There is one common feature: governments like to talk about lower taxes, but rarely fulfil their promises.
When it comes to taxes in Croatia, there is something which is common to all governments, even when they are headed by different parties. They all keep promising that taxes will be reduced “soon, “next year,” or “as soon as budgetary conditions allow,” but that almost never happens. Yes, there are occasional slight tax cuts adopted here and there, but for the most part, their effects are hardly felt by the majority of the population and are mostly focused on those with higher earnings anyway.
While economic situation in most other former Yugoslav republics is even worse than in Croatia (with the exception of Slovenia), their tax systems are favourable for running businesses and opening new jobs, which explains why some of them have been reducing the gap with Croatia. Here is a comparative analysis of the four most important taxes paid by the citizens and businesses: the value-added tax, the corporate profit tax, the personal income tax, and the pension and healthcare contributions paid from workers’ salaries.
All tax data for countries except Croatia have been taken from www.tradingeconomics.com.
Value-Added Tax (VAT)
This is by far the most critical revenue source for governments, which is the reason why this tax is often raised and almost never decreased. While differences between countries concerning this tax are not vast, each percentage point up or down means hundreds of millions of euro collected or not collected by the state budgets.
The top prize in this category goes to Croatia, which has by far the highest VAT rate in the region, and the second highest in the European Union. For many years, the rate was 22%, but that was increased to 23% in 2010, as the effects of the economic crisis were felt in the budget. The crisis continued, and the next government in 2012 decided to increase the rate again to 25%, where it still stands. The promises about lowering the rate are a constant feature of pre-election manifestos of all parties, but somehow they never get to do it once they win power. The current government said it would cut the tax by one percentage point immediately after entering the office and by an additional one percent during its term. We are now a year and a half into its term and, not surprisingly, nothing has changed. There are promises that the VAT might be reduced by the end of this year (with the decision possibly coming into effect in 2019 or 2020), but that is still just a promise.
As for other countries, Slovenia has the VAT rate of 22%, closely followed by Montenegro (21%) and Serbia (20%). Macedonia and Kosovo have the substantially lower rate of 18%, while consumers in Bosnia and Herzegovina can enjoy the lowest rate of 17%.
This is a tax paid by companies on their annual profits. It is not felt so much by the individual citizens, but is very important for attracting foreign investment, since investors are understandably more inclined to put their money in those economies where their profits will not be taxed at a higher rate.
In Croatia, there are two different corporate tax rates: 12% for smaller companies and 18% for those with higher profits. These rates were adopted last year, as part of the government’s so-called “tax reform,” which was actually more “a small tax cut so that it would appear we are doing something to kick-start the economy.” In earlier years, there was just a single universal rate of 20%. The cut in the tax is substantial for small companies (those with annual revenues below 3,000,000 kuna), but for potential major investors, the difference is more negligible.
In this category, Slovenia gets the main prize with the corporate tax rate of 19%. Serbia takes away 15% of companies’ profits, while Kosovo, Macedonia and Bosnia and Herzegovina have the same rate of 10%. Montenegro is the star, with the lowest rate of just 9% on company profits.
This is a tax paid by employees on their income through the year. In most cases, it is actually paid by employers in the name of employees who never get to see the money, so they often “forget” that they are paying the tax. Given that changes in the income tax rate are felt on each month’s salary, the effects of tax cuts and increases in this category are seen almost immediately.
Croatia has two different income tax rates: 24% for income up to 17,500 kuna a month, and 36% for income above the threshold. The first 3,800 kuna a month is non-taxable, and this amount can be increased for taxpayers with children and dependent family members. These tax rates were introduced in 2017. Before that, the tax rates were 12%, 25% and 40%, with 2,600 kuna a month being non-taxable. The changes resulted in higher net salaries for employees with average and above average incomes, which then further resulted in an increase in consumer spending and higher VAT budget revenues. Additional tax cuts are allegedly being planned for 2019 and beyond, but no specifics are known at this time.
Income tax rates vary in other countries and, due to differences in thresholds and non-taxable amounts, it is difficult to compare them exactly, but here are some rough numbers. Slovenia is the only country with a higher marginal income tax rate (50%), although its lowest rate is just 16%. Other nations take away a much smaller percentage of gross salaries from their citizens. In Montenegro, the income tax ranges from 9% to 15%, while in Kosovo, Macedonia and Bosnia and Herzegovina it is 10%. Serbia has a 15% primary income tax rate.
In addition to the income tax, gross monthly salaries of employees are also hit by salary contributions, which cover health and pension insurance, as well as some other fees. Just like income tax, they are mostly automatically deducted by employers, so employees never get to see the money.
In Croatia, the contributions amount to about 37.2% for most workers, depending on whether they are members of voluntary pension security schemes, whether they have additional health insurance and other elements. In Slovenia, the rate is 38.2%, in Bosnia and Herzegovina 42%, in Montenegro 34.3% and in Serbia 37.8%. The only country with substantially lower contributions is Kosovo, where just 10% of salary is deducted for pension and health insurance.
This shows that taxes in Croatia are mostly higher than in other countries. That is not a surprise, given the masses of people employed in Croatia’s public sector, for whose salaries money has to be found somewhere. However, despite high tax rates, the government has been mostly unable to raise enough funds to cover all of its expenses, which is the reason for the high level of debt owed by the state. Last year was the first in a long time that Croatia had a budget surplus, raising enough money to pay all the bills without having to go into debt. Still, the question is for how long it will be able to continue the positive streak.