In addition to the hot potato – the abolition of the zero VAT rate (so-called social) – the introduction of VAT on construction services is expected, which will be one of the major changes, as well as a different and much stricter calculation of input tax
Written by: Marija Zuber, advisor-editor at the magazine Accounting and Finance
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According to the work program of the Parliament, a new law on value-added tax was supposed to be adopted this year, which would align the taxation of transactions in Croatia with the requirements set by the guidelines of the European Union, but this task has been postponed until 2009. The European Union does not insist on harmonizing direct tax systems such as corporate tax and income tax, although there have been recent efforts to harmonize corporate taxation among EU member states. The goal of harmonizing tax solutions is to eliminate as many differences in tax systems as possible that affect the movement of capital, goods, and services between member states.
Services in trade with foreign countries
The provisions of the VAT Act regulating the place of taxation of services in trade with foreign countries will also need to be harmonized. According to the Directive, in addition to a dozen services that are currently taxed according to the recipient’s seat, data processing services, telecommunications services, radio and television broadcasting services, and various, increasingly numerous, IT services delivered via the internet, from the delivery of computer programs to distance learning services, should also be taxed according to this principle.
When it comes to value-added tax, the European Union also has a very pragmatic interest. Part of the value-added tax collected in member states is EU revenue and serves as a source of funding for the administration of this increasingly bulky association and its numerous earmarked funds. Therefore, the European Union carefully monitors compliance with regulations governing the taxation of goods and services in acceding states. The fundamental requirements for the harmonization of value-added tax regulations are found in Directive 112 EU adopted in 2006, which replaced the well-known Sixth Directive. The EU’s requirements for the harmonization of the value-added tax system can roughly be divided into several groups: harmonization of tax rates, the method of determining taxpayers and taxable items, and rules governing the right to deduct input tax.
On rates allowed only for export
Regarding tax rates, the Directive sets recommendations for the general VAT rate and requirements regarding reduced rates. Although our general rate of 22 percent is among the highest in Europe and the highest compared to neighboring countries, it is objectively difficult to assume that there is room for its reduction. EU guidelines allow for the application of reduced VAT rates for certain products and services, and the zero rate is allowed only for exports. Croatia currently applies a reduced rate of 10 percent for accommodation services, half-board, and full-board in tourism, as well as for newspapers and magazines.
A bigger problem is the zero rate that Croatia applies to certain products and services (medicines, orthopedic aids, books, milk, bread, film screening services). Since socially significant products are taxed at a zero rate here, it is reasonable to anticipate that Croatia will postpone the obligation to introduce taxation on these goods, even at a reduced rate, until it is forced to do so. Objectively, VAT rates are unlikely to change in the coming year. It is more likely that this hot potato will be left for later.
Small entrepreneurs still have a VAT threshold of 85,000 HRK
The definition of the circle of taxpayers who are legally required to enter the VAT system is determined by the criterion of annual revenue from taxable supplies of 85,000 kuna. If the business period is shorter than one year, the criterion is determined proportionally to the period in which the entrepreneur operated. Thus, small entrepreneurs are considered those whose annual turnover is less than 85,000 kuna.
Although there are loud demands among entrepreneurs to increase this amount, as it has not been changed since 1999, EU rules do not allow it. Namely, EU recommendations on turnover as a criterion for determining so-called small entrepreneurs below this amount are on average 5,000 euros in most countries.
TV subscription without VAT
The provisions that will certainly have to be changed relate to tax exemptions in the domestic market. Croatia must abandon the system of institutional exemptions currently applied. Instead of exempting all supplies made by banks, insurance companies, health institutions, educational institutions, social welfare institutions, and other public institutions as defined in Article 11 of the Value Added Tax Act, it will be necessary to exempt banking services, insurance services, treatment, education, etc. The number of services to which tax exemption applies in the domestic market should also be expanded to include postal services, radio-television subscriptions, all services related to insurance activities (including mediation in the conclusion of insurance contracts), some services related to the contracting of credit guarantees and loans, and certain services related to shares and stakes in companies.
