Download - Ivan Mikloš Minister of Finance of the Slovak Republic Kyjev May 16, 2005 THE TAX REFORM IN SLOVAKIA
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Ivan Mikloš
Minister of Finance of the Slovak Republic
KyjevMay 16, 2005
THE TAX REFORM IN SLOVAKIA
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INVESTORS THINK THAT SLOVAKIA HAS THE BEST INVESTMENT CLIMATE
Source: Czech-German Chamber of Commerce and Industry, 2004
91% of current foreign investors in Slovakia intend to expand their local investment!
Source: US Chamber of Commerce in Slovakia, 2003
Which country has the best business environment?
0% 10% 20% 30% 40% 50% 60%
Germany
Hungary
Poland
Czech Republic
Slovakia
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BUSINESS ENVIRONMENT IS RAPIDLY IMPROVING
• World’s best reformer according to the World Bank– #1 in Doing Business 2005– currently among top 20 countries
in the world regarding the quality of business environment
Source: Heritage Foundation and Wall Street Journal
Index of economic freedom
36
59
74
6066
35
0
10
20
30
40
50
60
70
80
2000 2001 2002 2003 2004 2005
SK CZ HU PL
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FISCAL REFORM: GENERAL CONTEXT
MAIN GOVERNMENT’S OBJECTIVE:
• reduce the general government deficit under 3.0% of GDP by 2006…
• … while simultaneously decreasing public expenditures as a share of GDP
Fiscal Position of General Government (% of GDP)
2002 2003 2004 2005 2006
Revenues 38.3 36.0 36.2 37.0 36.6
Expenditures 44.0 39.6 40.0 40.4 39.5
Net borrowing -5.7 -3.6 -3.8 -3.4 -2.9
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THE SLOVAK TAX REFORM: GOALS
BASIC PHILOSOPHY:LIGHT, NONDISTORTIVE, SIMPLE AND TRANSPARENT
TAX SYSTEM
• create business and investment friendly environment for both individuals and companies
• eliminate existing weaknesses and inefficiencies in the tax law
• eliminate distortive roles of tax policy as instruments for achieving non-fiscal goals
• improve tax fairness by taxing all types and all amounts of income equally
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FISCAL IMPACT OF THE TAX REFORM
• reform designed to be revenue neutral in 2004• serious attention paid to fiscal impact quantifications• 5 independent estimations made by following institutions:
– International Monetary Fund– Slovak Ministry of Finance - Institute of Financial Policy– special high-level working committee– Infostat (Slovakia)– Slovak Academy of Sciences
• conservative estimates adopted for fiscal purposes
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IMPLEMENTATION STRATEGY Chronology of the changes in the tax laws
1. Changes in indirect taxes: • amendment of VAT Act – introduction of one single rate of 19%
(before: 20% and 14%)• amendment of Acts on Excise Duties – increase of certain excise duty
rates: mineral oils, beer and tobacco products
2. Changes in direct taxes: • new Income Tax Act – introduction of flat tax • abolishment real estate transfer tax and gift and inheritance
tax
3. Changes in indirect taxes in compliance with EU tax legislation
- new VAT Act and new Excise Duties Acts - as of May 1, 2004
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THE SLOVAK TAX REFORM: SPECIFIC CHANGES
• radical simplification of the tax system– elimination of virtually all exceptions, exemptions, deductions, special rates,
and special regimes– elimination of dividend, inheritance, gift taxes, and real estate transfer tax
• introduction of low nominal rates– 19% flat individual income tax– 19% corporate tax– 19% unified VAT on all goods and services - without any exceptions
• shift from direct to indirect taxes
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1 flat rate: 19%
1 flat rate: 19%
THE REFORM RADICALLY DECREASES ECONOMIC DISTORTIONS CREATED BY THE TAX SYSTEM
2003OLD SYSTEM
2004NEW SYSTEM
PERSONAL INCOME TAX RATE
CORPORATE INCOME TAX RATE
VALUE ADDED TAXES
5 tax rates: 10%, 20%, 28%,
35% and 38%
5 tax rates: 10%, 20%, 28%,
35% and 38%
19% 19% 25% 25%
one unified rate: 19%
one unified rate: 19%
standard rate: 20% lowered rate: 14%
standard rate: 20% lowered rate: 14%
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THE REFORM RADICALLY SIMPLIFIES THE TAX SYTEM AND INCREASES ITS TRANSPARENCY
2003OLD SYSTEM
2004NEW SYSTEM
PERSONAL INCOME TAX BASE
CORPORATE INCOME TAX BASE
OTHER TAXES
LOTS OF exceptions, exemptions
and special regimes
LOTS OF exceptions, exemptions
and special regimes
NO exceptions, exemptions
and special regimes
NO exceptions, exemptions
and special regimes
LOTS OF exceptions, exemptions
and special regimes
LOTS OF exceptions, exemptions
and special regimes
VIRTUALLY NO special taxes and rates
VIRTUALLY NO special taxes and rates
LOTS OF special taxes and rates
LOTS OF special taxes and rates
NO exceptions, exemptions
and special regimes
NO exceptions, exemptions
and special regimes
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THE REFORM ELIMINATES MOST FORMS OF DOUBLE TAXATION OF INCOME
DIVIDENDTAX
DIVIDENDTAX
REAL ESTATETRANSFER TAX
REAL ESTATETRANSFER TAX
GIFTTAX
GIFTTAX
INHERITANCETAX
INHERITANCETAX
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Effective Tax Rate
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Personal Income(as a percentage of the average salary in the economy)
Effective Tax Rate
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0
Personal Income(as a percentage of the average salary in the economy)
FLAT TAX STILL ENSURES PROGRESSIVE TAXATION OF INCOMES
Poverty Line
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INFLUENCE OF FLAT TAX ON INCOME(person with unworking wife and 2 children)
-15
-10
-5
0
5
10
15
20
25
30
35
6 00
0
16 0
00
26 0
00
36 0
00
46 0
00
56 0
00
66 0
00
76 0
00
86 0
00
96 0
00
[%]
20032004
Negative tax (tax bonus)
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TAX RATES FACED BY INVESTORS IN SLOVAKIA
0% 10% 20% 30% 40% 50% 60%
USA (New York)
Ireland
France
UK
Japan
Germany
Poland
Czech Republic
Hungary
Finland
Estonia
Slovakia
Corporate tax rateEffective tax rate on investment income faced by a private investor (combined corporate tax and dividend tax)
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TAXATION II IN EU 25, (year 2003)
2005
2004
2003
28,929,3
30,7
0,0
10,0
20,0
30,0
40,0
50,0
60,0
SE
DK BE
FR FI AT IT LU
Euro
zone
EU
15 DE
EU
25 SI
NL
HU EL
PT
UK ES
CZ PL
CY
MT EE IE
Slo
vakia
Slo
vakia
Slo
vakia LV LT
[% HDP]
Poznámka: Eurostat uvádza pre SR 30,9% z HDP, avšak medzitým sa revidovali údaje HDP v SR za rok 2003 smerom nahor.
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TAXATION II IN EU 25, change 1995 - 2003
-9,9-12,0
-10,0
-8,0
-6,0
-4,0
-2,0
0,0
2,0
4,0
6,0
CY EL PT MT ES AT SE BE
UK FR IT LT CZ
EU15
Euro
zone D
KD
E SIEU
25 NL
LU FI PL IEH
U EE LVSl
ovak
ia
[% HDP]
Poznámka: Eurostat uvádza pre SR pokles o 9,7% z HDP, avšak medzitým sa revidovali údaje HDP v SR za rok 2003 smerom nahor; pokles medzi rokmi 1995 až 2005 sa odhaduje až na 11,7% z HDP
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PRELIMINARY RESULTS OF TAX REFORM
• Tax revenue development in 2004 shows that the estimates of the Ministry of Finance have been correct and collected tax revenues should be in line with the estimates
• Simplified administration and lower total tax burden have lead to improved incentives for entrepreneurship and investment
• Positive impact on employment is expected in a medium term
• From a macroeconomic and budgetary point of view it is too early to evaluate the overall impact of the tax reform
• Reform contributed to better rating of the Slovak Republic (A-)
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THE SLOVAK TAX REFORM: RESULTS
• no decrease in tax revenues– increased revenues from indirect taxes– less scope for tax evasion and tax avoidance– more motivation to pay taxes
• better incentives for investment and work– thanks to lower marginal rates– thanks to more transparent and equitable taxation
FASTER CATCH-UP = LESS REVENUES FROM EU FUNDS!
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FDI IS GROWING STEADILY
* ForecastsSource: National Bank of Slovakia
Foreign Direct Investment Stocks (US$ )
$0
$2 000
$4 000
$6 000
$8 000
$10 000
$12 000
$14 000
1997 1998 1999 2000 2001 2002 2003 2004*
FDI Stock by Country of Origin, 2003
France; 7.1%
Italy; 8.4%
UK; 7.1%
Czech Republic;
4.7%
USA; 3.9%
Hungary; 5.3%
Austria; 13.6%
Netherlands16.6%
Germany; 24.7%
Other; 8.3%
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POLITICAL WILL AND MANAGEMENT ARE KEY FOR SUCCESSFUL REFORMS
• must have a clear vision where you want to go• timing is key in the implementation
– implement less popular steps first• resist lobbies and entrenched interests
– if you give in to one demand, you will be less able to say no to others
• compensate the most vulnerable part of the population
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OTHER STRUCTURAL REFORMS
• pension reform– radical reform of the pay-as-you-go pillar– introduction of a fully-funded pillar (private pension accounts invested in
capital markets)• health-care
– make the system financially self-sustainable– improve the quality of services provided
• education– improve efficiency and quality of secondary education system– increase capacity and quality of tertiary education
• public administration– improve the quality of the public service– continue the de-centralization of public administration
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CONCLUSION: ENLARGEMENT CAN GIVE A NEW PRO-REFORM STIMULUS TO THE EU
• competitive pressures coming from the new members– current EU members will have to reform as well if they will
want to stay competitive in medium and long term
• “change of mood” within the EU– at least 10 out of 25 people around the table will be from
dynamic countries with significant reform experience
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Ivan Mikloš
Minister of Finance of the Slovak Republic
KyjevMay 16, 2005
THE TAX POLICY IN SLOVAKIA