Relaxing the Tax Burden on Enterprises: For Whom And How, If At All?

Big Questions for Small Percentage Points

The Ministry of Finance’s announcement that it could consider lowering the tax burden on businesses could have multiple effects on the economy and on employees, depending on how it is tailored. The context of such a measure is not only fiscal, rather any potentially larger intervention in this sphere would also require the reform of pension and health insurance

Relaxing The Tax Burden On Enterprises: For Whom And How, If At All?

Despite the small fiscal room to manoeuvre, the fiscal relief of the economy measure that’s been announced by the Ministry of Finance could, depending on the modalities adopted, stimulate economic growth by allocating all the exempted funds towards enterprises without having an effect on employee earnings, to contribute to reducing the ‘brain drain’ outflow of quality personnel from Serbia by creating space to increase net earnings, giving an extra chance for small and medium-sized enterprises to catch up with the rest of the economy and embark on the road of development, or to impact on reducing inequality in the society. And the level of unburdening of taxpayers and the way it could be conducted depend largely on the political preferences of the Serbian Government and the set of values that policymakers, directly or inherently, support. If there was, however, discussion of a more significant redistribution of budget funds to the economy, the context of such a measure would spread beyond the issue of mere fiscal policy and touch upon the fundamental issues of expected economic growth and the possibility of financing pension and health insurance sustainably under the current model.

DRAGOLJUB RAJIĆ,

BUSINESS SUPPORT NETWORK

HIGH LEVIES ON EARNINGS SEE US LOSE OUR BEST PEOPLE

REDUCING THE BURDEN ON EARNINGS WOULD ENABLE COMPANIES TO INCREASE THE NET EARNINGS OF THEIR EMPLOYEES AND REDUCE THE DEPARTURE OF QUALIFIED PEOPLE WHO HEAD ABROAD IN SEARCH OF BETTER PAID JOBS AND IMPROVED WORKING CONDITIONS

Serbia is lagging a full 15 years behind most Eastern, Southeast and Central European countries, which have reformed their tax systems and thus sought to relieve their economies and enable them to be competitive on the European single market. Bulgaria and Czechia have twice reduced their rates of taxation and contributions on labour, while Hungary, Romania, Slovakia, Poland, Croatia, Macedonia, Estonia, Lithuania and Albania have each done so once. The Prime Minister and President of Serbia constantly stress the desire for net monthly earnings in Serbia to average 500 euros, but that would have long been the case had taxes and contributions been reduced to the Eastern European average of 40.4% (viewed in real terms, not according to the Gross I and II earnings formula, which blurs the picture of the total burden on the employer, who now realistically pays about 64.3 dinars on every hundred dinars paid to an employee). With a reduced burden on earnings, employers would have room to pay higher net earnings and thus motivate high-quality personnel to stay in the country and working at their companies.

Moreover, all of these countries have significantly cut the number of total para-fiscal charges, and the highest number of them are in Croatia, with around 190, while Serbia has, according to the latest statistics, exceeded a total of 550 para-fiscal levies that are paid by businesses.

Since 2014, Serbia Has Also Experienced An Increase In The Import Of Labour, And This Trend Is Extremely Troublesome, Because As A Country We Are Losing The Best People In Managerial Positions – Engineers, Technicians And Tradesmen – The Very Profiles Of Workers That Form The Core Of Every Developed Economy

High burdens on earnings and excessive para-fiscal charges lead to average payment deadlines for the economy of between 135 and 140 days and to many companies facing occasional illiquidity issues, all of which results in an inability to increase the net earnings of their employees. This is one of the reasons why Serbia is abandoned each year by between 25 and 35 thousand people (according to various sources and research), who leave in search of better paid employment and improved working conditions abroad. Most worryingly, three-fifths of them are not unemployed, but rather they leave domestic companies that must then struggle to find adequate staff with the necessary experience to replace them. This has meant that, since 2014, Serbia has also experienced an increase in the import of labour, and this trend is extremely troublesome, because as a country we are losing the best people in managerial positions – engineers, technicians and tradesmen – the very profiles of workers that form the core of every developed economy.

 

MILADIN KOVAČEVIĆ

DIRECTOR OF THE STATISTICAL OFFICE OF THE REPUBLIC OF SERBIA

RELIEF IS MOST NEEDED BY THE WEAK

POOR LIQUIDITY STILL HAMPERS SMALL AND MICRO ENTERPRISES. IT IS CERTAIN THAT THIS LARGEST AND MOST VULNERABLE GROUP OF COMPANIES HAS THE MOST PRONOUNCED NEED FOR THE IMPROVEMENT OF THE BUSINESS ENVIRONMENT AND PARTIAL TAX RELAXATION

For a long time, the focus has been on a so-called tax wedge, which implies taxes and social security contributions (pension and health insurance, and primarily retirement funds). The “Programme Statement” of the current arrangement with the IMF (Policy Coordination Instrument) directs, in fifteenth points, towards the use of the existing fiscal space for improving the business climate and supporting growth, while the most effective measures would be to reduce contributions for social insurance and terminate para-fiscal charges. The brunt of change is definitely on possible reductions in social security contributions. The context of such a measure is not only fiscal in the narrow sense. Specifically, the existing fiscal balance, both budgeted and consolidated, and the prospects for GDP growth in the future are not sufficient to guarantee the sustainability of socially acceptable pension and health insurance due to the aging process of the population and the persistently low employment rate and high number of pensioners.

As such, the possible relaxation of social contributions must be linked to reform of the pension system, which must rely for a long time to come on the first pillar, i.e. the State Pension and Disability Insurance Fund (certain rationalisations can be reviewed, the application of the individualisation of accounts, as well as the creation of additional sources of income). The relaxation of contributions can also be partial. Specifically, analysis of company liquidity and profitability on the basis of financial statements for the 2014-2017 period indicates a positive change in the performance of companies in this period, in terms of higher profitability, a better financial position and increased liquidity. However, this progress is not uniform.

Namely, poor liquidity still hinders small and micro enterprises. It is evident that this most numerous and most vulnerable group of enterprises has the most pronounced need for the improvement of the business environment and tax relief. It is also possible to link fiscal relaxation for business with more progressive fiscal standards e.g. tax on total earnings tax or with the segregation of property tax according to the criteria of its use.

 

SRĐAN DROBNJAKOVIĆ

DIRECTOR OF THE SERBIAN ASSOCIATION OF EMPLOYERS

REDUCING CONTRIBUTIONS BY 2% IS REALISTICALLY POSSIBLE

What concerns every employer are fiscal and para-fiscal charges that don’t allow an enterprise to function normally and which are, unfortunately, unpredictable. These levies exist at both the national and local levels. Local governments permit themselves to determine them on their own, generally at those moments when the municipal coffers are emptying. It is estimated that there are around 510 of these levies at present.

There is room in the budget to reduce taxes and contributions from the current level of 64 per cent. It has unofficially progressed in that direction with the abolition of the 0.75% that was allocated for unemployment, and fallen on the burden of the employer. At this point, it is realistic to reduce contributions by two per cent.

A problem that most employers aren’t currently aware of is the property tax, which has been increased in some municipalities by up to three hundred per cent. The Serbian Association of Employers has submitted an initiative to the national Social Economic Council for restoring the calculating and determining of tax per square metre, in such a way that the only basis for taxation can be the accounting ‘book value’ recorded with all legal entities or the purchase value, or value in accordance with International Financial Reporting Standards (IFRS).

A specific question to be posed is whether the same basis applies for taxing the property of profit and non-profit entities.

 

MILOJKO ARSIĆ

PROFESSOR OF THE FACULTY OF ECONOMICS

POLITICAL AND DEVELOPMENTAL INTERESTS – WHICH ARE STRONGER?

A POLICY THAT GIVES PRECEDENCE TO GROWTH OF THE ECONOMY AND STANDARDS WOULD, IN THE LONG RUN, UTILISE A LARGER PART OF THE EXISTING FISCAL SPACE TO STIMULATE ECONOMIC GROWTH, BUT THE GOVERNMENT’S SHORT-TERM POLITICAL INTERESTS AND THE DEMANDS OF CITIZENS POINT TOWARDS THE HIGHEST POSSIBLE GROWTH IN SALARIES AND PENSIONS

Serbia last year achieved a fiscal surplus of 1.2% of GDP, while this year, with an unchanged fiscal policy, its fiscal surplus will amount to about 0.7% of GDP. Given the relatively high GDP growth expected in the coming years, it is estimated that a suitable deficit for Serbia would be between 0.5 and one per cent
of GDP. Such a fiscal deficit would enable a continued reduction in the ratio of public debt to GDP, while the fiscal policy would encourage economic growth. From the aforementioned it follows that room of around 1.5% of GDP exists to increase the expansiveness of fiscal policy. That space can be utilised to stimulate economic growth, through reductions in the tax burden or increasing public investment, but also for increasing current spending through increases in salaries and pensions. A policy that gives precedence to growth of the economy and standards would, in the long run, utilise a larger part of the existing fiscal space to stimulate economic growth, but the government’s short-term political interests and the demands of citizens point towards the highest possible growth in salaries and pensions. As such, one can expect – as some sort of compromise – that part of the fiscal space will be utilised to increase public investments and reduce taxes, while part will be used to increase salaries and pensions.

Taking the aforementioned into consideration, it can be concluded that room exists to reduce taxes, but that room is not large, amounting to around 0.5% of GDP, or 20-25 billion dinars. This modest fiscal space could be used to reduce taxes on production, labour and capital factors, as these taxes are the great hindrance to economic growth. Specifically, it is possible to reduce the fiscal burden on labour, which today amounts to about 64% (in relation to net earnings) by about two percentage points, through a reduction in contributions. Furthermore, it is possible to increase the non-taxable part of earnings by a few percentage points. Provided increases in salaries and pensions don’t exceed GDP growth, room would exist to introduce additional tax breaks when it comes to tax on profit, as well as to unburden the economy with the abolishing or reducing of some quasi-fiscal levies.

 

SAŠA RANĐELOVIĆ

ASSOCIATE PROFESSOR AND VICE DEAN FOR FINANCE AND INTERNATIONAL RELATIONS AT THE UNIVERSITY OF BELGRADE – FACULTY OF ECONOMICS

COMPETITIVENESS
AND/OR INEQUALITY

IF THE AIM IS TO REDUCE THE FISCAL BURDEN BY RELIEVING THE ECONOMY, THERE COULD BE A LINEAR REDUCTION IN THE TAX RATE OR CONTRIBUTIONS. IF, HOWEVER, THE GOAL OF TAX REFORM IS TO IMPACT ON REDUCING INCOME INEQUALITY, THEN THE NON-TAXABLE PART OF EARNINGS SHOULD BE INCREASED MARKEDLY

Serbia has established macro-fiscal stability in the previous period, so a solid fiscal surplus will be realised in 2018. However, from the perspective of stimulating economic growth while maintaining the sustainability of public finances, leading a policy of a mild fiscal deficit, ranging from 0.5 to one per cent of GDP, would be justifiable. This means that there currently exists significant fiscal space of around one per cent of GDP, i.e. over 300 million euros annually, which should be used primarily for a more noticeable and lasting increase in public investments and for reducing the tax burden, given that research shows that such a fiscal stimulus would have a significantly higher positive effect than, for example, a more significant increase in salaries and pensions.

Although the majority of taxes in Serbia are, in terms of level, close to or below the European average, and also the taxation average of Central and Eastern European countries, it has been assessed that the focus in reducing the tax burden should be on the fiscal burden placed on earnings, in order for the tax reform to have a positive impact on the economy’s international competitiveness and reducing the grey economy. The way fiscal burdens are reduced depends on the goals to be pursued. If the goal is primarily to unburden the economy, it could be adequate to conduct a linear reduction in the rate of tax or contributions. If, however, the goal of tax reform is to impact on reducing income inequality, then fiscal easing could be carried out through a more noticeable increase in the amount of the non-taxable part of earnings. Reducing fiscal burdens could in some cases, such as occupations that are in high demand, lead to the growth of net earnings among employees, while with some professions, such as those in which there is a large number of unemployed, reducing the fiscal burden would lead to a drop in costs for the employer, without a direct impact on the position of employees, but with an indirect positive effect on future growth in labour market demand.

The Way Fiscal Burdens Are Reduced Depends On The Goals To Be Pursued. If The Goal Is Primarily To Unburden The Economy, It Could Be Adequate To Conduct A Linear Reduction In The Rate Of Tax Or Contributions

In addition to reducing fiscal burdens, strengthening the competitiveness of the domestic economy also requires work on reducing the space for tax avoidance (e.g. through abuse of the rules on lump-sum taxation payments for entrepreneurs), and improving predictability through a clear and unambiguous formulation of the rules of taxation by legislators, and their consistent interpretation and application on the part of the Tax Administration.