—
—
The new reform in the income tax and contributions system, which Finance Minister Marko Primorac claims is the largest to date, is desirable and expected. Inflation has devalued the tax thresholds and censuses that regulate the amounts of the non-taxable part of income – these thresholds have been prescribed in the same absolute amount for several years, and their purchasing power weakens with each percentage increase in prices.
The second technical implementation problem of income taxation in 2023 is a consequence of the introduction of the euro and the Government’s commitment that the change of the national currency does not affect the legal system of the state in any way, so now all amounts used to determine tax reliefs and obligations of individuals are specified in decimal numbers. This complicates proper application and undermines the principle of simplicity that should apply in the income tax system.
In addition to these reasons, the Ministry of Finance recognizes another pressing Croatian problem: a large number of employees with low wages. According to the latest published data from the Croatian Bureau of Statistics, the median salary for February 2023 was 917 euros net and 1214 euros gross.
In February, there were a total of 1,587,266 employed, which means that as many as 793,633 employed workers receive a net salary lower than 917 euros, and 396,817 receive a net salary lower than 708 euros, or a gross salary lower than 901 euros (lower quartile, 25 percent of the total number). According to the announcement, the goal of the new tax reform, which is expected to come into effect on January 1, 2024, is primarily to improve the fiscal position of low-income workers.
Two Directions of Intervention
Even before the e-consultation process with the interested public was opened, models of reform measures intended to achieve this were published in the media. Interventions will occur in two directions: by reducing the base for calculating and paying contributions for mandatory pension insurance in the first pension pillar and abolishing the surtax while simultaneously introducing greater fiscal powers for local units. The new model for calculating and paying fiscal obligations from salaries has been published in an unofficial version, which is an additional burden for the Ministry of Finance.
This is a significant change that will affect the amount of net income for many employees, as well as other relationships in the labor market and society as a whole. Care must be taken that a model designed to solve one problem does not create new injustices and unwanted directions in the fiscal system and labor market. In this sense, the following seven points may be useful in preparing amendments to the law and suggesting to the entities that must prepare for the implementation of the announced changes where possible disputes may arise.
To begin with, contributions are paid for the period, while income tax is calculated according to the rules in effect at the time of salary payment. Croatia has a concept whereby contributions are calculated according to the regulations that were in force during the period the insured person spent in insurance, while the application of income tax regulations follows the cash principle and tax calculation according to the regulations that were in force at the time of receipt payment. The salary for December 2023, which is paid in January 2024, would be subject to the previous rules from the perspective of contributions, while the new rules would apply in the tax calculation. Only with the payment of the salary for January 2024, which is paid in February, would both novelties apply. This means an obligation for employers to intervene in payroll accounting programs twice, which incurs costs.
Additionally, a smaller contribution for pension insurance from gross salary automatically increases the base for calculating income tax, so for the same gross salary, after the introduction of the deduction from the base for calculating pension contributions, the tax base for calculating income tax will increase. It may exceptionally be prescribed that the new relief in the contribution calculation also applies to the salary for December 2023, which will be paid in January 2024.
Secondly, the reduction of the base for paying contributions must not affect the pension base in the first pillar. The reduction of the base for paying contributions for the first pension pillar should not affect the base for determining the amount of pension from the generational solidarity system. The pension from the generational solidarity system is determined based on the gross salary base, so it is important to maintain the current solution. Of course, this measure further shifts the burden of solidarity onto those who pay contributions.
Pension systems of generational solidarity have the task of redistributing income levels. Individuals who paid lower amounts of contributions while in the labor market still receive relatively higher pensions; conversely, those who paid higher amounts of contributions receive relatively lower pensions. The differences in pension amounts are smaller than the differences in earnings from which contributions were paid. This is one of the important tasks of state pension systems.
With the new model, the pension contribution itself is used for wage redistribution, and solidarity is extended to the phase of contribution payment. In countries surrounding Croatia, income tax is exclusively applied for redistributing income in the labor market, while Croatia introduces a redistributive impact of mandatory contributions. Therefore, the tax administration should not be surprised by the reactions of foreign investors and domestic insurers. More specifically, there will be an increased interest in replacing high salaries with other sources of income.
Read the full text in the new printed and digital edition of Lider.
—
—
