Croatia: Fiscalization to control gray economy

Fiscalization in Croatia  Photo: Dusko Jaromaz/Pixsell

Fiscalization in Croatia Photo: Dusko Jaramaz/Pixsell

The concept and the practice of fiscalization in controlling the gray economy, stamping out or minimizing avoidance of business sales tax, goods and services tax or VAT or whatever it’s called depending on where you live, has as of 1st January 2013 become a reality in Croatia. Fiscalization generally pursues as efficient as possible control over business operations and their turnover.

If any country needs such a system of control then the countries still struggling out of Communism would surely be at the top of the list.

One may ask: but there was enough control under Communism, why impose more? The answer to that question could include that fiscalization doesn’t fall under political controls aimed at benefiting the political elite and sustenance of totalitarianism where citizens’ livelihood depended not on their personal contribution to the nation but upon the personal will of the political elite. Hence, fiscalization can be seen as a process that has every chance of modifying business people’s behavior towards personal responsibility within the common good, i.e. the nation.

In 1789, in his letter to Jean-Baptiste Leroy, Benjamin Franklin (one of the founding fathers of the United States of America), said: “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes”. The latter sentence has not only become a famous quote in “Western” democracies but it’s implication that paying taxes is inevitable has somehow shaped the majority of individual citizen’s responsibility towards the common good, i.e. nation building. Under the thumb of Communism, and consequent widespread tax avoidance and corruption, Croatian people, regretfully, missed out on such social “pressures” to comply with tax laws and accept each individual’s responsibility towards the state.

Croatian government is currently enforcing its new Fiscal Law on cash-based businesses.

Under this law a fiscal device (computerised cash register) is placed into the system for monitoring tax pay or fiscal systems in the function of control over money traffic in accordance with law. Citizens will even be able to check with the tax office whether a receipt they’ve been given at a restaurant, say for the dinner they’ve consumed, has in fact reached the tax office electronic registry.

Fraud in terms of concealing sales from the tax office may seem insignificant if we think in terms of individual consumer, but it adds up to serious levels on the overall scale. Estimated losses for government tax revenue can add up to billions – and these billions are the billions necessary to secure funds for decent living standards and improvements as well as maintenance of public facilities.
So, fiscalization in the sense of current implementation in Croatia with cash dependent economy represents utilisation of tax collection system with help of various secure devices designed to safe keep amounts which taxpayer has collected from buyers, and produce report totaling sum of tax money needed to be paid into government’s budget. Undoubtedly, government revenue increase is set to increase via this system.

The Croatian Ministry of Finance has emphasized that it will ban business activities, stamp closed all premises of those businesses found not to comply with the new law, i.e. who are not issuing “fiscal receipts” for all sales. As life would have it, cafés, restaurants etc. are the first to comply. If, upon inspection, non-compliance is discovered and then rectified, then the business would be allowed to recommence with business.

About 400 fiscalization inspectors hit the streets of Croatia on January 8th and the plan is to inspect over 1,500 businesses by January 11.

A seemingly very costly, if not unaffordable, compliance check. Seemingly heavy handed flooding. Could be, but perhaps that is exactly what’s needed in the Croatian cash/gray economy which, to my view, has enjoyed a far too long a honeymoon period on issues of tax obligations.

On January 11th, Vecernji List reported that in the past five days, 418 fiscalization inspectors had completed 3,418 inspections and found 248 non-compliances. Hospitality businesses (restaurants, cafés…) found to be non-compliant were given 48 hours to correct this and achieve compliance.

This result is a good sign of better things to come for Croatian economy and business behavior.

Almost universal experience tells us that certain individuals will always invent solutions or ways to elude their fiscal duties, to avoid paying taxes or declare minimised income or profit in order to minimise their tax bill. Some humans are just like that and always will be. Tax evasion occurs in particular where there are faults and loopholes in legislation and enforcement methods are deficient.  By the sound of things the latter is not a problem in Croatia these days: there’s almost an army of fiscalization inspectors on the streets. There’s even a Facebook page on the issue of fiscalization in Croatia; the potency of social media is bound to make its mark as well.

All said, near future will tell how efficient Croatia’s fiscalization system is. Certainly one cannot bypass the fact that it has imposed new burdens on those taxpayers who have been responsible with their tax obligations; they will need to invest in new computer technology and software, and some may struggle to find the initial cash flow necessary in order to meet compliance with new Fiscal law. Perhaps the Ministry of finance might look into assisting some businesses in this area at this early stage of legislation enforcement? Fiscalization will also increase operating costs of businesses, and indeed, some business owners are talking of job losses etc. because of fiscalization.
Fiscalization teething problems may be many, indeed, but oh what a great opportunity for a positive partnership between business, individuals and government.
To quote Jeff Heinrich of Montreal’s Gazette, on the issue of the success of similar fiscalization as in Croatia: “…there’s no question: Tax collectors certainly have an easier time doing their job now than they did before. And that’s good for everyone: taxpayers, businesses, the government, everyone.
We have to get the message out that tax evasion is harmful to the collectivity. Everybody, not just us, has to do their share to make sure there’s less of it.”

Couldn’t agree more! Ina Vukic, Prof. (Zgb); B.A., M.A.Ps. (Syd)

Comments

  1. Miso Sorbel says:

    Fiscal devices are mandatory in Sweden since early 2010. Their implementation within the set of measures aimed to halve the gray economy of Sweden until 2014. All taxpayers who do business with cash, they must have a tax devices. Excluded are the largest companies for which the tax authorities found that they have enough good system of internal controls and therefore do not require fiscal devices. According to Swedish law, the fiscal cash register is made up of cash and certified control unit that is connected to the cash register and enroll in an encrypted form of records of all transactions at checkout (invoices, account cancellations ..). The control unit provides the data records for a period of at least five years.

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  2. Aboutcroatia says:

    Micromanaging, controlling, cash economy – while great will still have thieves finding ways to avoid collecting VAT or PDV as they call it in Croatia. But that only means that tax collection will end up like a colander where the bulk goes into state budget anyway. That’s better than nothing and – the thieves – thieve their children’s or grand-children’s living standards i.e. health, transport etc …

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  3. Michael Silovic says:

    Great article Ina! I agree that everyone needs to pay taxes on goods and services and modernization of collection is the first step in the right direction. Tax collection is paramount in order for Croatia to continue on it’s path of success. But the problem with tax collection for some is the fact that many view taxes as an unfair burden because once it is collected it is not fairly distributed through goverment services and distribution. We see this already on a regular bases where a great portion of goverment investment is put into tourism. While we can all agree tourism plays a vital role in our economy it is unfair that others do not benefit from its success. As an example If we look at our farmers and agriculture in general they are in great need of assistance from our goverment. Agriculture is the 2nd most important source of income for many countries and in Croatia alone we imported 10 Billion dollars alone this past year of agricultural products. People involved in agriculture are starving for business and trying to keep their farms working and in many cases keeping our heritage alive. When they see that what they pay in taxes is not reinvested in them it makes it harder for them to want to continue. I think in order for tax collections to be successful the goverment has a responsibility to spread the wealth to all regions.The other issue that people in general want to avoid paying taxes is because of goverment itself. Many see goverment officials getting rich and living above the means of the average persons and how goverment has a way of crying poverty to the people while giving pay raises and benefits to themselves. All goverment officials should fill out a yearly basis on a public registry all of their assets and income and any benefits they receive including contributions so that the people know that they are being treated with the same fairness as anyone else.Until this is done you will always have a portion of the populous who will not pay taxes.

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    • Agree with you Michael regarding fair distribution of tax revenue but you need to collect the tax in order to distribute and Croatia does not seem to have that, so any extra tax collected may indeed see improvements in government subsidies to agriculture etc. I believe that Croatian politicians do file their asset etc card where it’s transparent what they have and earn etc. But I think there are too many holes in that system as well and they will need to tighten that one as well.

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      • Michael Silovic says:

        I agree and they also need to pay taxes on the fair value of any preferential treatment such as use of corporate jets, hotels, free food, etc and these should also be listed under a gift category and taxed at the same rate as any Croat. I am all for collecting taxes that are owed.On another note I left out on my last post with regards to agriculture , agriculture today accounts for three percent of the Gross Domestic Product (GDP), compared to almost 20 percent two decades ago. so we have lost basically 17% of our GDP because of lack of involvement and investment by our goverment and that is a lot of money to lose when we important 10 billion a year of products that we can grow and sell our selves and that’s a lot of money to collect taxes on.

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      • Yes Michael, shocking figures re agriculture and lost opportunities. Let’s hope that what you see will also be seen by those in power and that agriculture, food production, will see a well deserved, a so worthwhile revival. It’s almost as if Croatian government needs a good kick in the butt that’ll wake it up into some serious action. So much natural wealth and potential in Croatia.

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  4. Robert Keane says:

    California evidence suggests that the property tax has comparative merits in its ability to create incentives for more balanced development.
    http://edq.sagepub.com/content/15/1/21.abstract

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  5. Martin Sostar says:

    I like this initiative much better than the ridiculous “Pillar of Shame” where names of tax evaders were published by the Croatian government. I know governments must get their income from somewhere and the safest ones are from profits from government owned industries or companies and, of course, from taxes. Given that the Croatian government (like most in the world) have privatized much of its assets (with shocking corruption and theft, to boot) it would do very well if it used some of those fiscalization inspectors to comb through the privatization and when fraud and underpricing etc is discovered, return that asset quick smart into government ownership. There is a huge bank of cash in there alone, I am sure.

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    • Spectator says:

      Let’s hope that if that happens, Martin Sostar, that those caught with their hand in the cookie jar Croatian government had won’t do a Gérard Depardieu trick and flee the borders with the loot.

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      • Spectator, yes I too cannot stomach what Gérard Depardieu – fled France to avoid paying tax on wealth. He seems to have forgotten that most of his wealth was made from movies funded by the French taxpayer. If it weren’t for tax payer funded movies etc he would most likely never have come to be so wealthy. Let’s hope that our children do not learn from him and that they do not learn from Vladimir Putin who gave Depardieu Russian citizenship. But what can you expect from Communist die-hard mentality – thieving from the people is what their trade mark is and was despite the fact that they swear to live for the people. Eh!

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      • Hear, hear, Marko L. and Spectator 🙂

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  6. Yes Martin Sostar – they should start with former president Stjepan Mesic and his daughters. Plus, with all those tycoons in Croatia who rose into riches almost overnight, from empty pockets.

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  7. Mason Proper says:

    Regarding Gérard Depardieu and his refusal to pay wealth tax, the new tax system brought about by the new French president etc – I don’t agree with his flying the coup because his wealth was most likely accumulated through his involvement in movies – originally funded in the main by French taxpayer/government. But I do not, I do not agree in taxing the wealthy more than those that are not wealthy because that is like punishing – severely – success. God knows today’s economy needs the wealthy and their knowhow. It doesn’t, though, need any tycoons, baboons, who got rick from abusing their power and using their connections in the privatization of government assets as happened in Croatia and other ex-Communist countries.

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  8. Michael Silovic says:

    I do not see this being an issue in Croatia because there aren’t that many rich Croatians. But I feel strongly that all former and current goverment officials need to have an audit done to see where they accumulated their wealth and that the proper taxes have been paid. I am in favor of a public registry for all goverment officials that show all their assets, income and taxes paid on a yearly basis for all to see. the audit should include assets before coming into power as well and it should be posted on the goverment website of the office they work for.

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  9. Alis Jacob says:

    hello Ina, a little to the left of this article, am currently involved via my parents with regards to inheritance in Croatia, they have lawyers acting on their behalf and are finding that many thousands of dollars spent on this and no end in over 7 years, to find that the judiciary and government are not acting on the side of the law in many many inheritance cases, being maligned by the authorities and families (sic) in Croatia (Zadar opstina). Some leads may help as I am about to embark on a voyage of discovery to Croatia and seek a just outcome to the dilemma that has caused many families to fall apart. I realise it is a touchy situation but when fraud is committed by families and authorities it is beyond one’s comprehension as to how that can be in a country like Croatia, where we once stood proud we are now bewildered by the treatment Croats dish out towards the diaspora of Croats across the globe. Regards, Alis Jacob

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    • Alis Jacob, your story can probably be repeated a million times. It’s absolutely shocking and unacceptable the way most probate or inheritance cases have been going for too long. Things may improve though as a relatively new procedure has Public Notaries doing the work rather than the court through “ostavinski” inheritance process. Furthermore, there are still lots of “tails” from the old Communist era where, depending on who you know at high places, fraud i.e. transfer of land ownership had often happened to detriment of rightful heirs who, e.g., lived in diaspora. Yes go there and insist on right outcomes, you may want to take a new solicitor if needed…

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  10. I can confirm that today, 13th Jan, my favourite restaurant in Varazdin is using one of the new cash registers. All the staff have their own electronic key and the system seems to be just fine. I don’t know if people will be looking pay for their lunch with cash “under the table” but it is step in the right direction.

    A quick note to Alis Jacob. It isn’t just you. Lawyers here are beyond belief in the main, the majority of their “customers” end up embroiled in seemingly endless cases. The judges never make a decision anyway. Not a happy scene.

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