Most should have insisted that HDZ and SDP create a budget for the next four years

Renowned tax expert Hrvoje Zgombić joined PwC a little over two years ago as the chief partner for Croatia, one of the leading global professional services firms. PwC aimed to strengthen its market position, and Zgombić, along with two other partners who joined with him, was attracted by the strong international brand and the wide range of services.

Zgombić also leads PwC’s tax and regulatory services department in Croatia, and prior to joining PwC, he was a senior partner and CEO of Zgombić & Partners. He is a certified auditor, tax advisor, and court expert, and in an interview with Lider, he discusses current announcements of tax changes and pressing issues in the Croatian economy.

Most advocates for the abolition of the dividend tax; what do you think about that?

− Any abolition of tax is a good idea. This is particularly evident with the dividend tax because this tax leads to a reduction in investment as it decreases the net earnings of company owners, whether they are shareholders or holders of business shares. Secondly, when you introduce a dividend tax, the value of the company decreases by about ten percent because the valuation of the company is based on net discounted cash flows, and it matters whether you previously received one hundred kuna in dividends as cash flow, and after the introduction of the tax, ninety kuna. This means that before the introduction of the tax, you could sell the company for ten million euros, and after that, for nine. Very simplistically, we could say that the introduction of the dividend tax reduces the value of the entire Croatian economy by ten percent. The reduced incentive for investment leads to a decrease in employment.

Do you believe that the collapse of state finances is inevitable?

− Yes, I still think so; it is just a matter of time. And that depends solely on how long creditors will be willing to lend us money. The end will come when external creditors are no longer willing to do so. Right now, we see relatively little of these problems because when we go abroad, especially now in conditions of low interest rates, there is a lot of liquidity, and we are getting loans for everything we need.

However, a turnaround has already occurred on the domestic front as banks reportedly will no longer finance the state. Is this a signal that the end is near?

− Domestic banks, which have a better perception of the national economy, have announced that in conditions of such indebtedness, they are no longer willing to finance Croatian public debt. I do not know what this will mean and in what timeframe for state finances, but if foreign creditors also act this way, which is a matter of time, then we will find ourselves in a position where we will have to forcefully do what we did not want to do willingly, namely cut public spending. And beneath all these reforms are people who will end up losing their jobs. When talking about reforms in the public sector, it is a vague concept, which is why Most may have made a mistake by not insisting that HDZ and SDP create a budget for the next four years, as the effects of all reforms are reflected in the budget, and everyone can easily see how well you keep your promises. Parties should announce a budget for the next four years when entering a campaign because it reflects all the announced reforms.