Proposed reduction of the general VAT rate to 24% from 2020 – public consultation until September 6

The Ministry of Finance on Thursday released drafts of proposals to amend several tax laws for public consultation, which among other things foresee the expansion of the application of the reduced VAT rate of 13% from 2019, a reduction of the general value-added tax (VAT) rate to 24% from 2020, and a further reduction of the real estate transfer tax rate from 4% to 3%.

>>>EU member states should be given more room to reduce VAT

In Croatia, three VAT rates are currently applied – a general rate of 25% and two reduced rates of 5% and 13%. To relieve the economy, the draft proposal for amendments to the VAT law proposes a reduction of the general VAT rate to 24% from January 1, 2020.

At the beginning of August, Prime Minister Andrej Plenković announced that an additional tax relief of 2.7 billion kuna is planned for next year, noting that the Government has not abandoned the reduction of the general VAT rate by one percentage point but is considering implementing it from January 1, 2020, instead of next year.

Recalling that tax relief in the first two rounds of tax reform amounted to around 4 billion kuna, Plenković said that with the new package of tax changes from the beginning of next year, an additional relief of 2.7 billion kuna would be enabled, which should allow for increased personal consumption, employment, and investments, state budget revenues, and ultimately economic growth.

The legal proposal also states that “given that the general VAT rate creates a high regressive effect, it is necessary to expand the application of the reduced VAT rate of 13% to reduce the regressive effect of VAT on the most vulnerable groups of citizens, and at the same time, the reduction of the regressive effect will lead to relief for the economy as a whole.”

The VAT rate of 13% would apply from next year to baby diapers, fresh and chilled meat, fish, fruits, and vegetables. Recently, Finance Minister Zdravko Marić stated that the Ministry’s calculations show that, assuming price corrections for these products after the VAT rate reduction, this would bring an average Croatian family 872 kuna annually in terms of consumption structure.

>>>Marić: There is room for further reduction of the tax burden, VAT

Considering the proposed changes regarding the expansion of the application of the reduced VAT rate of 13%, it is estimated that they will have an impact on reducing state budget revenues from VAT by approximately 1.4 billion kuna annually.

Changes are also proposed regarding the use of personal vehicles for private purposes, for which a 50% input tax deduction has been made, which is necessary to align with the European Commission’s requirements regarding the elimination of the value threshold for input tax on cars and the right to input tax for vessels and aircraft. Entrepreneurs currently have the option of a 50% input tax deduction for the purchase or lease of personal vehicles and other means of personal transport whose value does not exceed 400,000 kuna. It is now proposed to eliminate that value threshold.

It is also proposed that from next year, for the efficiency of tax collection and the reduction of various types of abuse, taxpayers enter the VAT system as soon as they meet the entry conditions during the year (the entry threshold is currently 300,000 kuna), rather than at the beginning of the next calendar year as is currently the case.

The fulfillment of tax obligations arising from the application of the special taxation procedure for telecommunications services, radio and television broadcasting services, and electronically provided services to non-taxable persons performed by taxable persons based in the European Union, or in Croatia, but without a seat in the member state of consumption is also simplified. Thus, among other things, a threshold of 77,000 kuna is introduced to simplify the operations of taxpayers who supply electronic services to other member states with a value below that amount.

The real estate transfer tax rate will be 3% from next year

Amendments to the Law on Real Estate Tax plan a further reduction of the real estate transfer tax rate from 4% to 3%.

>>>Zagreb caterers for a 10% VAT and the abolition of the consumption tax

Since last year, this rate has been reduced for all taxpayers from 5% to 4%. The Ministry of Finance states that it wants further tax relief in real estate transfers to further relieve those who decide to purchase real estate, but also to encourage the resolution of land registry issues. Thus, a reduction of the real estate transfer tax rate from 4% to 3% will be prescribed, effective from January 1, 2019.

It is estimated that the relief due to the reduction of the real estate transfer tax rate by one percentage point will amount to around 100 million kuna.

It is expected that organized land registries will further enhance legal certainty in real estate transactions and resolve property law relations, while the reduction of the real estate transfer tax rate will influence citizens’ decisions to address ownership issues regarding real estate.

Changes in contributions will save employers up to 900 million kuna

The draft proposal for amendments to the contributions law proposes the abolition of the contribution for mandatory unemployment insurance of 1.7% and the contribution for occupational health protection of 0.5%. At the same time, the contribution for health insurance will be increased from 15% to 16.5%, which aims to contribute to addressing financial difficulties in the healthcare system.

>>>Used cars: Whether they will be more expensive or cheaper with VAT depends on the purchase date

By abolishing the two contributions, the total burden on wages from contributions decreases from 37.2% to 36.5%. This would reduce the total expenditure of entrepreneurs on wages by 0.7 percentage points, which according to projections amounts to 900 million kuna, thus opening up space for wage increases, the Ministry assesses.

They also note that the rights that are realized based on the contributions whose abolition is proposed will be retained based on the payment of retained contributions with adjustments to sectoral regulations, the Health Insurance Act, and the Employment Mediation Act and rights during unemployment.

To prevent abuse of regulations for insured persons who have a full-time employment contract with the employer while simultaneously being a member of the management board or executive director or manager of a cooperative at that employer, it is proposed to increase the coefficient from 0.65 to 1.1, which is multiplied by the average salary to determine the monthly bases for calculating contributions.

This would equalize their monthly base with that of insured persons based on self-employment, who determine profit from self-employment and reduce the difference in the amount of mandatory contributions between the aforementioned, the Ministry explains.

The Ministry states that no additional funds from the budget will be needed for the implementation of the proposed law.

Administrative relief for taxpayers

The General Tax Act has been in force since the beginning of last year, and the proposal for amendments and supplements published today plans, among other things, its alignment with EU regulations regarding electronic communication to reduce the burden on taxpayers in terms of unnecessary visits to the Tax Administration, as well as the cost of the Tax Administration for sending and preparing paper output documents.

>>>IJF: Room for reducing VAT only after sustainable rationalization of state expenditures

To facilitate business for taxpayers, the administrative burden is reduced by eliminating unnecessary data in forms that the tax authority already possesses, and for statistical reports, a reduction in the reporting frequency is proposed, which is currently prescribed as four times a year, to only once a year and within the deadline for submitting tax returns for income tax or profit tax.

Furthermore, the Ministry says that in recent years it has been observed that business entities, especially those registered outside the Republic of Croatia, provide their services to Croatian citizens while avoiding meeting the conditions regulated by Croatian regulations for performing certain activities.

In this way, undue tax benefits are achieved. To prevent this, the possibility is now introduced for the competent authority to prohibit such a business entity from operating. Since in the mentioned cases, services are most often provided via websites, the law regulates the implementation of the prohibition of operation by blocking access to the content of the website. Penalty provisions are also prescribed for internet service providers if they do not implement the prohibition order by blocking access to the content of the website.

Among other things, in the article on tax secrecy, it is necessary to prescribe how the list of debtors published by the Tax Administration will be formed. The exception from tax secrecy also includes actions in criminal proceedings, the Ministry states in its explanation.

Legal provisions are also changed in the area of collection and enforcement proceedings and the write-off of overdue tax debt. The Ministry of Finance estimates that no additional funds will be needed from the state budget of the Republic of Croatia for the implementation of the amendments and supplements.

>>>Štromar: Reducing burdens on wages may be smarter than reducing VAT

The proposal for amendments and supplements to the law on fiscalization in cash transactions is also in public consultation.

The fiscalization system enables real-time monitoring of the operations of each taxpayer, and its positive effects are visible in almost all activities, the Ministry says. An average of 6.4 million invoices arrive in this system daily, and by comparing data on the number and amount of issued invoices, their growth over the years has been observed. Thus, the number of invoices issued in 2017 was 0.03% higher than the number of invoices issued in 2016, and the amount of invoices issued in 2017 was 7% higher than the amount of invoices issued in 2016.

The Ministry emphasizes that with the proposed changes, they aim to improve the system to create a more generous, fairer, and more competitive tax system and to raise fiscal discipline.

And with the draft proposal for amendments and supplements to the Corporate Income Tax Act, Croatia is fulfilling its obligation to align with the EU directive

on establishing rules against tax avoidance practices that directly affect the functioning of the internal market, specifically in the part of provisions that come into force on January 1, 2019.

This directive represents only one part of measures aimed at preventing the observed unforeseen application of profit taxation regulations, international tax law, as well as generally accepted models and guidelines developed by the Organization for Economic Cooperation and Development (OECD).

The Ministry’s proposals are aimed at preventing the relocation of profits from Croatia to another country.

“Given that there are already rules in the tax system of the Republic of Croatia related to the deduction of interest as well as a general rule against abuse, and the possibility of taxing non-resident companies, no impact on corporate income tax revenues is expected after the introduction of the aforementioned provisions. However, the establishment of a fairer profit taxation system is expected,” the Ministry assesses.

>>>Čačić on tax reform: I welcome the reduction of VAT on food

The public consultation regarding these proposals lasts until September 6.

The draft proposal for the law on excise duties is also in public consultation.