: With the exception of Croatia and Serbia, corporate tax rates are very low in the
Western Balkan countries.
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

Table 41 - VAT rates (%)

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

(K) Kosovo
Standard rate

Reduced rate

(S) Serbia

20

10

(ME) Montenegro

19

(MK) Macedonia

18

(BiH /FBiH) Fed. Bosnia/Herzegovina

17

n/a

(BiH/RS) Republic Srpska

17

n/a

(K) Kosovo

16

n/a

(HR) Croatia

25

5 10

EU 28 on average (2014)

21.5

Highest rate in EU: Hungary

27.0

Paid by employer

Paid by employee

17.9 %

19.9 %

9.8 % (+ 15% payroll tax)

33 39 %

27.0 %

10.5 %

31.0 %

33.0 %

(K) Kosovo

5.0 %

5.0 %

(HR) Croatia

15.5 %

20.0 %

Austria (with max ceiling)

21.5 %

18.0 %

Belgium (no ceiling)

34.6 %

13.0 %

(MK) Macedonia (with min. and max. ceiling)


(BiH /FBiH) Fed. Bosnia/Herzegovina
(BiH/RS) Republic Srpska

9.0 %

0.5 eur/month in Zagreb

5.0 %

8.4 %

Austria

1.0 %

3.5 %

Germany

1.9 %

4.5 5.0 %

(HR) Croatia

Table 44 - Tax wedge for worker on average salary (% of total labour cost)

Table 42 - Social contributions (% gross wage)

(ME) Montenegro

n/s

Real estate property taxes are generally low. Real estate trading taxes are more or less at the
level of EU countries. The real estate lease tax is relatively high in the countries which provided
data.

Comment: all countries of the Western Balkans apply high VAT rates which are close to the EU
average. Croatia goes even far beyond with a rate of 25%. Besides the rates it is equally important to see which goods/services fall under the reduced rate (where it exists).

(S) Serbia

0.05 1.0 %

(S) Serbia
(ME) Montenegro
(MK) Macedonia
(BiH /FBiH) Fed. Bosnia/Herzegovina
(BiH/RS) Republic Srpska
(K) Kosovo
(HR) Croatia
EU27 on average for single worker on 67% of average salary (2013)
Belgium for single worker on 67% of average salary (2013)
Norway for single worker on 67% of average salary (2013)

39.9 %
51.0 %
37.0 %
41.2 %
39.7 %
17.0 %
39.6 %
36.8 %
50.1 %
34.1 %

Comment: The tax wedge for workers is relatively high (mostly around 40%). One country has
an over-the-average figure: Montenegro. One country has a very low wedge: Kosovo.

Comment: Social contributions are very high in Montenegro, the Federation of BiH and Serbia.
They are extremely low in Kosovo (only funded private pensions). It is also remarkable that in
all Western Balkan countries (with the exception of Kosovo) employees pay the bulk of the social
contributions; in Macedonia and BiH/RS they even pay the totality of the contributions.
Table 43 - Real estate tax(in %)
Annual rates tax (in % of
market rental value)

One-time registration tax


(in % of purchase value)

Tax on rental income (in


% of rental income)

n/s

n/s

n/s

(ME) Montenegro

0.19 0.62 %

0 3.0 %

9.0 %

(MK) Macedonia

0.1 0.2%

2 4%

n/s

(BiH /FBiH) Fed. Bosnia/


Herzegovina

0.05 0.5 %

58%

17 %

(BiH/RS) Republic Srpska

0.05 0.5 %

3%

17 %

(S) Serbia

68

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IV. TAX AND BUDGETARY REFORMS IN THE COUNTRIES OF THE WESTERN BALKANS
All countries of the Western Balkans (WB) faced the economic and social consequences of the
economic and financial crisis like all European countries did.
But unlike most of the other European countries, the countries of the WB were (and continue to
be) confronted with high degrees of informal economy (and corruption) and low levels of formal
employment.
This all together is very detrimental for the state budgets and limits the possibilities of the government for an active investment- and social policy.
That is why the governments of the WB focus on the consolidation of their budgets and at the
same time on measures to attract new investments, in particular FDI.
Several measures are already implemented, others are planned. It will be important to examine the effectiveness of each of these measures.
Measures intended to consolidate the state budgets include amongst others :

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

On the expenditure side :



strengthening of fiscal discipline (ME)

rationalization of public procurements (ME)

cuts in the cost of public services (ME, MK) and of social protection (MK); decrease of social contribution rates (MK)

switch from progressive personal income tax to a low flat rate tax (MK)

reduction of the corporate tax rate (MK)

tax release for companies with liquidity problems (MK)

credit supports for companies (MK)

introduction of a zero % corporate tax rate for non - distributed profits (MK) and for re-invested profits (HR)

important infrastructural programs (roads, railways, energy) (MK)

exemption from profit- and personal income tax for 5 years for new companies and new
employment in northern Montenegro (ME)

granting higher deductible standard costs (from 30 to 70%) for rented private accommodation in tourist areas in order to reduce the risk of grey business operations (ME)

setting up of an electronic database for all beneficiaries of social benefits and implementing the concept of one-stop-shop for the payment of all benefits (HR)

On the revenue side :



introduction of a new reduced VAT rate for goods and services which were not taxed before (e.g. food, books) (HR)

increase of standard VAT rates and rates of excise duties (ME) (HR)

introduction of a crisistax (ME)

measures to reduce the tax debt of individuals and companies (ME)

introduction of new fees (e.g. on smokers areas in restaurants) (ME)

increase of certain property taxes (e.g. on illegally built apartments) (ME)

strengthening the institutional and personal capacity of the tax administration and stricter control on the payment of taxes and social contributions (ME, MK, HR)

integrated collection of PIT and social contributions by PRO (Public Revenue Service)
(MK)

switch to the system of gross salary (which means broadening the personal income tax
base) (MK)

extension of the tax system to small businesses (e.g. green markets) (HR)

intensified fight against the grey economy through more severe sanctioning (ME)

setting up of a new department for tax coordination and control and of a special office
for large taxpayers (HR)

introduction of a fiscal cash register (HR)

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V. REFORM PROPOSALS FORMULATED BY THE TRADE UNIONS OF THE COUNTRIES


OF THE WESTERN BALKANS
Based on the data displayed in the previous chapters one can conclude that, from a trade union
point of view, the tax systems in the countries of the Western Balkans are unfair, not only in
their structural design but also in their operation.
Unfair in their structure because of the too heavy weight of indirect taxes and the too limited
taxation of higher incomes (both personal and corporate) and of large property (income).
Unfair in their operation due to a lack of efficiency, effectiveness and compliance.

PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

1.

Budget policies


In several countries there is an urgent need for budget increase and for a higher share
in the budget for education, capital investments (mainly in public infrastructure), social welfare
and active labour market policies (in particular training).

Non-productive expenditure should be reduced.


There is a need for better management of public finances, more adequate budget planning, more efficient allocation of budget spending and more budgetary discipline by the governments. An independent public body should monitor public finances.

During the last years there has been a clear trend in the WB countries towards higher indirect
taxes, low flat rate taxes on personal income and low taxation rates for corporate income together with lower social contributions (for employers).

Trade unions should be involved in the drafting of the state budget.

A lighter but more efficient public administration is recommended.

Raising the cost/benefit question about this move, evidence so far in the WB countries and
elsewhere, suggests that the expected direct effect of the introduction of the low flat rate taxes,
namely an increase of FDI (and thus also of formal employment and budget revenue) and a
decrease of the shadow economy, did not materialize. On the contrary, this move led to a legitimating and a stabilization of the informalities in the economy instead of curbing or eliminating
it. It also sharpened the shortage of public revenue and made governments more dependant
on foreign credits, often provided by international financial institutions.


Governments should depend less on loans from international institutions by generating
more own tax income.

Over the period 2010-2012 the net inflow of FDI in the group of six WB countries decreased by
20% (from 4.113 mio US $ to 3.294 mio US $) and remarkably, the only country of this group
which could welcome a strong increase of FDI was Croatia, exactly the country with a progressive personal income tax system and the highest corporate tax rate of the region. In 2012, 42%
of the net inflow of FDI (1.395 mio US $) went to this country.


Reorganization of the tax administration and of the tax procedures in terms of more efficiency, more effectiveness and more correct functioning of the tax supervision, tax collection
and tax control.

In order to make the tax systems more fair, efficient and effective, the trade unions of the
countries of the Western Balkans propose several measures, taking into account the specific
situations in the different countries. The trade unions made also some proposals concerning
the state budgets. These measures are listed below in clusters. The list is neither exhaustive
nor applicable in its integrality in each country : the hard core measures would however merit
a general application.

2.

Tax administration

There is a need for:


Investment in capacity building of the tax administration and of the tax inspectors : sufficient staffing, permanent training and upgrading of skills, IT equipment, creation of databases.
A decent salary for the tax inspectors in order to avoid corruption.

Accountability of the tax administration vis--vis the tax payers, transparency of the tax
procedures and possibilities of appeal for the taxpayers.
3.

Tax structure, types of taxes and tax rates

These measures are structured around the following headings :

The following measures are necessary:


Introduction of a (more) progressive system of personal income taxation with a higher
top rate and tax exemption for the lowest salaries (up to 50% of the average earnings) in order
to rebalance the system between direct and indirect taxes and to bring more fairness in the
system, to allow more redistribution of income and allow more active policies.

- Budget policies
- Tax administration
- Tax structure, types of taxes and tax rates
- Tax and social fraud, tax evasion and corruption
- Social protection / social assistance
- Attracting new investments (FDI)


More differentiation of VAT rates : zero rate or lower rate for basic goods and services
and higher rates for luxury products/services (e.g. weekend houses, large villas, luxury cars,
boats, etc).

In order to broaden the tax base, critical examination of the numerous tax deductions,
tax exemptions, tax allowances and tax credits, both for personal income tax and for corporate

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tax : are they really all justified and effective ?



Companies who do not deliver the promised recruitment of new staff in exchange for
any kind of tax expenditure (be it subsidies or tax exemptions) should reimburse the granted
expenditure, that means restitute the subsidy or pay the full corporate tax.

The majority of small parafiscal burdens (fees) should be abolished.


Property taxes should contribute more to the state revenue. Large and multiple properties should be properly taxed; basic real estate for residential purposes should be tax exempted
or taxed at a low rate.

The potential of higher taxes on capital income (from leasing, real estate trading, interests, dividends, etc.) should be explored.

Environmental taxes should be developed as part of an integrated and coherent waste
management (higher taxes for landfill, separate collection of waste at municipal level, recycling
contribution, investment in recycling industries, etc.). Environmental taxation delivers a double
dividend.

Higher tax on insurance- and bank transactions.


More centralization of the tax system would allow more equal treatment of all taxpayers
and more efficient tax control and collection.
4. Tax and social fraud, tax evasion and corruption
The fight against corruption, tax fraud and tax evasion can only be won by governments if they
succeed in restoring the confidence in government and in guaranteeing the respect for the state
of law.
It is of utmost importance to reduce by all means - prevention, sensibilisation and repression
- the tolerance for the grey economy, for evasion of social contributions and tax fraud and for
corruption.
Stricter and more regular control is needed on tax declarations of private earnings and of business profits in order to reduce the substantial underreporting of earnings and profits and increase the financial discipline.
Strict control also on the application of the law on the minimum salary and on the correct payment/transfer to the Public Revenue Office (PRO) of the witholded social contributions ; the
PRO should send each year to the workers a report on the received social contributions (and
taxes if any).
State bonds should no longer be emitted on paper, but in a digital form.
Stronger supervision of the banking and insurance sector is also needed.
Better prevention mechanisms should be introduced In public procurement; the main contractor should be liable for subcontractors.
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Cash transactions should be limited; all important payments should go via bank accounts (or
credit cards) so that they become traceable.
Different databases should be developed in the tax-, social-, financial- and employment services
and used in a coordinated way (that means interlinked).
Unjustified, undeclarable and undeclared wealth of private persons (high public and other officials, politicians, businessmen, civil servants, etc.) should be examined on its source and sanctioned proportionally in case of violation of the law.
The functioning of the different inspection services (social protection, employment, direct and
indirect taxation) should be coordinated and the operations in the field should be done jointly
(joint task force).
For sensitive sectors of the economy (construction, trade, transport, horeca) a labour card and
badge can be useful as registration and control instrument.
In tourist areas rented apartments / houses and tourists should be registered in a central register and effectively taxed (tax on rental income and tourist tax).
Bilateral or multilateral automatic exchange of information agreements in the field of direct and
indirect taxation can be very useful.
Need also to regulate and control transfer pricing.
On the yearly tax declaration form the question can be raised if the taxpayer has a bank account
or an insurance contract abroad .
For repatriated black or grey capital from abroad a regularization and amnesty procedure can
be foreseen, associated with reasonable financial penalties.
All financial transactions with tax havens - be they direct or indirect - should be checked on their
economic justification and interest-, dividend- and royalty payments to these countries should
be taxed at a higher rate.

5. Social protection / social assistance

Need to spend more money of the unemployment fund for active labor market policies (e.g.
financing of training) instead of passive unemployment benefits.
In order to avoid the assistance/benefits trap, the thresholds for allowing a combination of social assistance/social benefits support and low paid work in the formal sector should be revised.
If people loose their support once they take up a small formal job, they will be tempted not to
take up that job or to work in black.
The rationality of second pillar pensions should be defined.
In Kosovo, there exists only a mandatory funded pension scheme. The trade unions ask the
replacement of that scheme by a pay-as-you-go scheme (Bismarck type).
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PERC/LO-N Regional Project Tackling Taxation, Informal Economy and Corruption in the Western Balkans towards better governance and democratic process

6. Attracting new investments (FDI)


The trade unions underline the importance of the tax- and fiscal system for the investment decisions and industrial location.
But at the same time they stress that, besides the taxes, other elements are equally important
for future investors, such as :
-
the availability of good public infrastructure;
-
the rationalization of procedures for starting up a new business or for enlargement investments : procedures should be transparent, less lengthy, less burdensome (bureaucratic)
and less expensive (registration costs);
-
stable and secure business environment; clearly allocated rights and responsibilities;
transparency of property rights; respect of the rule of law.
-
more accountability and financial discipline of the government (timely return of VAT to
companies).
-
good labour relations and social dialogue practices.
The European Commission (EC) supports this view in a Communication to the Council and the
E.P. of 23/10/2001 with the title Towards an internal market without tax obstacles (COM 2001
/ 582 final).
In this Communication the Commission notes that Although empirical studies show that there
is a correlation between taxation and location decisions, the analysis does not provide evidence
of the impact on actual economic decisions. Taxation is, of course, only one of the determinants
of investment and financing decisions. The existence and quality of economic infrastructures,
the availability of qualified work, as well as the short and medium-term outlook in different
markets and countries are among the other important determinants of investment behavior.
The geographical accessibility of markets, transport costs, environmental standards, wage levels, social security systems and the overall attitude of government all play an important role
too. Which of these factors are relatively the more important very much depends on the individual type of investment decision.
Two researchers, A.Paulus (University of Essex) and A.Peichl (University of Cologne) question in
a paper of the Institute for Social and Economic Research of the University of Essex whether a
personal income tax reform namely the introduction of a flat personal income tax is the best
instrument to increase growth and employment. Their answer is: The user costs of labour and
capital play an important role in determining the labour and investment demand. These user
costs, however, are determined more by social security contributions and corporate taxes than
by personal income tax.1

Martin HUTSEBAUT
1 September, 2014
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