Serbian tax system – heaven for investors, hell for citizens

Photo: Marko Rupena / Kamerades

What do Serbia and the Maldives have in common? Similarity is not geographical or cultural, but fiscal. Namely, Serbian tax policies and its “socialism for the rich” place the country among those in the “grey zone” of tax havens.

Claims that Serbian taxes are too high and that their reduction would lead to an economic revival are commonplace in the rhetoric of neoliberal economists and the so-called “expert public”. High taxes are blamed for discouraging economic activity by demotivating talented entrepreneurs to start businesses which would benefit all. Allegedly, part of their profits would spill over into the pockets of the poor through the so called trickle-down effect. All it takes is to cut down all possible taxes.

On the other hand, the latest “List of tax havens”, published by the European Commission, once again puts Serbia within the infamous circle known as the “grey zone” of tax havens. Together with Marshall Islands, the British Virgin Islands, the Maldives, St. Lucia, Montenegro, Macedonia and Turkey, Serbia found itself on the list of territories mapped for the sake of combating tax evasion. Serbia is criticised for the lack of transparency of its tax system, and for failing to implement the Base erosion and profit shifting (BEPS) measures defined by the OECD. The second point is particularly interesting, given that the BEPS measures suggest ways to prevent different strategies which the multinational corporations use in order to evade taxes or allocate their payment to countries with extremely low taxes. These strategies aren’t necessarily illegal, but they “undermine the legitimacy and integrity of the tax system”, allowing big companies to further enlarge their profits.

All of the above raises a dilemma: how could Serbia be a tax haven where the multinationals flock to pay low taxes, and at the same time get criticised by the local economists for maintaining high taxes?

Serbian taxes

Tax revenue is the most important income item of the state budget. More precisely, its contribution to the budget amounted to 83.9% in 2017 and 2018. Tax revenue structure reveals that its largest chunk is yielded through value-added tax – VAT (51%) and excises (29%).

It’s clear at first glance that the major contributors to the budget are plain citizens with their everyday shopping. VAT is tax on consumption, obliging the consumer to contribute to it with every purchase. The traders simply raise the price of their merchandise to subsume this tax. The tax is easy to collect, and pretty hard to evade, which motivates countries to implement it. By raising the VAT we all pay, the state creates a manoeuvre space for the reduction of taxes which affect capital, thus siding with the rich.

On the other hand, corporate taxes produce no more that 9% of the overall tax revenue.

So, the largest companies, who make the biggest profits, contribute to the state budget less than plain citizens. We are talking about taxes paid by companies and other legal entities established for making profit. They are taxed at 15%, which spells one of the lowest corporate tax rates in Europe.1

Much like other post-socialist states, Serbia has very low corporate taxes (for example, Montenegro 9%, Macedonia 10%, Kosovo 10%, Moldavia 12%). Instead in rising prosperity, these countries compete in a “race to the bottom” by providing investors with a better “business environment”.

Simply put, if you are an owner of a big company in search of a location to pay the lowest possible tax in, Serbia is an ideal place. In addition, Serbia offers “highly qualified and cheap labour force”, supported recently by a contingent of young workers who enter the programs of dual education. All an “investor” could hope for. Needless to say, the socio-economic position of the Serbian population is neglected, and decent life is entirely forsaken.

Reducing corporate taxes is an inevitable policy in such a context, while foreign direct investments appropriate mystic symbolism. Each new one is celebrated as an opportunity to supply the freshly employed workers with salaries for a decent life. Moreover, such companies receive state subsidies in the form of tax exemptions for several years, or even direct state subventions.

Demands made on behalf of the Serbian Chamber of Commerce, which required of the State to lower corporate taxation to 10%, implement changes to the Labour law and raise the criteria for sick leave, should be interpreted with the above sketched out context in mind. The claims that: “It would accelerate economic progress” are all too familiar. However, if we take the relevant data into account, we will see that a causal relationship between diminishing taxes and economic progress in a state is hard to find. The demands more likely reflect the interest of employers eager to make more money at the expense of building schools, hospitals, roads, and other structures which rely on the state budget. It is perfectly clear that the claims which present the reduction of taxes as a basis for economic progress are false.

Income tax and excises

The income tax is imposed on income, autonomous business income, authors’ rights, capital, real estate, capital gain and other types of income yielded within the territory of the Republic of Serbia.2 The income tax can be progressive or flat. Progressive taxation of income assumes that higher tax rates are applied to higher income. For instance, income could be separated into three brackets, with the lowest taxed at 15%, middle at 25%, and the highest at 35%. Flat taxation, on the other hand, assumes that all types of income are burdened with the same tax rate (for example 10%), regardless of their volume. Additionally, the lowest salaries don’t necessarily have to be taxed (a rule that some countries use), while the highest salaries can be taxed up to 50%.

The local lawmakers decided in favour of the second option, flat tax, with certain modifications. The income tax rate in Serbia is 10%. Nevertheless, it is legally prescribed to further tax income falling over a certain limit. Net income that thrice surpasses the average mass income, and falls under a sum of six times gross average income is taxed by an additional 10%, while net income that surpasses that limit is taxed by an additional 15%.3

The 10% tax rate is also one of the lowest in Europe, so that salary of a person working for minimal wage gets taxed at the same rate as salary of a company’s CEO, who makes several thousand Euros a month. Of all the European states, only Bulgaria (10%), Czech Republic (15%), Estonia (20%), Latvia (15%), Lithuania (23%), Hungary (15%) and Romania (16%) opted for flat taxation. Of those, Serbia and Bulgaria, as we can observe, have the lowest income tax rate. A detailed research done by NALED, an organization which cannot brag to be socially sensitive, shows that the progressiveness of the local income tax belongs to the lowest in Europe, which leaves space for it to be more justly arranged.4 As the representatives of the organization point out: “Serbia is definitely under average when it comes to taxation of the highest salaries, compared both to the old and the new EU members”.5

When it comes to excises, there’s not much to add, apart from the fact that they also show how the state uses required adjustments to the EU’s legal system as an excuse for implementing socially irresponsible policies. For example, excises for electricity have been put into practice in 2015 using the admission negotiations as justification. This additionally raised the cost of electricity, once again burdening the poorest part of the population.

Serbia has one of the largest economic gaps in Europe, and taxes could be used as means to reduce it. Since the local tax system is highly unjust and disproportionately burdens plain citizens through VAT and excises, there is definitely space for fundamental reforms. Any change to the present state would represent a progress, leading to more inflow to the state budget through corporate taxes and taxing the highest salaries, while simultaneously reducing taxes on the lowest salaries. Additionally, the electricity excises are dubiously just, and there is space for VAT exemption on certain types of products.

Translation from Serbian: Iskra Krstić

This article was originally published in Serbian on Nov 16, 2018

  1. Until 2012 tax rate was 18%, upon which it was raised to 20%. To be more precise, there are two VAT tax rates in Serbia. The 20% tax rate is applied to most products, while basic supplies – baked goods, drugs, corn – are taxed at 10%. A tax rate of 8% has been applied to basic supplies until 2012.
  2. Law on personal income tax, article 3
  3. Law on personal income tax, article 87
  4. It’s especially interesting that NALED points out that, unlike most other countries, Serbia didn’t raise its tax rates upon the burst of the world economic crisis. On the other hand, bailing out banks represents one of the major scandals in the recent history of economy
  5. Labour taxation system and possible ways to reform it, NALED
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