from SKK 450 to SKK 540 per month; cancellation of old age
insurance premium rate decrease by 0.5% per each child; non-approval of lower limit increase and upper limit introduction for the assigned sum of 2% of income taxes for public beneficial services)
The Amendment to the Income Tax Act as of 28 October 2005 has increased tax-deductible flat expenses for self-employed persons from the hitherto 25% to 40%. Flat tax expenses for craftsmen have remained unchanged at the level of 60%. Self-employed persons will be able to assert the new amount of flat tax expenses for the first time in 2007 with presentation of tax returns per 2006; however, the amounts of tax advance payments shall be affected thereby as soon as in 2006. The original Government proposal reckoned with unification of flat tax expenses for all the tradesmen, including craftsmen, at the level of 35%. Tradesmen can deduct flat expenses from their incomes since 2004 when the new Income Tax Act, that has replaced the until then valid flat tax, has come into effect. Assertion of flat expenses simplifies administration as tax payer is not obligated to maintain single-entry or double-entry accountings but maintains only the statutory register of incomes that replaces accounting maintenance in a simplified form.
According to the representatives of the Slovak Tradesmen Union, the adopted increase in flat tax expenses has not been satisfactory. Instead of the approved 40%, they would adopt increase to
Association of Small-Sized Enterprises have considered the increase unsatisfactory as well and required increase of the deductible flat expenditures rate also for craftsmen. The opposition members have proposed to introduce 80% of deductible flat expenditures for farmers. Some observers have supposed the Ministry of Finance of the SR could proceed further and even out the flat expenses for all the small-sized entrepreneurs to the level of 60%.
The Members of the National Council of the SR have approved also a new tax bonus amount for children. The child tax bonus sum has increased from SKK 5,400 per annum (SKK 450 per month) to SKK 6,480 per annum (SKK 540 per month). This sum shall be subsequently annually increased to the same degree as the subsistence minimum amount. Tax bonus is a sum by which the taxpayer's tax is reduced for each dependent child sharing the taxpayer's household.
Concurrently, the amendment has cancelled decrease of the old-age insurance premium rate by 0.5% per each dependent child (the so-called payroll tax bonus), i.e. under the new rules, all the employees shall pay the same amount of 4%. According to the presenters, this system has been demanding in terms of administration and more favourable for the more solvent people since 0.5% meant for them a notably higher allowance than for the less solvent ones.
The Members of the Parliament have approved the finance resort proposal whereupon tax assignation – assignment of 2% of paid taxes of natural persons and legal entities for public beneficial service purposes should be restricted. To explain, the assigned tax sum should be according to the Ministry of Finance of the SR at least SKK 250 (currently minimum SKK 20 with natural persons and SKK 250 with legal entities) and should not exceed SKK 5m with legal entities. The Ministry has defended its proposal by claiming the assigned small sums pointlessly load the administration (as the administrative costs of tax offices for documenting and sending the small sums often exceed the very assigned contributions), and by the proposal to restrict the assigned contribution amount, the Ministry aimed to prevent reallocation of capital within large companies that establish own foundations or unincorporated associations. According to the Committee of the National Council of the SR for Finances, Budget and Currency, such a measure would result in a big drop-out of resources for public beneficial activities of the non-profit sector and with natural persons would deprive more than 335,000 citizens of the possibility of assigning 2% of tax. As at the end of July 2005, 417,000 natural persons and 14,000 legal entities assigned 2% of tax per 2004, whereas the revenue totalled SKK 878m.
Recently, approximately 40% of gainfully employed natural persons have been making use of the possibility of assigning 2% of tax, whereas the average assigned sum totals about SKK 650.
Natural persons make approximately one third of the total tax assignation revenue. Ondrej Dostál from the Conservative Institute of M.R. Štefánik has calculated that in case of approving the minimum sum in the amount of SKK 250 for natural persons, these persons would have to earn per month from almost SKK 13,000 up to above 17,000 (depending on the number of maintained children) in order to be able to assign 2% of the paid tax to the non-profit organisations. In his opinion, tax assignation would become a matter of luxury for the better earning citizens.
Evaluation of the Experts' Committee:
14.9%
31.9%
4.3%
0.0% 2.1% 0.0%
46.8%
0%
10%
20%
30%
40%
50%
Absolute Approval
Moderate Approval
Minor Approval
Status quo Minor Disapproval
Moderate Disapproval
Absolute Disapproval The amendment to the Income Tax Act brought various unrelated changes which were assessed differently by the experts. According to the majority of assessors, the amendment had more positive elements than negative. They welcomed the increase in tax-deductible flat expenses for small traders from 25% to 40%, which would have a positive impact on small enterprise area, but at the same time they pointed out that it would be of benefit if it could be unified with craftsmen, who are entrepreneurs as well, while they can subtract at large as many as 60%. Some of them agreed with the increase in the child tax bonus, which, according to one of the interviewees, should be valorised every year by the amount of inflation. Some experts perceived positively the abolition of a so-called payroll tax bonus, which was unambiguously a regressive measure,
Evaluation of Economic and Social Measures Tax Policy 2005
advantageous for the richer, because 0.5% meant a significantly higher concession for them than for those earning less.
According to some opinions, the amendment brought positive steps which are, however, non-systematic. They represent further adjustments and changes in legislation which is still not transparent enough. The tax and payroll tax system should be perceived as a whole and so the problems in the given area should be solved. According to one interviewee, the measures dealt with the social aspect, but whose realisation is essentially made possible mainly through resources saved in other social issues, and according to him, it is disputable whether it was such a positive measure as it could seem at the first moment. According to him, it is disputable how their realisation will be provided for in further periods as far as the financial resources needed are concerned.
Different attitudes were recorded in the issues of tax assignations and non-approval of limits for remitted sums of 2% of taxes. The major part of interviewees agreed with a complete abolition of this institution which is, according to them, administratively very demanding, inefficient and can be abused. Some of them shared the opinion that this is still not the right time to limit the institute of tax assignation since real benefactors are few and far between in Slovakia.
Juraj Nemec: “The amendment contains various measures, some of them will have a more crucial impact (small traders – I take it as a positive step), others only a very marginal one.“
Martin Krekáč: “The package of measures in the Income Tax Act can be assessed as one of many small steps for reducing the administrative complexity of the tax burden of specific population groups (small traders) and the opportunity to remit 2% tax-part for a purpose which the tax payer himself considers to be important.“
Eugen Jurzyca: “The increase in flat tax expenses for small traders means further destruction of knowledge-based economy barriers. Without a "flat rate", the situation would be as follows: If a small trader uses a lathe, he can include his depreciations into costs and so reduce the tax. If a small trader uses only his brain, he is not allowed to include his depreciations into costs. So the tax system discriminates the use of knowledge and prefers the use of machines.“
Milan Velecký: “For self-employed persons, the chance for insurance rate reduction did not function in practice; the Social Insurance Agency claimed that it had no software premises for it.
Otherwise, it is a subject for discussion. Europe faces the ageing of its population and growing problems to maintain the current pension scheme. There is (in SR was?) a totally legitimate requirement also to link pension insurance to the number of children, because the continuous system may include not only payment of insurance payrolls, but also children who will contribute to it in future. For flat expenses – it is a pity that some craft activities still remained preferential (60%). It surely is not good to put the tax payers against yourself. If flat expenses have to exist, then they should be equal for all self-employed persons. I do not mind the non-approval of the upper border in tax assignation. If a company dedicates 2% of its tax to an allied subject, nothing bad will happen. Because even then they can only be used for public benefit aims.“
Ladislav Balko: ”Every measure directed at supporting economic development, employment etc.
should be a contribution. However, as a financial lawyer, also working with tax law, I must express a critical opinion on the fact that the current Income Tax Act has been amended more than ten times since its acceptation at the end of 2003. This does not speak for a systematic approach in the area of tax acts, which again will lead to an unclear and complicated legal adjustment. It is disputable whether this measure will be favourable for self-employed persons and effective for reducing the tax and payroll tax burden of some groups. The non-determination of an upper limit for remitted sums from 2% of income taxes of legal entities will be decisively against tax ethics – the risk that a large volume of money could flow between a mother company and an allied foundation or civil association. Couldn’t a strict legal determination of the objective for the use of assigned resources be taken into account?“
Igor Rintel: “I do not agree with the introduction of an upper border, if the equal tax rate is valid, the other conditions should also be equal.“
Robert Žitňanský: “A reasonable measure, except for the part related to the assignation of 2%
of tax. The most reasonable solution would be the abolition of this part – if the state feels like it does not need 2% of the income tax, it should reduce the tax rate by this amount. Anyone who wants to can find a public benefit recipient of his money. This will also hinder the effect of company foundations which then use the 2% for their PR activities.“
Peter Schutz: “This is a good amendment, the tax assignation should, however, be abolished as a whole.“