Countries Alter Tax Rates, What Will New Croatian Government Do?

Lauren Simmonds

As Poslovni Dnevnik/Jadranka Dozan writes on the 24th of July, 2020, the fifteenth Croatian Government, and the second one under Andrej Plenković, promised to do a lot in its programme by the end of its mandate; from creating the conditions for the bringing to life of as many as 100,000 new jobs, raising the average salary to 7,600 kuna and the minimum one to 4,250 kuna, to ten percent higher pensions and more generous social benefits.

The new-old prime minister sees the main lever for achieving these programme goals and economic recovery in the full utilisation of the now somewhat (in)famous 22 billion euros from the European Recovery Fund and the seven-year EU budget. This is obviously an important stronghold for the further tax relief that has since been announced.

Another day or two after the election victory, Plenković said that we don’t have time to celebrate, and among the first moves he announced were cuts in income and profit taxes, as well as a reduction in VAT on food in some products.

In the meantime, the statements of the equally new-old Minister of Finance, Zdravko Marić, suggested that this wouldn’t be a package, especially not in terms of the beginning of the application of lower rates in general.

Lowering the 36 and 24 percent income tax rate to 34 and 20 percent is likely to take place before the reduction of corporate income tax for companies with an income of up to 7.5 million kuna from 12 to 10 percent. It’s also likely to happen before looking into reducing VAT in the aforementioned segment.

Some economists believe that in terms of the timing of this so-called VAT intervention, this isn’t a mere matter of it being common practice to introduce such changes at the beginning of the calendar year. The coronavirus crisis has trampled all over many common practices, with as many as eleven European governments deciding to respond to the pandemic’s shockwaves by temporarily lowering VAT rates over recent months, and not just in terms of more flexible collection models.

Even among those eleven nations, only Germany has resorted to indiscriminate VAT cuts. As of this month, it has lowered the general rate from 19 down to 16 percent. Most others opted for targeted selective reductions targeted at individual sectors, products and services.

The Croatian Government’s package of assistance to the economy was one of the most generous in the entire EU (when measured in relation to GDP), but in the field of VAT, which in our budget carries revenue of as much as 13-14 percent of GDP, anti-crisis measures remained, allowing business owners the ability to pay VAT only after collection, and not upon issuing invoices. This eased their liquidity situation.

Numerous variants of flexibility of rules in the VAT system were also used by countries that also reduced the rate of that tax on certain products and services for a period of time. According to Avalar VATlive, a global specialist for these taxes, their focus was mainly on the hospitality and tourism sector, transport, cultural events, books, publishing and the like.

In adopting measures during the coronavirus crisis, governments have generally followed what other countries were doing very closely, so this sort of perpetual intervention in VAT rates was introduced in early July and is set to last until the end of the year.

Norway, however, which isn’t an EU member state and is known for smart moves, was much quicker than most others. The non-EU Northern European nation halved VAT on public transport, hotels and cinemas from 12 percent to 6 percent in early April for a period of seven months. The Turks, who also aren’t EU members, also started with their interventions in April, but they decided to almost completely give up on the idea of VAT (slashing it from 18 to 1 percent) on domestic flights and accommodation, for a period of eight months.

The Austrians halved their VAT rates on alcoholic beverages (from 20 to 10 percent), and further reduced it (from 10 to 5 percent) for restaurants, cafes, culture, and for part of the Austrian press.

Since July, the Czech Republic has reduced the levy on sports and cultural activities and accommodation services (from 15 to 10 percent), while Greece has temporarily eased the levy on taxis, ferries and other public transport, among other things. The option for the partial reduction of VAT has been being discussed in Ireland over recent days as well.

European announcements regarding reforms…

Spanish Prime Minister Pedro Sanchez recently announced fiscal reforms for Spain, but in the direction of tax increases, aimed primarily at the higher taxation of large companies.

In this regard, the media especially emphasise that one of the targets could be American technology companies. Sanchez is also announcing the acceleration of the introduction of new environmental taxes. This issue will surely come to the forefront in other EU member states in the foreseeable future as well, both due to the green strategic orientation of the EU and owing to the fact that the huge “umbrella” borrowing to finance the recovery plan of the economies affected by the coronavirus crisis will need to be repaid at some point.

There are no such tax announcements in the Croatian Government’s programme, so it remains to be seen whether they will be imposed during the mandate or not.

The reduction of tax revenues

At the moment, the focus lies primarily on tax relief, whenever that might actually start. Since in the first half of the year, tax revenues were reduced by between 13 and 15 percent or about 5-6 billion kuna (only in the second half was it close to 7 billion kuna), it is understandable that in the plans for further relief in the eyes of the Croatian Government, things rely heavily on the use of European Union money which should be available to Croatia in the coming years.

For more on the Croatian Government, follow our politics section.


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