Tax Reforms In Slovenia, Recent Developments And Challenges Presented by: Prof. Dr. Bohinc Date: 15 – 16 February 2024 Introduction - The EU's powers in tax area are very limited. • (Partial harmonization rather than unification!) - However, tax sovereignty within the EU is not absolute. - EU directives harmonize only specific aspects of taxation such as: - • Value-added tax (VAT), • Excise duties, and • Certain aspects of direct taxation. The common concept is the smooth functioning of the internal market (Art. 26 of TFEU)- - The policy sets goals in the direction of combating harmful tax evasion and tax avoidance - Direct taxation (the income, property and capital taxes), is not covered by EU regulations (fiscal sovereignty of the member states Tax Sovereignty In The EU - Refers To The Ability/Authority Of MS To: - Determine and enforce their own tax system tax policies independently. -set tax rates, tax exemptions and deductions, and - Collect tax revenues - Tax competition and tax sovereignty are interconnected concepts! - Various EU directives and regulations that aim to prevent: - • Harmful tax practices that can • Distort competition within the single market; • MS to use their tax policies to gain unfair advantages or create trade barriers. The EU also encourages cooperation and information sharing among MS to combat: • Tax evasion, tax fraud, and • - Aggressive tax planning It is crucial for the economy to have a stable and predictable tax environment. The Current Situation In Slovenia - Is not stable and predictable • Various, frequent and uncoordinated tax reforms • Slovenia has adjusted its tax system several times over the years. • The effectiveness of these changes depended on the political environment. • The Slovenian tax system needs a comprehensive reform in order to (objectives):  Harmonize with international standards and  Ensure a fair and sustainable revenue structure and  Greater public financial sustainability - Corporate Income Tax • Slovenia: 19%;  The rate for withholding tax from income sourced in Slovenia is 15%,  EU:21.5%; • Reduction of the tax base is possible for:  Investments in R/D in equipment and intangible assets,  Voluntary additional pension insurance, for donations,  Employment and investing in certain regions,  Investing in the digital and green transition • The average tax rate in the EU: 21.5%. • Higher rates than Slovenia:  Germany (30%),  France (25%),  Great Britain (25),  Spain (25%),  Netherlands (25.8%),  Austria (24),  Norway (22%), in  Slovakia (21). • The same tax, as in Slovenia:  Czech, slightly less in Croatia (18%)  Serbia (15%). - Business community proposes: • Gradual reduction of the corporate income tax rate from 19% to 15% over 4 years and • Of the withholding tax rate from 15% to 10%. • Increase of the relief for investments from 40% to 50%. • It is reasonable to consider the proposal on progressive taxation of profits by:  Taking into account the ratio between  The amount of funds for the payment of profit and  The amount of funds for the payment of labor costs,  So that a lower tax per profit paid out by a company that has this ratio more balanced. - OECD Study: a lot of revenue is lost due to the narrow base of the VAT. • A range of goods and services are taxed at a reduced VAT rate, from which wealthier households benefit the most. By expanding the tax base by 10%, an additional revenue of EUR 120 million would be collected, which would be close to the loss due to the reduction of employees' social security contributions by 1% point. • The lower rate of VAT (9,5%), which is relatively low, is applied to too many goods and services. • The general VAT rate must be maintained at the current level (22,5)%. However, there is a possibility to eliminate the regressive effects of the reduced VAT rate. • Some products and services that are taxed at a reduced rate of VAT benefit the rich more than the poor - One of the main problems of the Slovenian tax system is the low taxation of real estate. • Compared to other EU members, • Slovenia has the fifth lowest real estate tax rate, • As a percentage of GDP among the EU-27. • Average, property tax in the EU is 1.8% of GDP, • France - highest rate at 4.0%. - • Slovenian rate is at 0.6% of GDP. • These revenues are compensation for the use of urban land. • It amounts to approx. 0.15% of the value of the property. • This tax applies to all real estate, regardless of how it is used OECD: • After the introduction of the RET, the state budget could reduce the income tax revenue sharing ratio from 54% to 36%,. • If Slovenia would collect income from RET in the amount collected on average by other • - - OECD countries, It would collect an additional EUR 280 million. RET causes • Inadequate savings habits of the population; • Does not encourage the sale of vacant properties • Investment real estate is the main part of an individual's assets. • The implementation of the RET should: • Reduce the current anomalies in the taxation of commercial real estate, • Impose tax only to the second apartment. Development Cap (DK) is the limitation to social contributions at 4,400 EUR or 5,500 EUR (2 times, or 2.5 times the average salary). • Proposal for the DK, addresses the :  Brain drain, of the highly educated with a high level of specific knowledge,  Multinational companies not to move their headquarters to neighboring countries  Due to a more favorable wage burden. • DK:  Limits the payment of all social contributions above a certain limit of the monthly gross salary and covers key experts who contribute to the growth of added value. • - DK would cover key professionals in the private and public sector. Tax incentives, encouraging employee ownership: • Simplify employees participation from company profits in the form of:  Ownership (share or option) o Or a cash scheme and • Provides companies to strengthen employee ownership in the business; • Strengthens the growth of innovative and fast-growing companies • This way, companies can:  Increase the loyalty of key employees  Focus on long-term strategy  Ensure higher growth and lower staff turnover. - The introduction of so called development cap; limit to all social contributions above a certain monthly gross salary (2x average). - Introduction of a tax incentive rewarding employees from company profits in the form of ownership (share or option) or cash - Increase of the tax deduction for pension savings from EUR 2,600 to EUR 5,000; from 5.9% of gross salary to 10% of gross salary - Consider the progressive taxation of companies profits - different tax rates, depending on • Size of profit, or • The ratio between:  The amount of distributed profit and o The amount of labor costs).  The higher is the paid profit relative to wages, the higher is the profit tax!