Croatia’s Tax Reform: More Not Paying Income Tax And Sugar Not As Sweet

 

Croatia’s PM Andrej Plenkovic and finance minister Zdravko Maric unveiled Thursday 27 October 2016 the new government’s tax reforms they’ve been keeping under wraps for weeks. They say that the new tax system, encompassing tax reforms, the government is bringing in from 1 January 2017, will be simple and transparent and fairer. Well, as far as the issue of transparency is concerned there’s no need to raise it simply because in these cash-poor days savvy and “street-wise” consumers suss out any hidden taxes pretty quickly – taxes can never be non-transparent for too long.

 

From a bird’s eye view having a drink at a bar in Croatia is just about to hit your pocket by a whole 12% of extra VAT (PDV in Croatia) and the sugar you add to your coffee or make a cake with is going to do the same. Perhaps the only cheering squad for these increases will be the health costs for the bodies of those vulnerable to or on the verge of contracting liver cirrhosis or diabetes…Going to the movies will slug you an extra 10% VAT so you’ll be choosing the movies to go and watch at the movie theatre much more carefully as you reluctantly find less and less difficulties in waiting a year or so for the movie to show on TV.

 

But there are mercies in this tax reform, too: your seeds, seedlings, fertilizer and pesticide will cost less as VAT/PDV for these products slides downward from 25 to 13%. The VAT on electricity supply, baby car seats, rubbish removal, coffins and ash-urns is also going down by the same 12%.
Come 1 January 2018, as VAT/PDV goes down to two brackets only – 25% and 12% – and the 5% bracket vanishes from the VAT formula – 5% VAT on milk, bread, orthopedic aids, medicines, newspapers and books jumps to the magical new flat rate of 12%.
When it comes to income tax the current 3 brackets: 12%, 25% and 40% will disappear and be replaced by 2 brackets as one becomes a tax-free bracket from 1 January 2017. So this is how you will or will not be paying income taxes in Croatia from 1 January 2017:

Income per month:
0-3,800 kuna (506.5 Euro) – No income tax
to 17,500 kuna (2,331,00 Euro)- 24% income tax
17501 kuna + – 36% income tax
These income tax rates, of course, do not include tax surcharges or surtax that are imposed on wages in many towns and cities in Croatia. Some surcharges can climb up to 12% and one can come across two people doing the same job in the same workplace but be receiving a different net wage.

“The current tax system in Croatia has certain negative characteristics which have led to its lack of competitiveness. It is too complicated in comparison with other countries around us. The high tax burden, a large number of exemptions, and frequent changes are the reasons why the tax reform has featured as one of the most important reforms to be implemented during the term of this government”, said PM Plenkovic, that frequent changes in tax laws have created a climate of mistrust and uncertainty for businesses and investors.

“This tax reform is complete and comprehensive. It shall seek to achieve the following goals: economic growth and employment, strengthening of competitiveness of Croatian economy, encouragement of demographic renewal, social justice, promotion of small and medium enterprises and agriculture”, said Plenkovic.

Finance Minister Zdravko Marić noted that the general corporate tax rate would be reduced from 20 to 18%, while corporate tax rate for farmers and businesses with revenues of less than 3 million kuna per year would be 12%. He also announced the abolition of tax relief for reinvested profits due to relative lack of use of this tax relief.

“In the current system, about 900,000 people do not pay any income tax, and with the proposed changes that number will increase by another 560,000 people, so ultimately, in the new system, about 1.5 million people will not pay any income tax”, said the Finance Minister.

 

Well, that’s about as many people as there are in employment. About 1,660,000 people work in Croatia. With the minimal wage hovering over about 3,200 kuna there are some 10% of the employed earning a minimum wage, not paying income tax; then a few percent more on low wage between minimal and  3,800 kuna. There are about 1,320,000 pensioners in Croatia and probably half of those have the pension that falls within the income tax-free bracket. All in all it seems that there are quite a lot of people on income not paying income tax, which cannot be good for the country in economic dumps.  It can’t be good for the individual either because being in tax-free bracket means your income is barely enough to survive on. Soon the tax paying won’t be able to sustain the pensioner incomes and trouble rises fast. Social catastrophe everywhere as minimum or low wage earners find it harder and harder to have ends meet, regularly needing to make hard choices even between eating a meal or going without some other necessity of life.

 

Property tax has finally been overhauled in Croatia and is reportedly to be ushered in with the New Year. “First home buyers of established/used home/property are now free from property acquisition tax, but not so the buyers of new homes…we are suggesting the general reduction of those taxes, ” said minister Maric.

 

According to finance minister Maric the entire tax reform is worth 2 billion kuna (266 million euro) and the money will be circulating and turning around from year to year so that there is more money around and the bigger the personal expenditure the better it is for the GDP.
The high unemployment and low labour participation rates highlight the need for further reforms of the labour market and benefit systems, said a 2015 IMF report. This in essence means that there needs to be serious reforms to public administration, including employment, pension and benefits regulations – all these would increase labour participation in the economy, including tax revenue. To have notable effect on the sinking economy, to lift it up, these reforms need to occur at the same time as the tax reforms and yet there are no significant public administration reforms in sight yet. In fact, public administration machinery seems to have increased under this new government despite its announcement some weeks back that it would reduce it, so, without significant public administration reforms it will certainly be interesting to see what benefit, or damage, the tax reforms will wage upon the ordinary battler battling to survive, nothing extravagant, just decently. Ina Vukic, Prof. (Zgb); B.A., M.A. Ps. (Syd)