Taxation in Europe 2011

Taxation in Europe 2011 The yearly report on the evolution of European tax systems
a publication from the Institute for Research on Economic and Fiscal Issues Edited by Pierre Garello
About IREF IREF is a private institute founded in 2002 by representatives of the civil society coming from the academic as well as business worlds. It is designed to be an efficient platform for the investigation of fiscal and taxation policies. Taxation is a many-faceted issue and existing studies are mostly incomplete if not biased. It is the aim of IREF to explore systematically and completely questions related to taxation and public finance. IREF has a strong European dimension. Tax studies can no longer ignore the process of globalisation and its consequences in terms of tax competition. In particular, tax authorities are currently under the strain of two opposing forces: centralisation and harmonization on one hand, devolution and competition on the other. It is IREF's intention to reintroduce in this debate the essential links between tax competition and individual freedom. In order to achieve its goals, IREF relies on a network of specialists. Today, a team of over 25 scholars or professionalseconomists and lawyersreport regularly on the quantitative as well as qualitative evolution of the fiscal systems of their respective countries or regions. Besides its Yearbook on Taxation in Europe, IREF is editing books, reports, briefs and academic studies on topics related to taxation and public finance. Those studies together with general information on taxation in Europe can be found on IREF website at: http://www.irefeurope.org
CONC URRE NCE FISCA LE ET LIBER TE ECON OMIQ UE
Taxation in Europe 2011 The yearly report on evolution of European tax systems the
a publication from the Institute for Research on Economic and Fiscal Issues Edited by Pierre Garello IREF 2011
A short presentation of IREF 'Yearbook on taxation in Europe' Series Among the many ways to understand the climate of opinion and the culture of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal systems almost always rhyme with complexity; each system bearing the weight of its history. But the attempts to change the system, to give it a new direction, are highly instructive. To observe changes, debates and new directions in tax systems is precisely what IREF yearbook is all about. In that sense, the yearbook is not in direct competition with other yearly reports on taxation that typically focus on numbers rather than on the philosophy behind them. Another unique trait of this yearbook is to provide the latest information on the topic. What is presented here are the last known figures (this year, data for 2010) and the on-going debates. This approach allows the reader to judge whether public decision makers have been keeping their promises or have been victims of inter-temporal inconsistency; drawing plans that they are later unable or unwilling to maintain. The yearbook is conceived for all those who look for a dynamic understanding of tax and budgetary policies. This includes scholars and students, of course, but also journalists, businessmen and public decision makers. While avoiding technical jargon, authors do not hesitate to enter the details of a mechanism whenever it is necessary. For we all know that there is sometimes a world between notional and real taxation.
Those reports can be used all along the year for quick reference whenever mention is made of one of the twenty countries presented here. The country profile
cards, that have been added this year for the first time, should further facilitate such use of the yearbook.
Table of contents Main findings for 2010 Austria Belgium Bulgaria Croatia Czech Republic Denmark France Germany Italy Lithuania Luxembourg The Netherlands Norway Poland Portugal Slovakia Romania Spain Sweden Switzerland United Kingdom Country Profiles Austria 2010 Belgium 2010 Bulgaria 2010 Croatia Czech Republic Denmark France
11 15 21 31 39 44 53 66 73 80 86 95 102 106 118 126 140 147 157 166 173 179 189 190 191 192 193 194 195 197
Germany Italy Lithuania Luxembourg Netherlands Norway Poland Portugal
198 199 200 201 203 204 205 206
Romania 208 Slovakia 209 Spain 210 Sweden 211 Switzerland 212 United 213
2010
Kingdom
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Taxation in Europe
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Main findings for 2010 Pierre Garello
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Main findings for 2010 Pierre Garello IREF Balancing between constraints rather than reforming Once again, IREF's yearbook on taxation confirms that in Europe, including within the European Union, fiscal policies are far from homogeneous. One obvious reason for this is that countries are not confronted with similar situations. While some, such as the Netherlands, Norway, Slovakia, Luxembourg, Germany, Sweden or Switzerland, are close to a balanced budget, others are more or less - and sometimes badly - in need for fiscal consolidation. The latter group of countriesthose that must urgently reduce public deficit and public debt, forms a large majority. But divergences between fiscal policies can also be traced back to "ideologies". If today almost no one suggests that deficit and debt could safely be increased (a good point at last after many stimulus packages had to be swallowed in 2009!), only few believe that the present situation calls for a deep rethinking of the welfare state. Almost nowhere politicians
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behave as if the sovereign debt crisis was calling for a fundamental reorientation of economic policies. As a result, in most countries 2010 was a year of mildbut sometimes painfulreforms aimed at balancing the budget or at least at getting the budget closer to balance. Surely, many governments hope that a strong economic recovery will allow for a progressive reduction of the share of the state in the economy and, more importantly in their opinion, to the much-desired fiscal consolidation. This scenario is, however, very unlikely. For one thing, the general level of taxation remains much too high to be compatible with strong growth. But also, the social acquis that make the welfare state require expenses that are likely to grow at least as fast as the economy. Such is the case with unemployment benefits, free access to schooling and university, health care benefits, etc. As an illustration, end of 2010, hundreds of doctors in Czech Republic threatened to quit their jobs and leave for countries with more "doctor-friendly" environment. What they must understand, however, is that no real improvement for them will be taking place unless deep reforms are implemented. What needs to be done is to demystify the notion of "social acquis", and, as all the signals of public finances are turning red, it could be the right time to do so. It
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could be the right time to explain that wealth and welfare can't be written done in the lawIf citizen have a right to the pursuit of happiness, one can't guarantee a right to happiness! As a matter of fact, sound economic analysis teaches us that state-run redistribution mechanisms are difficult to sustain in the long run and that a much safer and fruitful mechanism for development is to make individuals responsible for their future. Pooling of risks being of course welcome. Trends in taxation Having made the choice to balance the budget and to restore growth by all means without introducing structural changes, we observe almost everywhere a mix of various, predictable policies. More precisely, the trends are: to lower ormore oftento leave unchanged rates related to direct taxation (corporate and personal income taxation), but often with a broadening of the basis (getting rid of exemptions, tax-credits and the like) to increase indirect taxes, starting with VAT and continuing with excises to increase top marginal income rate (because, it has argued, an increase of VAT harms more the low than the highest incomes)to increase
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international cooperation between tax authorities. But these are just trends. In reality, everywhere the making of a fiscal law remains, as Bismark used to say, like the making of sausage - you don't want to see how it is produced! To illustrate, IREF fellow in Sweden reports that the Swedish income tax system has become so complicated that the most reliable source of information is a privately owned and operated website (www.jobbskatteavdrag. se). Some of the most original and diverging moves Reading the twenty reports published in IREF 2010 yearbook, one will get a taste of the various "sausages" put together by each government and realize that each one is somehow unique; some, like the Portuguese one, being particularly spicy in 2010. Interestingly, one also notices conflicts between recipes. For instance, at the very moment where France is painfully getting out of its local business tax (a tax that used to be based on payroll), the Germans are thinking to introduce one! Germany also got a new trick: "Taxpayers have a right to receive interest payments by the tax administration if refunds take more than 15 months. From 2011 on,
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these interest payments themselves will count as taxable income." Lithuania has learned a good lesson in economic theory and mechanism design: The state having decided to pay mandatory health insurance contributions for the unemployed, a surge in unemployment figure followed as a number of individuals officially registered unemployed in order to avoid having to pay contributions. The mechanism was then amended. Romania also received a good lesson. The making of the Romanian "sausage" was made of an increase of VAT by 5 points (from 19% to 24%) and a shortening of the list of goods benefiting from a preferential rate. The result of this double increase of rate and base was a disappointing increase of VAT revenues of only 10%. At the opposite, Sweden that consistently lowered taxes for the past four years was rewarded with higher revenues... Governments also adopt different recipes to fight fraud and tax evasion. Hence, in late November 2010 the German Constitutional Court has ruled that the fact that data on clients of foreign banks had been collected illegally does not protect tax evaders from prosecution, even if the accusations rely entirely on illegal sources of information. But in the same time, the Belgian court took the opposite direction. The Brussels Court of Appeal has confirmed the judgment
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of the Court of First Instance rejecting the claims of the Treasury based on listings that came into the possession of the Treasury through the commission of a crime, namely theft by dishonest employees Many lost opportunities Reading last year's reports we had the feeling that something was cooking but it wasn't clear yet what direction the various governments would take. For once, everyone shared the view that changes had to be implemented, that the bill was no longer affordable. The title of the preface for the 2009 yearbook was: 2009, A transition towards what? One year later, one must sadly observe that little has happened. The goal was survival, not the setting of a new dynamics. As our UK report puts it, 2010 was a year of lost opportunities in the midst of fiscal panic. As always in Europe, and fortunately, this is not everywhere the case. One of the best moves in our opinion took place in Slovakia where employees will from now on be paid a "super-gross" wage (superhruba mzda in Slovak). This means that each employee will receive on his bank account not only his "regular wage" but also the social and health contributions that used to be paid by his employers. Hence the wage received will express the total labor
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cost. This is in stark contrast with rules prevailing almost everywhere in Europe. More importantly, it constitutes the best way to prepare the ground for true reforms; making taxpayers aware of the costs and benefits of the prevailing systems. 2011 is again a year full of uncertainty due, in particular, to the crisis of the euro-zone that is far from being over. Nonetheless, for decision makers that are convinced that further postponing reforms is unwise, interesting ideas such as the one just mentioned can be drawn from those reports. Austria Stefan Buczolich The Hayek Institute, Vienna Current situation Austria is currently one of the countries with the highest tax burdens in Europe with a progressive personal income tax system with top marginal rate at 50%, a corporate tax rate at 25% (lowered from 34% in 2005) and, as will be explained, a new flat capital gains tax rate which is independent from individual income and amounts to 25% for both short and long-term investments.
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Notwithstanding this heavy fiscal burden, public debt in Austria stwas approaching 200 billion on 31 of December, that is, about 68.6% of GDP (Source: CIA World Factbook). This places Austria at the 25th place globally. Compared to other Western European countries such as Germany and France with a percentage of public debt of GDP of 74.85 and 83.5% respectively, and amid rising deficits all over Europe, the short-term risks in Austria still seems to be moderate. Development of Public Debt since 2006 in absolute numbers and as a percentage of GDP 200 6 Debt ( 145. billion) 265 200 7 147 .37 6 Debt (% 56.5 54. GDP) 3 18 200 200 201 8 9 0 161. 168. 179. 715 715 1 78 201 1 186. 903
57.2 61.5 63.4 63.8 2 0 2 2
Source: Statistik Austria (2010, 2011 estimates) Because efforts to reform the costly and inefficient administration were omitted in the 2011 Budget, the increase of public debt is expected to continue, although its pace should decrease. The 2011 Budget is
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expected to lead to a Budget deficit of 3.2%. The WIFO institute, founded by Friedrich A. Hayek and Ludwig v. Mises in 1927, recently presented its concept for an administrative reform yielding cost reductions of up to 5 billion per year. A long-awaited coalition budget In 2010, the political agenda was heavily dictated by the budget negotiation between the coalition partners SPO (Social Democratic Party) and the OVP (People's Party). Rising costs resulting from still high unemployment and bank bail-outs along with a substantial decrease in tax revenues urged the coalition to take measures against a further increase of public deficit, although the Social Democrats and the People's Party did certainly not agree on how this problem should be addressed. The final presentation of the budget was postponed as the coalition intended to wait for updated information to be offered by research organizations that would enable them to adapt the budget to the most recent forecasts of economic growth and predicted budget deficit. According to the constitution the budget has to be presented in the Parliament ten weeks before the end of the year, on 22 October. Nevertheless, Finance Minister Josef Proll held his first speech on 30 November. When both
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parties reached an agreement about the key measures at a meeting at the end of October, the elections in Vienna were already past. Both SPO and OVP had suffered heavy losses, whereas the right-wing populist party FPO could increase its result by almost 11 percentage points to 25.77%. Stressing the importance of savings in order to consolidate the Budget, the coalition agreed on a ratio of 60:40 of savings and new sources of tax income. In 2010 the SPO proposed an Eight-Point plan unexceptionally consisting of proposals ranging from new and higher taxes on wealth and capital gains to a bank tax based on the banks' assets. Finance Minister Josef Proll, member of the OVP, repeatedly stated that there were no plans to introduce new taxes in order not to harm the middle class and small to medium sized enterprises. The final budget was announced to be one of the most ambitious in the last decades. Critics however said that the budget lacked necessary broad structural reforms. Child Support and tuition fees Austria is currently one of the countries with the longest child support in the European Union. The coalition decided to reduce the maximum age for students tothqualify forth child support from the 26 to the 24 birthday and also to cut the 13th
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child support to 100 and limit it to scholars (child support is usually paid 13 times per year, 12 payments for each month of the year and one additional payment in September, when school starts in most of the states as compensation for the costs of books, etc.) The expected savings amount to 270 million per year. Tuition fees, that were abolished in 2001 for students who manage to complete their studies within a certain time span (usually the minimum time plus one semester), are once more considered by the conservative OVP, citing the lack of capacity and deteriorating conditions for students at universities. Capital Gains Tax So far profits from security investments are exempt from taxation if the asset is not disposed of within one year, whereas the individual's personal income tax rate is levied on speculative earnings. A flat 25% tax rate is applicable on dividends and interest income regardless of the source and regardless of the individual's income. As of 1 January 2011 a flat tax rate of 25% is applicable on all capital gains from stocks and mutual funds, regardless of the individual's income and the time the asset has been held. Any shortterm capital gains from investments purchased in 2011 and sold before 1st of October will be subject to the
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Taxation in Europe
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individual marginal tax rate and have to be declared separately. Income from derivative instruments and bonds (excluding interest payments) will be tax-exempt after one year. Beginning October 1, any realized profit from assets purchased after 2010 taxes will be withheld automatically, causing considerable discomfort since in case of losses in the same period taxes will not be refunded before declaration after the end of the year. The new flat tax is no longer dependent on neither personal income nor on the time horizon of the investment; it is therefore questionable whether the new solution will particularly target speculative earnings as most individuals with medium to high incomes will pay less taxes on their short term capital gains, whereas longterm investments aiming to insure a certain standard of living during retirement will be affected by the discontinuation of the speculative period. One might think the introduced capital gains tax is similar to that imposed in Germany in 2009, in-depth scrutiny reveals a few details that differ significantly from the German model. Losses from financial transactions may not be carried forward in order to reduce taxable capital gains in the future. Capital gains from the sale of stocks, bonds or derivatives may not be consolidated with other forms of income
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including interest payments of savings accounts. Transaction costs or other brokerage fees such as escrow costs are not tax deductible. In contrast to German law that offers a 801 tax allowance for individuals, such an allowance is not implemented in the current law. A few other aspects of the new rules will hopefully give rise to further discussion, in particular the fact that a major discrimination has been introduced, between asset classes. Profits from life insurance will be exempt as well as long-term capital gains from real estate, while gains realized within 10 years will be taxable. If an apartment has been used by the owner, profits from its sale are tax exempt after two years. Parallel to the introduction of the capital gains tax, the tax levied on income of private (for-profit) foundations has been increased from 12.5 to 25%. As of January 2011 many banks have already voiced their concerns about
the costs related to the new capital gains tax and claim that the short time span provided to implement the new legislation would cause overall costs higher than the expected tax revenues. On February 1st 14 Austrian Banks filed suit against the newly implemented capital gains tax, complaining about the short period for banks to implement necessary new technologies and high overall cost that are expected to surmount future tax revenues in the next years to come. Bank Tax The Bankenabgabe" is a Bank Tax with estimated revenues of 500 million consisting of 340 million from taxing total assets only targeting larger banks and an additional 160million of higher taxation on derivative transactions. Total assets of banks will be taxed at a rate of 0.04% if above 1 billion Euros, while a tax rate of 0,08% will be applicable if the bank's assets exceed 20 billion Euros. Tobacco Tax Taxes on one pack of cigarettes will rise by 15 to 25 cents yielding 100150million. Fuel Tax Fuel Tax on gas and diesel will increase by 4 cents and 5 cents respectively. In order to protect commuters from additional expenditures they will be given additional compensation. The increase of the fuel tax, along with other measures as the flight tax, is part of a somewhat opaque ambition of the coalition that is praised to combine
tax increases with desired aspects of environmental policy. Flight Tax A flight tax of 8 for continental flights with European destinations and a of up to 35 for international flights will be effective on January 1st and is expected to yield 60 million in 2011 and 90 million per year in the next years. Since both national and international airlines have to charge the fuel tax for every flight taking off from Austria, shifts to airports like Bratislava, only one hour away from Vienna by train, are expected to increase as the tax may make up a substantial amount of the total price when consumers choose to book a flight with a low cost carrier. A similar tax was abolished in the Netherlands after having been in effect for just one year. Wealth Tax The last year's debate ahead of the final agreement on the 2011 Budget was dominated by the calls for a wealth tax, a (preferably international) financial transaction tax, higher taxes for private foundations and a capital gains tax. Although a wealth tax has not been included in the current Budget, many politicians of the SPO and members of the the Austrian Chamber of Labour have repeatedly stressed their continuing efforts to introduce a wealth tax. Chancellor Faymann said he was in favour of a wealth tax applied on net assets above 1 million with the tax rate in a range between 0.3 and 0.7%. Supporters of the wealth tax name high taxes on labour income and comparably low taxes on capitals gains and wealth in Austria as their main arguments.
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Taxation in Europe 2011
Belgium Thierry AFSCHRIFT Professor at the Free University of Brussels Lawyer www.afsc hrift.com The Belgian paradox One could obviously not talk about Belgium without tackling its political crisis. Belgium holds a sad record for facing the longest political crisis in Europe: being without any government for more than 249 days. Should Belgium fail to get a new government by March 30 it would beat... Iraq's world record of 289 days in 2009. This political crisis has of course enormous consequences on what happened - or did not happen - last year but could also deeply impact our economic future. In December 2010, the rating agency Standard & Poor lowered to "negative" its perspective on the Belgian financial rating, due notably to the legislative paralysis and the lack of a credible budget policy for 2011. However, economically, Belgium works relatively well. The growth rate is not bad. Belgium finished 2010 with a public deficit of 4.6 % of its GDP. This is better than the 4.8 % deficit determined by the Belgian
Belgium Thierry Afschrift 29
stability program. In addition, public debt reached 97.2 % of GDP and it is also less than the forecast. This is the Belgian paradox. One can nevertheless fear that the caretaker cabinet will not be able to deal with the economic issues of the future. While most European countries have adopted various measures to reduce their deficit for years to come, Belgium has not yet a real budgetary policy or a concrete tax policy. Noone can predict what will be the fiscal or budgetary orientations of the future government. However, in order to reduce its astronomical public debt and to avoid its debt reaching more than 100 % of GDP, the future government whatever its composition - will inevitably have to cut spending. It will have to struggle with structural deficits. Far from expecting a corresponding reduction of taxes, it will be essential to boost investment and enhanced Belgian competitiveness and attractiveness. The deficit struggle will certainly involve some fiscal effort. Where the Belgian State already takes 46% of what its inhabitants produce and spends 53% of it, tax competition might be the only thing which can still moderate the government's temptation to always prefer an increase in receipts to a reduction of expenditure in order to balance the budget. Despites the Belgian political and legislative apathy of the last months, few measures were adopted at the beginning of 2010, and one can
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underline the case law relating to privacy, European freedoms, etc. One can also draw an outline of what could happen in a near future. Fight against tax fraud and banking secrecy In accordance with most European countries' policies on this issue, the Belgian state gives itself more and more means to fight tax fraud and to reduce banking secrecy to nil. Its interventions are however prejudicial to the right to privacy. The new article 335 of the Belgian Tax Code ("BTC") gives tax authorities wider investigative powers: any officer is entitled to collect any information related to any tax, even one for which the officer has absolutely no jurisdiction, and can convey this information to other tax administrations. It seems at least doubtful that the new version of this disposition complies with article 8 of the European Convention on Human Rights, with article 22 of the Constitution and with the law of 8 December 1992 on the protection of privacy with regard to the processing of personal data. It creates indeed systematic and spontaneous transmission of information between tax administrations without any preconditions. In 2010, the fight against banking secrecy continues as it began in the wake of the economic crisis. Different
double tax treaties have been modified in order to insert "on demand" data information exchange clauses. Many vague proposals have also been made by different members of Parliament in order to abolish the last rampart of the Belgian banking secrecy, article 318 BTC. On that subject, the current political crisis gives this secrecy a few moments grace. However, if the proposals are adopted without being modified the new law will be prejudicial to the right of privacy. In this regard it is symptomatic that, in Belgium, the right of privacy and the right of ownership are most of the time sacrificed in favour of an always more powerful State. To strengthen the fiscal anti-evasion policy, a new reporting obligation has been introduced. The new measure concerns legal persons who make payments to persons established in a tax haven as soon as the total amount of 100,000 is exceeded. Consequently these payments should be included in a separate declaration. In May 2010, the Belgian government published a royal decree updating the list of the tax havens, and the 'non-existent or low taxation' countries. The list covers countries where certain companies are not or slightly taxed (a nominal tax rate lower than 10%). This is used to require that any payment to a company established in a listed country is only deductible if this company is the subject of a special declaration, and the payment
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corresponds to "industrial and commercial considerations and not an artificial construction". We observe that the Belgian tax authorities do not consider as tax havens: Liechtenstein, Gibraltar, Hong Kong, Macau or Panama, for example. Therefore payments made to companies established in these countries do not fall within the scope of the new legal provisions. A law of 18 January 2010, published in the "Moniteur belge" of 26 January 2010, overloads the legal provisions on the prevention of money laundering, dating from 1993, which have been reinforced many times since then. Among the multiple obligations it prescribes, this law states that, from now on, "any person or entity who acquires securities representing capital or otherwise conferring the right to vote in stock companies ... and has issued bearer or dematerialized shares, must declare to the company, not later than the 5th business day following the date of acquisition, how many securities it owns when the voting rights attached to those securities achieve a proportion of 25% or more of the total voting rights ... ". The text aims at preventing companies, with bearer or dematerialized shares, from being able to declare that they are unaware of their shareholder's identity when a bank account is opened or during a tax audit. These obligations do not exist for shareholders holding less than 25% of voting rights in a company,
even if the companies in question are controlled by the same person, by spouses or relatives. Shareholders wishing to keep their anonymity which can be for very good reasons should place themselves in a situation where they hold less than 25% of the shares. This new measure against shareholders' anonymity--that the law justifies by the fight against money laundering--might have consequences in terms of inheritance. At the time of death, in order to tax the value of the shares, tax authorities will only have to ask the company who are the shareholders (if the shares were to be owned by an individual). Notwithstanding the legislative will to fight tax fraud, tax evasion and tax havens, the Belgian Courts rightly pointed out that this battle and the repression of this fraud cannot be conducted at any price or on any conditions. In the tax component of the KB Lux case, the tax authorities have nothing to be delighted about because almost all judgments pronounced by our Courts are favourable to taxpayers challenging tax assessments after the "discovery" of the famous listings coming allegedly from the Luxembourg bank. One of the arguments for rejecting the claims of the Treasury was that the listings on the basis of which the disputed taxes were established are not conclusive: they are mere copies of microfiches containing no reference to their author, signature, stamp or other evidence to identify
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their origin. Another argument has been advanced to challenge these tax assessments: the listings concerned came into the possession of the Treasury through the commission of a crime, namely theft by dishonest employees. As far as the criminal aspect of this case is concerned, the Brussels
Court of Appeal has confirmed the judgment of the Court of First Instance that relied on this second argument to declare the prosecution inadmissible. One can only welcome this brave decision which will remind the Public Prosecutor's office that, under the rule of law, the end does not justify the means and it is not possible to prosecute someone for an offence on the basis of the commission of another. This will give some food for thought in a setting that seems quite similar to the LGT case in Liechtenstein and the HSBC case in Switzerland. Corporate Tax In the wake of the recession, corporate tax receipts have fallen and in order to boost economic activity, this tax rate could be reduced. With a corporate tax rate of 34 %, Belgium has in fact one of the highest in Europe. But instead of that, the maximum "tax deduction for equity capital" rate for the 2011 and 2012 assessment years is reduced from 6.5% to 3.8%. Admittedly the "tax deduction for equity capital" has played a role in the tax income inflexion, but according to the National Bank this has been to a limited extent. Since 1 January 2006, a Belgian company can benefit from a "tax deduction for equity capital" also known as a "deduction for notional interest" (Art. 205bis-205novies, BTC). All companies are treated, from a tax point of view, as if they had borrowed their own funds at an annual rate of interest equivalent to the rate for ten years bonds issued by the Belgian state. The "notional interest"
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calculated in this way is deductible from the taxable base for corporation tax purposes. Since its coming into existence, this measure has been a disputed one. This deduction is presented as "gifts" to companies and one criticizes their cost for the budget, as well as their social uselessness. It is not impossible that the deduction will be soon linked to an employment condition. Proposals have been raised in this direction. Tax deduction for equity capital There are three objectives behind this deduction scheme. First, to establish equilibrium between the tax treatment of the equity capital and the tax treatment of loans. Under the former system, it is fiscally more attractive for a company to be funded by means of loans because the interest can be deductible for tax purposes. The equity capital, on the other hand, gives rise to nondeductible dividends. The new scheme remedies this situation partly by decreasing the taxable base by an amount corresponding to the interest that the company would have paid if it had borrowed the same amount. Second, the new measure offers an attractive alternative for "coordination centres" whose present low tax regime should be withdrawn at some point because it is incompatible with EU states aid law.
Last, the new fiscal treatment allows Belgium to compete with the general fall in the corporation tax rates throughout Europe. Although the nominal corporation rate tax stays at
33, 99%, the new measure cuts the effective rate down to 26 % on average, a little less than the European average. Nevertheless, few modifications occurred: a few explanations concerning the basis for the calculation are inserted in the law and any deduction that is not used during the taxable period can henceforth be consecutively transferred to the following seven "taxable periods" instead of during seven "years", as previously. In the context of tax neutral crossborder mergers, the notional amount of interest deductible and the tax credits for research and development may now be fully transferred as if the merger or de-merger had not taken place. Moreover, the parts taken over or acquired that are located in Belgium must no longer necessarily be used in a Belgian "establishment" (of the acquired foreign company), but these can also be used in the Belgian acquiring "company". The Belgian Tax Code provides that, under certain conditions, dividends from stocks and shares held by a Belgian company are deductible from the profits of this Belgian company as "definitively taxed income". This deduction is allowed up to a limit of 95 % of the gross amount paid. One of the conditions concerns a minimum participation of 10% in the capital of the paying company or a minimum participation of at least 1,200,000 (purchase value). As of assessment 2010 year, this condition also applies to dividends acquired by credit institutions, insurance companies and listed companies. Once again, this comes with the proviso that any amendment made after 1 January
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2009 to the closing date of the annual accounts is without effect. Moreover, the minimum participation is raised to 2,500,000 (or still a minimum of 10%). This applies to income that is allocated or made payable as of 10 January 2010. Finally, amendments have been made to the favourable so-called "tax shelter" system. Under certain conditions, this system provides exemption from corporate tax for investments in recognized audiovisual works. Those amendments enlarge the scope of the tax shelter system. For example, it is no longer necessary for the "production company" to be a "domestic company", but from now on it may also be the "Belgian establishment of a foreign company". The notion of "fiction films" replaces that of 'longplay films" and thus includes films not only of long, but also of medium and short duration. Personal Income tax As in 2009, the year was poor in interesting measures. No fundamental modification occurred at a legislative level. In Belgium, whatever the composition of the government is going to be, one should fear, in the short or medium term, an increase in the rate of withholding tax on interest, the imposition of a tax on the capital gains on shares, and perhaps an increase in the marginal income tax rate for high incomes. Its is however interesting to mention that, on 1 July 2010, the European Court
of Justice judged that Belgian legislation imposing an additional local tax on income from capital where the income is received by a Belgian resident without the intervention of a Belgian financial institution, violates EU laws on the free movement of capital. Under Belgian tax law, foreign interest and/or dividends received without the intervention of a Belgian financial institution have to be reported in one's Belgian income tax return and an additional local tax (varying from 0% to 9,5%) is levied. However, in the case of interest and/or dividends received via a Belgian financial institution, a withholding tax of 15% is deducted and there is no obligation to report this income in one's Belgian income tax return, so that no additional local tax is due. The Belgian Tax Authority confirmed in its circular letter dated 19 October 2010, that it would abide by the decision handed down by the European Court of Justice on 1 July 2010. Moreover one can welcome the setting up of a tax conciliation service, introduced by the "Program" Law of 25 April 2007. This service is operational since 1 June 2010. The new service, working independently from the Federal Finance Department, has the purpose of assisting the taxpayer to find "possibilities for an agreement rather than going to court" according to the Minister of Finance. Green tax legislation For many years Belgian tax policy has been influenced by environmental considerations. Energy-saving
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measures tend to be encouraged by the granting of tax advantages. The crisis and the budgetary constraints imply nevertheless that those advantages are tending to be reduced or limited. As of 1 January 2010, the calculation of the benefit in kind for the free private use of company cars by employees or company directors depends on the CO2 emissions of the car and is no longer based on the fiscal horsepower.
VAT Belgium is being found at odds with the interpretation of the Court of Justice developed in the Breitsohl case for nearly ten years since in Belgium real estate transactions remained excluded from the application of VAT. However, from 1 January 2011, Belgium complies with the European requirements. From now on, the simultaneous sale of land and a new building will be subject to VAT. The new regulation replaces the former registration tax. This measure is favourable to VAT taxable persons. Indeed, enjoying full right of deduction, they can fully deduct input VAT in their VAT account. Moreover, they will no longer pay a registration fee on the land value. Other purchasers of land will bear a heavier tax burden. Indeed, they will have to pay 21% VAT on the value of the land adjacent to the building instead of registration tax of 12.5% or 10% and the VAT will not be recoverable. Until recently, in order to benefit from the reduced VAT rate in the real estate sector, construction works on land needed to be executed by a registered building contractor. This requirement for the application of the 6% VAT rate applicable in such situations has now been abolished by means of Royal Decree dated 2 June 2010. Since the 1 January 2010, VAT in the catering industry has been reduced
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from 21% to 12 %. The measure should have been analyzed and the results submitted to the Government in late October at the latest. The political crisis postponed this analysis. This reduction should be maintained if it does not lead to a reduction in tax revenue. Conclusion While a caretaker cabinet is at the helm of a boat without captain, and trying to keep the trains running on time, fears are growing of threatening economic troubles. Rating agencies and the nation's Central Bank have warned of a poten
tial threat from financial markets if politicians fail to strike a deal soon. "This chaotic situation... could have long-lasting effects on the Belgian economy... The markets will be merciless if the country does not emerge promptly from this unprecedented hell" said billionaire investor Albert Frre, a leading shareholder in energy groups Total and GDF Suez. Despite the current political crisis being the biggest challenge Belgium has to deal with, the country should not delay important long-term economic decisions that will end not only by delaying or avoiding investment projects but also by corporate expatriation. Measures have to be taken soon in order notably to reinforce the competitiveness of Belgian companies.
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Bulgaria Petar Ganev Institute for Market Economy, Sofia 2010 was a controversial year for the Bulgarian fiscal policy the common use phrase in the recent years "balanced budget" was replaced by "excessive deficit"; the budget was revised in the middle of the year, even though no major changes took place in the tax policy; the health and pension reforms were debated all through the year; some partial nationalization of private pension accounts for early retirement took place; the shadow economy was once again an issue. Along with all these, the government started a campaign towards the rich with helicopters flying over some big estates taking pictures and also a proposal for introducing a "luxury tax". In 2011 Bulgaria will struggle to achieve a "reasonable" deficit below 3 percent of GDP. No major taxes are changed, except for the slightly higher social contributions and some excise duties. There are, however, concerns that the budged would have to be revised throughout the year, as happened in 2010. Fiscal Issues
Bulgaria Petar Ganev 45
Bulgarian economy did not improve much in 2010 the economy grew less than 1%, employment is source of worries and foreign investments are not coming back. Expectations are now that the recovery will finally happen in 2011, with an economic growth of 3,6%. The fiscal stability of the country depends on that growth. 2010 was a bad year for Bulgarian fiscal policy. Throughout the middle of the year the revenues were far from their expected levels and this led to a severe revision of the budget from almost balanced to one with excessive deficit. Moreover, the deficit for 2009 was also revised upwards, which gave an entirely new look to Bulgarian fiscal stability. If, consequently, tons of measures were discussed through the year to get the budget back on track, only a few of them have been implemented. The revision of the budget didn't affect the tax policy. In 2011 Bulgaria is expected to recover partly from the crisis, which means more revenues and less pressure for the budget. The deficit is projected to be just below the 3% line, which will be a success after two consecutive years with excessive deficits. More revenues are expected mainly from VAT and corporate taxation, thus depending on the recovery of the economy. In 2011 the government is supposed to redistribute around 36,5% of GDP, which is slightly less than the
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previous years some cuts in the administration took place and the pensions were frozen. Nevertheless, the pressure on the government and the budget will remain high, as all sectors are asking for more money and opposing all unpopular measures. The fiscal debate promised to be intense in 2011. Direct Taxation (Corporate Tax & Income Tax) In 2007 the corporate tax rate in Bulgaria was reduced to 10% (down from 15%). The following year the income tax was also reformed replacing the progressive scale (20%, 22% and 24%) with one singe flat rate of 10%. Those tax cuts made Bulgaria the country with the lowest direct taxes in the EU, excluding the social contributions off course. Both tax cuts brought about positive effects for the economy and the state budget that were clearly visible prior to the crisis. The revenue from corporate taxation went straight up after the reform both in 2007 (up almost 40%) and in 2008 (an additional 20%). Nevertheless, the crisis had a severe impact on corporate tax revenues that felt by almost 20% both in 2009 and 2010, going back almost to their level before the reform. In 2011 the corporate tax will still be at 10% with projection to stay at that level for the years to come. The official projections
for 2011 are that the revenues from corporate taxation will start to recover (up 17%) and will reach 1.7 billion levs (870 million) which represents more or less 2.2% of the GDP. The flat tax story is somewhat different. Since the introduction of the single flat rate in 2008 the revenues also went up, but also prove to be stable during the crisis. The positive budgetary effect of the flat tax is indisputable with a single tax rate two times lower than the lowest marginal rate of the previous progressive scale, the revenues went up and stayed stable during the crisis. In 2011 the revenues from income taxation are projected to reach BGN 2.1 billion (1,1 billion), which is around 2.7% of the GDP. Despite the purely ideological debate over the flat tax in Bulgaria, the official projection is that the flat tax will stay unchanged 10% flat rate and no tax-exempt minimum. Tax exemptions continue to be an issue. Since the beginning of 2010 some tax exemptions for farmers were removed--they were not supposed to pay any income tax in the previous years. Earlier, beginning of 2009, a tax exemptions for young families with mortgage loans was introduced deduction of interest payments. This exemption was highly disputed in the recent years and the object of several votes in the Parliament. Nevertheless, it will be upheld in 2011. The data shows that in 2009
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more than 5 thousand families benefited from it; a shortfall in tax revenues of around BGN 2 million (1 million). Indirect Taxation (VAT & Excise Duties) Indirect taxes include VAT and excise duties on special goods such as cigarettes and alcohol beverages. The VAT in Bulgaria is set at 20% and, despite the various discussions that took place during the year, it is supposed to stay at that level for the years to come. The budget revenues from VAT are expected to reach BGN 6.5 billion (3.3 billion) or 8.4% of GDP in 2011. This is above their 2010 level and back to the revenues of 2009. Some changes in the preferential VAT for tourism were made effective 1 April 2011 a single reduced VAT rate of 9% will apply to hotel accommodation services regardless of whether they are a part of a tourist package or bought individually. Until now the reduced VAT rate of 7% applied only to hotel accommodation if it is a part of a tourist package. Bulgaria has to harmonize its tax regime with that of the European Union by introducing the minimum excise duties of the European Community on tobacco, alcoholic beverages, and fuels. Started in 2002,
the harmonization process is scheduled to be completed by the end of 2013. In 2010 excise duties on kerosene, electricity for industrial purposes and cigarettes increased, while on gasoline and diesel, as well as on liquor there were no changes. The fiscal effect of the higher excise duties on the budget was expected to reach BGN 300 million (150 million), mostly due to the higher excise duties on cigarettes. But in fact, the revenues collapsed even below their 2009 level the additional revenue from excise duties on cigarettes never materialized as consumption felt and smuggling went up. Once again the Laffer curve prove to be right in this case higher taxes on consumption led to lower revenues, as trade shifted to the shadow economy. In 2011 excise duties on tobacco and some fuels have been increased, but still the budgetary effect of this is expected to be remote. Overall the revenues from excise duties in 2011 are supposed to reach BGN 3.8 billion (1.9 billion) or 4.9% of GDP, which would be more than 2010, but less than 2009. Social Security Contributions Social contributions are still the most disputable tax in Bulgaria. In 2005 the contributions were above 40% of the gross wage, but following
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a 6 percentage points cut in 2006 and a 3 percentage points cut in late 2007, they felt to 33.5% of the gross wage. At the start of 2009 a further reduction of 2.4 percentage points was enacted, followed by another 2 percentage points cut in 2010, bringing the contributions bellow 30% of gross wage. The cuts did not reached uniformly all the contributions: if the pension contributions were reduced, along with those for unemployment, the healthcare contributions were increased. Also, starting in 2009 and along with social contributions paid by the employee and the employer (as in most European countries), the State itself started to pay social contributions for every worker 12% of the gross wage. Those "new" State contributions, however, are more of an accountant's trick than a real reform. Actually, the State had always made payments from the budget to the Pension Fund the difference is that those payments were called transfers (or subsidies) and now they are called contributions. Even with these state contributions, the state pension fund is far from balanced and need further government subsidies (transfers). Throughout 2010, the crisis put additional pressure to the pension system and the government was forced to take action. The negotiations with the so-called "social partners", namely the trade unions and the
business organizations, were intense and lasted months. The result was a long term reform plan, which includes frozen pensions, higher social contributions, higher retirement age for both men and women (starting 10 years from now), and also some measures to reduce a wide spread strategy of early retirement. Still, the pension plan was not welcome and there is a probability that the long term measures would not be enforced as written. One of the most heated controversies in the country was the partial nationalization of the private professional pension funds the idea was to transfer the money from the early retirement accounts in private funds to a newly set-up state "early retirement" fund. The goal was not so much to reform the pension system, but mainly to indirectly support the budget. At the end, the government stepped back and transferred into the National Social Security Institute only the money of those to retire in the next 3 years thus, not establishing a new state "early retirement" fund and not shutting down the private professional funds. Still, partial nationalization did take place and some private accounts were shifted to the solidarity system. This action is now supposed to be reviewed by the Constitutional Court. At the end of 2010 the healthcare system in Bulgaria went through a deep crisis, pushing for the second
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time in just one year the minister of healthcare to leave office. The state of the system was chaos bad organization and artificial pricing, lack of financing, perverse incentives and fraud, and absence of agreement on the expected reform. Nevertheless, by the end of the year some changes did take place the most important change is that the health contributions (8% of the gross wage) will henceforth go entirely and directly into the system, while until now 25% of the money (2 percentage points) was going to the "health reserve" held at the Bulgarian National Bank. Meanwhile, the money that was accumulated in the "health reserve" around BGN 1.5 billion (800 million), is now considered to be part of the fiscal reserve. Meaning, it can be spend on everything, not necessarily health. In 2011, another 1.8 percentage points will increase social contributions: 1 percentage point increase in pension contribution for the employer and 0.8 percentage points for the employee. Thus, the social contributions as a whole will again be over 30% of gross wage. Again, the employer contributions are higher than those of the employee, but that is not so important as both of these payments lay, one way or another, on the shoulders of the employee (as they are taxes on labour).
Moreover, the 0.1% employer's contribution to the Salary Guarantee Fund is abolished for several years, as the amount of money accumulated in the fund is sufficient. There is also an increase in the amounts of the minimum social security thresholds for the main economic activities and groups of professions by 5.6% average. Also the minimum social security thresholds for self-employed individuals in 2011 will be determined, based on their taxable income received in 2009. As administrative measures, the period for calculation of the compensations for unemployment, pregnancy and birth is increased to 18 months and the period for calculation of the compensations for temporary disability is increased to 12 months. The current regulation for payment of monetary compensations for temporary disability by the insurer for the first three days of the disability will be extended until the end of 2011. Social Security Contributions in Bulgaria (% of the gross wage) Social Contributions Fund (2011) State Fund Private
Tota Empl Emp Emp Emp l oyer loye loyer loye
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e e Pension 17.8 7.10 5.70 2.80 2.20 0% % % % % Illness & 3.50 2.10 1.40 X X Maternit % % % y Unemplo 1.00 0.60 0.40 X X yment % % % Labour 0.50 0.50 0.00 X X Accident s& Professio % % % nal Illness* Health 8.00 4.80 3.20 X X % % % Overall 30.8 15.1 10.7 2.80 2.20 0% 0% 0% % % (*) The rate for Labour Accidents and Professional Illness is averaged there are several rates depending on the labour category varying from 0.4 to 1.1 percent. Further changes in the social security contributions are to be expected in the forthcoming years. Either the pension plan will be enforced as written or a new plan will be developed in both cases changes in contributions and retirement age are coming. The healthcare system has proven to be highly vulnerable in the
recent years and it is expected to remain so in the years to come changes in health contributions are also possible. Local Taxes and Issues The local taxes were also an issue and recently some changes took place: In 2011 Bulgarian municipalities will be allowed to set the annual real estate tax rate within the range between 0.01% and 0.45% on the highest of the gross
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book value and the tax value of the immovable property. Before that the maximum rate was 0.25%. A new tourist tax has been introduced replacing the tourist fee. As of 1 February 2011 the rates determined by municipalities should be in the range of BGN 0.2 to BGN 3. The tax is due per night and is payable by the property owners providing lodging. Along with these, the debate focused around the government campaign towards the rich helicopters were sent to fly over some large estates to take pictures while a proposal for introducing a "luxury tax" was made. Those actions (and pictures) were all over the media, triggering vivid discussions, but achieving nothing substantial. Conclusions Fiscal policy in Bulgaria has played a crucial role for the development of the economy in the recent years. Balanced budgets and low taxes proved to be a success prior to the crisis, while the excessive budget deficits in 2009 and 2010 did not strengthen the economy. 2011 will be a tough fiscal year, as the deficit is supposed to stay below 3% of GDP. As for the taxes, the 10% flat income tax, the 10% corporate tax and the 20% VAT should remain untouched in the years to come. Social contributions will once again drag attention, as further reforms in pension system and healthcare are inevitable.
Croatia Giorgio Brosio
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Croatia Giorgio Brosio University of Torino A delayed economic recovery A very few substantial tax measures have been introduced in Croatia in 2010. The most important of which, the earlier repeal of the special tax on salary income introduced in 2009, has been due to the necessity of sustaining household consumption in the face of the persisting slow-down of the economy. The second measure, consisting in a restructuring of the tax rate schedule applying to the personal income tax, has a more structural character and it is also oriented to realign the Croatian tax system to the structure prevailing in most EU countries. Tax measures have clearly to be inserted in the evolution of Croatia's economy that continued to be affected, even in 2010, by the global economic crisis. GDP continued to contract in 2010, although at a decelerated pace. The decrease of 5.8 percent observed for 2009 was reduced to an estimated 1.6% in 2010. While the drop in 2009 was due to a huge fall of exports of goods and services (consisting mainly of
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tourism) and to a contraction of personal consumption-exacerbated by the tax measures--the surge in foreign demand that took place in 2010 was not big enough to compensate for the sluggish trend of domestic demand. Domestic consumers still felt the burn of the increases of VAT and of special tax on salaries. Household consumption was also negatively affected by repayment of personal loans to banks and by the reduced propensity of the latter to extend new loans to families. Domestic investment showed a further drop, particularly in the construction sector, where the activity had reached a huge peak just before the time of arrival of economic crisis. Projections for 2011 show the return of the economy to positive although modest growth: GDP is expected to
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increase by 1.5 percent under the stimulus of personal consumption and reconstruction of inventories in firms. Tax measures As mentioned above and in the previous report, to keep the public sector deficit under control the government introduced in July 2009 a special crisis tax. This was a temporary levy to be applied until 31 December 2010 - on salaries, pensions and other income with a tax rate of 2 percent on incomes exceeding HRK 3,000 (the equivalent of 409 per month) and with a tax rate of 4 percent on incomes exceeding HRK 6,000 (818 per month). This levy was rather substantial and was seated on top of an existing personal income tax that, while not particularly productive, holds the top statutory tax rates among Eastern European countries. (The same applies also to the corporation income tax). The prolongation of the economic downturn brought to a sharp inversion of the tax policy. On July 2010 the Croatian parliament decided to eliminate, starting from July 1, the special tax of 2 per cent, and to eliminate the remaining special tax of 4 per cent starting from November 2010. It has been calculated that some 1,254,000 taxpayers had been affected by the tax measure and that it has contributed about 400 million to the central government budget. Moreover, significant changes meant to slightly reduce the tax burden and to realign the tax rates applying to different categories of income have also been introduced with an amendment to the personal income tax law approved by the national parliament in 1 July 2010. They are detailed in the two following tables.
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Table 1. Croatia: changes in the personal income tax applying to income from wages and salaries New tax schedule from 2011 Tax schedule applying to 2010 filings Tax Income Tax Income rates brackets rates brackets Kunas Kunas 12% 43,200 13,50 43,200 % 25 43,200 - 25% 43,201 % 129,600 108,000 40 129,600 30% 108,000 % 129,600 37,50 129,601 % 302,400 42,50 302,400 % The changes in the tax rates schedules were accompanied by the elimination of a number of tax relieves that have a considerable importance weight for taxpayers. They are, more precisely, the deduction from income of expenses for: health services; voluntary and additional health insurance; insurance premiums paid in respect of life insurance with a retirement savings component; certain costs for the purchase or construction or maintenance of a first main (principal) residence, as well as
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interest expenses paid for these purposes; and; rental costs for a main (principal) residence. On the other hand, it was also decided that employer payments to pension funds payments by employers made to Croatian voluntary pension funds (pillar III pension insurance) on behalf of employees up to a maximum of HRK 500 monthly per employee will be treated as nontaxable income for PIT purposes (and as a corporate profits tax deductible expense for the employer).
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Table 2. Croatia: tax rates schedule applying on income from capital Tax schedule applying Tax schedule applying until June 30, 2010 from July 1, 2010 Income from renting property 15% 12% Income from interest 35% 40% Income from dividends 15% 12% Income from insurance 15% 12% Budgetary policy Central government revenue declined by 1.4% during the first eight months of 2010, compared with the same period of the previous year (National Bank of Croatia, Economic Bulletin, N-164, December 2010). The decline was due to a large extent to the combined effect of the impact of the system of collections of the taxes on business and to the slowdown of the economy in 2009 (tax advances on profits in a year are based on effective profit of the previous year). Also social contributions have had a sharp decline because of the fall of wage bills. The decline in tax revenues would have been much sharper without the introduction in mid 2009 of the special tax on salary income that impacted positively on collections also in the year 2010. Government expenditure stagnated during 2010. Stagnation derived from
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the combination of widely diverging trends in the components. While expenditure for personnel declined due to cuts taken in 20009, expenditure for pensions and social benefits increased. In particular, unemployment benefits had sharp increase. To keep expenditure under control the government had to cut programs of capital expenditure. The combined effect of declining revenues and stagnating expenditures has been to increase the public sector deficit that is estimated to reach a level of 4.2
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Table 3. Structure and recent evolution of tax revenue in Croatia 2007-2010 (millions of kunas)
2007% on total2008% on total2009% on total2010% on totalPersonal income Tax1772.72.91687.02.51399.02.51200.81.9Profit tax8816.314.510564.715.99439.815.96314.810.2Taxes on Property578.61635.90.9532.20.9491.20.8VAT37747.9624 130862.237050.362.237884.961.1Sales tax168.50.3166.50.25123.50.2122.10.2Excises9096.9155 88.60.98205.10.811283.718.2Taxes ongames and505.10.8543.80.82532.80.8609.41.0gamblingTaxes oninternational1641.52.71900.802.81721.22.81658.12.7t radeOther taxes509.60.8001590.102436.33.9Total tax revenue60837.110066344.91006059410062001.3100
in 2010, up from the 2.9% of the previous year.
Source: Ministry Finance of Croatia
of
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Czech Republic Jin Schwarz jr. Resident Research Fellow, Liberalni Institut (Prague) The year 2010 was an election year in the Czech Republic. The debates both before and after the election were concerned mainly with growing deficit. In order to reverse the trend of recent years, the newly elected government implemented a number of measures on revenue and expenditure sides with a plan to lower the deficit under 3 % of GDP in 2013. However, no deeper reforms were so far implemented, nor planned in greater detail. It is therefore not clear what ways will the government use to further balance the budget. Without profound reforms, there may be no other way to tame the deficits than to increase the tax burden. "PIGS" effect and the deficit The year 2010 was markedly influenced by the development of the so-called PIGS, or southern-wing EU countries Portugal, Italy/Ireland, Spain, and especially Greece. Whilst during the previous years after the financial crisis outbreak the emphasis of fiscal and monetary policy was put
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on fight against the recession and financial system instability, in 2010 the sustainability of public finance became one of the most important issues. The Czech Republic was having deficit problems already in 2007, that is, even before the crisis hit its economy. Extraordinary and unexpected high tax revenues in 2008 temporarily pushed the deficit below the 3 % Maastricht criterion. However, the inability to seriously tackle the issues of budgetary imbalance resulted in a government deficit of 6.1 % of GDP in 2009. According to the methodology of the ESCB (European System of Central Banks), the cyclical part of the deficit was literally zero. In other words, even if we adjust for the impact of the business cycle and oneoff factors, the remaining structural deficit of the Czech Republic in 2009 was 6.1 %. It became were soon clear that without restrictive measures the deficit in 2010 was going to reach 8 % of GDP. The technical government, appointed after the previous government fell due to a vote of no confidence, was therefore looking for ways to decrease the deficit. Political pressures from both ends of the political spectrum led however to such measures on both revenue and expenditure sides, that the resulting mix was more a tax increase than an
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expenditure cut. Still, the government managed to decrease the planned general government deficit for 2010 to 5.3 % of GDP, which remains nonetheless far above the level generally understood as sustainable. As a consequence, the new government coalition committed to bring the deficit down to 4.6 % in 2011 and under the 3 % threshold by 2013. Revenues and expenditures in 2010 Changes to the tax system may not have the predicted impact on the tax yield. This might be due either to unexpected external shocks or to the fact that taxpayers alter their behaviour in reaction to the changes. A closer look at the tax yields reveals that even though the predicted real GDP growth of 0.3 % was two percentage points below the actual 2.3 % GDP growth in 2010, the tax yields do not even reach the budgeted amounts. The corporate income tax yield, even after the fall of the rate from 20 to 19 percent, was predicted to be 20.4 % larger than in 2009. The statistical data show that it rose only by 3.6 percent. The excises were expected, also due to increased rates on fuels, alcohol, beer, cigarettes, and tobacco, to bring almost 14 percent more to the budget than in the last year. In reality, only 5.7 % more was collected during 2010.
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Similar development could be observed on the social security contributions' side. Even though the contribution ceiling increased, the year-on-year growth in 2010 was only 2.3 %, while it was expected to be 5.5 %. Not even the VAT yield reached the expected growth of 6.7 % and was 0.4 pp lower. To sum up, despite expectations and relatively positive economic development, the total revenues of the state budget increased only by CZK 25.9 billion ( 1 billion; 2.7 % y-o-y). As a reaction to some minor savings measures and the economic recovery, the expenditures of the state budget in 2010 fell by CZK 4.1 billion ( 160 million; -0.9 % y-o-y). The reality observed in 2010 gives us therefore a slightly blurred image. On one hand, the decrease of expenditures and their structure confirm that the economic growth was stronger than expected. On the other hand, the inability to collect budgeted taxes goes against intuition. The only plausible explanation is that the economic agents altered their behaviour either as a consequence of the crisis or due to the tax increase. Tax changes As usual, very important changes appeared again on the revenue side of the state budget. During 2010 a
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number of changes in the tax system were introduced which come into effect with the beginning of 2011. The most significant ones occurred in the area of social insurance, sickness insurance, and health insurance. Under the sickness insurance, employees and self-employed persons in the Czech Republic are entitled to benefits in case of sickness or parental leave. Not only do the minimal insurance contributions increase (by approx. 4 % for the social and health insurance, and from 1.4 % to 2.3 % for the sickness insurance), but less individuals will benefit from it, as the self-employed persons will be eligible for the sickness benefits only after twenty-two days of sickness (until the end of 2010 it was fourteen days). A so-called "flood tax" has been introduced that should be effective only in 2011. The mechanism is that a general income tax deduction will be lowered by CZK 100 a month ( 4), that is, by almost 5 %. Starting in 2011, payments going to former soldiers and policemen won't be subject to tax exemption. The same is true for the president's salary and the rent of the former president. Various non-salary payments to politicians and judges will also for the first time be subject to the income tax. In order to lower the deficit as much as possible without increasing tax rates, the government resorted to abolition of various tax exemptions. In addition to the measures mentioned
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in the previous paragraph, the minister of finance decided to make the interest on building savings (i.e. a government-subsidized savings account meant to be used for building or obtaining housing) subject to the 15% personal income tax. Moreover, government subsidy of the building savings from 2010 is going to be retrospectively taxed by 50 % in 2011 and decreased in the following years. Last new source of government income in 2011 will be the solar energy. There was an unexpected solar energy boom in 2010 in the Czech Republic that was caused primarily by high fixed purchase prices (guaranteed price of the electricity produced by solar power plants set by the government) and long income tax holiday. This development is a typical example of how the governmental subsidy of renewable energy sources can go wrong. At the time the law was approved in 2005, the fixed purchase prices were set according to then expected investment return. However, already during 2008 the technologies started to cheapen. The drop was so dramatic that returns on photovoltaic power plants went through the roof which attracted an extremely large number of investors. As the distributors are forced to pay the fixed purchase prices for renewable power, the tremendous increase in the solar power output would lead to soaring
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selling price in 2011 that is the price the consumers have to pay. The government argued that, in order to restrain the growth of price, it had to cancel the tax holiday and implement a special income tax on solar power plants put into operation in 2009 and 2010 with the rate of 26 percent. The solar tax revenues will be then partly given back to the distributors in order to cover some of their expenses related to the solar power which would allow them to keep the selling price of electricity lower. A welcomed side-effect would be approximately CZK 4 billion from the solar tax that is expected to stay in the state budget. To sum up, the changes to the tax system introduced in 2010 had two main goals. To increase the tax revenues as much as possible in order to push down the deficit but, at the same time, to keep unchanged the tax burden for the overwhelming majority of the tax payers, including the highest-income groups. The revenue side of the state budget in 2011 is planned to increase by 2.1 % compared to 2010. Public sector and the debt Without taking any restrictive measures, the deficit of the general government would reach 6.7 % in 2011. Considering that the Czech Republic representatives still were not
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able to carry out or prepare any deeper reforms, such level of public finance deficit could send the Czech Republic to the group of unsustainable countries such as Greece and Ireland. Only with one fundamental difference: as the Czechs do not have the euro, rich eurozone members wouldn't feel the need to bail them out. Moreover, according to a Deutsche Bank analysis of public debt sustainability published in March 2010, from 2020 on the Czech Republic would face grave difficulties with its debt if it doesn't quickly implement some reforms. Deutsche Bank experts simulated various possible paths of macroeconomic development over the next ten years in order to assess the stability of debt levels in 38 different developed and emerging economies. Needless to say, the predictions are to a large degree mechanistic. However, they do provide a useful way of comparing possible public debt development in various countries. Using the most plausible baseline scenario, the Czech Republic public debt would reach 69 % of GDP in 2020 with a further increasing trend. This places the Czech Republic into the group of four worst performing emerging markets. Among developed markets the position would be significantly better. But still the debtto-GDP ratio would be far above the 60% Maastricht debt threshold.
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It is no surprise that the topics of deficit, debt and fiscal sustainability formed the core of the debates preceding the general election in May 2010. Also due to the course of the Greek crisis, two new political parties promising to introduce budget responsibility and fight corruption made it into the parliament. Together with the conservative Civic democrats they formed a coalition government with the emphasis put on dealing with deficit and corruption. In order to avert the grave scenario of skyrocketing debt, the new finance minister prepared a set of remedies on the expenditure side of the state budget based on the coalition agreement that, as in other European countries, raised stout resistance. To accompany the above described increase in revenues which he expected to reach CZK 20 billion ( 0.8 billion), he made a plan of saving over CZK 58 billion ( 2.3 billion) from the state expenditures. Most of them were directly taken away from the budgets of ministries. Hence, CZK 13.3 billion ( 0.5 billion) will be saved in 2011 by a one-tenth decrease of the amount of money allocated to current expenditure of the ministries and a reduction of investment expenditure by one fifth. Funds for salaries of public employees will be lowered by 10 percent, which should save another CZK 11.4 billion. The only exception are the teachers
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their salaries will on average increase by 3.5 percent in 2011. Apart from these major items, the government decreases by one tenth the budgetary reserves (CZK 11.1 billion), and fewer resources will be available for road and railroad construction (CZK 3 billion), farmers (CZK 3 billion), poor and mildly disabled (CZK 3.5 billion), and newborn child benefit (CZK 1.3 billion). Reform and other plans The major shortcoming of the budget for 2011 is a complete lack of any deeper modification of either the revenue or the expenditure side of the budget. In addition to the already introduced saving measures, the governing coalition agreement sketched a roadmap of proposed longer-term goals they want to reach. Two main topics connected with the area of public finance are the pension and the health-care reforms. Both reforms have already been subject of public debates for several years. A health-care reform has been prepared that benefited from the Slovakian experience. Unfortunately, mainly due to fierce opposition from social-democratic politicians and very fragile majority of the coalition parties in the Parliament in the period 20062008, it was impossible to implement a single component of that reform. Without surprise, this inability to deal with the under-financing of the Czech
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health sector led to protests of thousands of doctors some of whom, in the last months of 2010, announced that they were quitting their jobs in order to work in countries with more "doctor-friendly" environment. What those doctors do not understand, however, is that without deeper changes in the way the health-care is financed, it is not feasible to allocate more resources to health-care, especially when high public deficits prevail. Plans for such changes are still very preliminary, though. Similarly, a proposal for pension reform has been prepared during 2010 by an expert advisory committee which was asked to update of similar report written as early as in 2005. According to the calculations, the Czech pension system will inevitably generate a deficit of 4 % of GDP each year starting in 2050. As a consequence of social security payments and taxes adjustments during the crisis, the system generated a deficit of CZK32 billions (approx. 0.8 % of GDP; 1.3 billion) already in 2010. The expert committee proposes two possible ways of reforming; both of them assume a decrease of the social security contribution rate from 28 % to 23 % of gross wage, that social security contribution ceiling be halved, and, in order to fiscally compensate, that the two VAT rates (10 and 20 %) be unified to one 19 % rate which should be enough to cover not only the current deficit but also
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the consequences of the reform in the coming years. The first and preferred proposal requires to direct 20 percentage points from the 23 percent point of social contributions into the currently existing pay-asyou-go (PAYG) pillar, whereas the remaining 3 pp. will go into new funded pillar. The reformed pension funds, investment companies or other asset managers will then manage investment of the pension savings within the framework of the second pillar according to the participant's choice. Participation in both reform pillars will be compulsory for all individuals under 40. The third pillar will, beside life insurance, consist of reformed voluntary pension insurance with a state contribution. In the second variant the whole 23 percent will be directed into the first PAYG pillar. The second pillar will be managed by the reformed pension funds and the direct state support will be 3 percent of the gross wage, provided the participant saves at least the same amount. The entry into this second pillar will be voluntary. The government made a promise to follow the conclusions of the advisory committee to the largest possible extent. Part of the plan is to use all future privatization incomes and dividends from state-owned enterprises for smooth transformation of the pension system. The timing is however so far unknown.
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As a part of the coalition agreement, the government committed to simplify the tax system, explicitly mentioning transformation of inheritance tax and gift tax under the income tax. Moreover, the government wants to abolish most of the existing income tax exemptions. They stated that they do not want to increase the progressivity but are determined to eliminate regressivity that occurs when the tax payer hits social security and health security ceilings. Last major planned modification of the tax system is higher taxation of lottery and gambling. The future In a fight against structural deficit the Czech government prepared in 2010 a mix of measures that should raise revenues by CZK 20 billion and shrink expenditures by CZK 58 billion. At first glance the strategy was successful, but there are still several risks awaiting. To begin with, according to the Czech Na
tional Bank, the ministry of finance builds on overoptimistic prediction of the 2011 GDP growth: while the ministry expects the economy to grow by 2.3 %, the CNB would rather bet on 1.6 %. And lower growth means, of course, lower revenues and higher expenditures. Second, there are no sign that a specific reform allowing for a sizable and permanent decrease of government expenditure will come soon. It is very unlikely or totally unrealistic that the minister of finance will be able to continue balancing the budget in following years by further cutting the salaries of public officials and current expenses of the ministries. And last but not least, there also exists a risk for the taxpayers that continuous shift from direct to indirect and less visible taxes would allow the politicians to silently and unobtrusively increase the tax burden while keeping the most visible income tax constant as promised. Without profound reforms, there may be no other way to tame the deficits in the end.
Denmark Jacob Braestrup 79
Denmark Jacob Braestrup, M. Sc (Political science) Senior adviser, Confederation of Danish Industries In January 2010, the largest tax reform in more than ten years began taking effect, shifting some DKK 30 billion ( 4.0 billion) of tax revenue when fully implemented in 2019. Of this, more than DKK 25 billion ( 3.4 billion) is used to lower the marginal tax on income in order to encourage work and investment. In 2010 the top marginal tax rate was lowered from 63 percent to 56.1 percent its lowest level in at least 40 years. Later in the year, an "economic recovery package" postponed some of the tax cuts and increased other taxes in order to improve public finances. Along with the tax reform and other (minor) tax changes, the combined effect has been a general lowering of almost all marginal tax rates alongside a broadening of the tax base that will increase the overall tax burden in what is already the world's most heavily taxed country. Lowest marginal tax since 1970 The most notable element of the tax reform, which was agreed upon in 2009, and which began to take effect in 2010, was the abolition of the middle income tax rate of 6 percent. This effectively changed the Danish tax system from a three-tier system to a two-tier system. More importantly it
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also reduced the top marginal tax rate on labour income by some 5% percentage points. The bottom income tax was also reduced by 1.5 percentage points, taking the total reduction in top income tax rate on labour to 6.9 percentage points (from 63 percent to 56.1 percent). The tax reform also increased the threshold for the top income tax, therefore reducing the number of people affected by the tax. The threshold was increased from DKK 377,400 ( 50,630) in 2009 to DKK 423,800 ( 56,860) in 2010. As a consequence, the number of taxpayers paying the top income tax fell from just over 900.000 persons in 2009 to less than 640,000 persons in 2010 (from 19 percent to 13 percent of all taxpayers). Originally, the threshold was set to be increased further in 2011 (to DKK 444,700 / 59,660), but, as part of the "economic recovery package" agreed upon in 2010, this increase has been postponed to 2014. For persons earning less than the threshold for the top income tax, the reduction in the bottom income tax has lowered the marginal income tax by 1.4 percentage points to 40.9 percent and 42.3 percent respectively, depending on whether one benefits from the reduction in marginal tax due
to the "employment deduction", which reaches its maximum at an income (gross labour income) of DKK 320,000 ( 42,930). The reduction in the bottom income tax also lowers the tax on transfer incomes such as unemployment benefits, etc. The very positive effects of the tax reform on marginal taxes were unfortunately marred by one aspect of the reform. In order to offset the effects of higher energy taxes on poorer households, the centre-right (minority) government originally proposed a lump sum "green cheque" for every adult person. During the proceeding negotiations with other parties in parliament, this was changed to an income-adjusted tax rebate of maximum DKK 1,300 ( 170) per adult and DKK 300 ( 40) per child (maximum DKK 600 / 80 per mother), The income adjustment of the "green cheque" adds 6.9 percentage points to the effective marginal tax at income levels between approximately DKK 395,000 ( 53,000) and DKK 413,000-422,000 ( 55,410-56,620), depending on the number of children. In this income interval, the marginal tax on labour income is de facto increased from 42.3 percent to 49.2 percent. Lower tax on capital income The reduction in tax rates and the increased threshold for the top income
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tax have also had a significant impact on the taxation of personal net positive capital income (excluding income from shares/stocks which is taxed separately). Since the 8 percent labour market contribution only applies to labour income, the 2009 top marginal tax on capital income was 59.7 percent for top income tax payers with net positive capital income. For those not paying the top income tax, the rate was 38.8 percent. The reduction of income tax rates in the tax reform reduced the marginal taxes on capital income to 52.2 percent and 37.3 percent respectively, while the higher threshold for the top income tax reduced the number of taxpayers affected by the top rate. This effect was boosted by the introduction of a DKK 40,000 ( 5,370)/person/year deduction in the capital income subject to top income tax. The deduction may be shared between spouses, thus ensuring that a married couple does not pay top income tax on the first DKK 80,000 ( 10,730) in net positive capital income, regardless of their labour incomes. Since the implementation of the tax reform, a further reduction of the top tax rate on capital income has been passed by parliament. In January 2010, the government under pressure from the EU proposed an end to the special tax treatment of certain (Danish) bonds. Hitherto, capital gain on certain high-yield bonds (provided they were issued in DKK) was tax-free (the interest was taxed as capital income). The government proposed and later
parliament agreed to end this discrimination between Danish and foreign bonds by eliminating the tax advantage linked to these bonds. The resulting revenue was used to lower the top tax on capital income even further. In 2010, the top rate on capital income was lowered to 50.2 percent, and in the coming years the rate will be gradually reduced to 42.7 percent in 2014. Taking into account the reductions already agreed upon in the tax reform, the combined effect will be a reduction in the top tax rate on net positive capital income from 59.7 percent in 2009 to 42.7 percent in 2014. An increase in the after-tax marginal income of more than 40 percent. Finally, the tax reform also lowered the tax on capital income from shares, which is taxed separately from other incomes. In 2009, dividends and capital gains from shares were taxed at 28 percent up to a total of DKK 48,300 ( 6,480); at 43 percent for the amount between DKK 48,300 and 106,100 ( 6,48014,240); and at 45 percent for any amount above. The thresholds are automatically shared between spouses. As part of the tax reform, the 45 percent bracket was abolished and the top rate lowered to 42 percent. Thus, a married couple will pay 28 percent on the first DKK 96,600 ( 12,960) in combined income from dividends and capital gains from shares and 42 percent on any amount above this level. In 2012, the low rate will be reduced to 27 percent.
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Improved tax regime for foreign researchers and experts As part of the budget for 2011, parliament decided on some changes to the special tax regime for foreign researchers and experts. The very high taxes on personal incomes have traditionally made it difficult for Danish companies to attract foreign experts. As a consequence, foreign scientists and high-earning experts have since 1991 had access to a special tax regime with a low flat tax in a limited number of years. The rules for the special tax regime have been modified several times, and in 2008 the existing threeyear arrangement was supplemented by a five-year arrangement. Persons who had not been Danish taxpayers for a period of three years (i.e. foreigners or Danish ex-pats), and who were either scientist/researchers or who had yearly gross salary exceeding DKK 832,000 (111,630) could chose either to work up to three years with a flat tax of labour market contribution (8 percent) plus 25 percent (totalling 31 percent); or up to five years with a flat tax of labour market contribution plus 33 percent (totalling 38.36 percent). At the end of the three or five-year period, people would automatically transfer to the regular income tax system. For all but the most highly paid, the new five year arrangement was, however, unattractive compared to three years on the low flat tax and two years as a regular taxpayer, and thus
very few persons chose the five year option. In 2011, the two arrangements were replaced by one, five year special tax regime with a flat tax of labour market contribution plus 26 percent (31.92 percent total). At the same time, the "quarantine period" required as a nontaxpayer to Denmark in order to be able to use the special tax regime was extended from three years to ten years in order to discourage Danes from "abusing" the system. Broader tax base In line with all other major Danish tax reforms for the last 30 years and indeed most tax reforms in the OECD countries the lowering of marginal taxes on personal income were in large parts financed by a broadening of the tax base. The single largest contribution came in the form of a one-year (2010) freeze of the automatic adjustment of all thresholds in the tax system. Normally, all thresholds in the tax system are adjusted upwards yearly to take account of the increase in wages. The adjustment is based on the development in wages two years prior, that is, the 2010 adjustment would have been based on the (quite substantial) wage increases of 2008. By suspending the adjustment, the government permanently increased the tax revenue by DKK 5 billion ( 670 million), financing one sixth of the total tax reform.
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As part of the economic recovery package, passed in 2010, the threshold freeze was prolonged another three years, meaning that tax thresholds will not be increased until 2014. The tax reform also broadened the tax base by instituting maximum levels for some tax deductions, such as a DKK 100,000 (13,420) maximum tax deduction for contributions to certain pension schemes. Hitherto, contributions to labour market pension schemes with monthly pension payments for at least 10 years (not lump sum pensions) were deductible against all income taxes except the 8 percent labour market contribution (consequently, payments from pensions are not subject to labour market contribution). Now, only the first DKK 100,000 (13,420) will be deductible against other taxes, except if the payments are made into a lifelong pension scheme (annuity), in which case there is no maximum deduction. Related, the tax reform introduced a temporary "equalisation tax" on large pensions payment meant to offset the "unfairness" that current pensioners or persons facing pension in the near future (with large pensions) would pay a maximum marginal tax on their pension payments of 52.2 percent, while having (as workers) enjoyed a deduction on their pension contributions of up to 59.7 percent (top marginal tax excluding labour market contribution). Originally, the government toyed with the idea of having the equalisation tax for some 30 years, but in the end, a 6 percent surtax was agreed upon (reflecting the
abolished "middle tax") for the years 2011-14, where after the rate will be reduced by one percentage point in the years 2015-2020. The tax applies to total pension payments exceeding DKK 362,800/year (48,680). The tax base for personal income taxes were also broadened by introducing a number of add-ons to taxable income, such as an add-on to taxable income for employees with company car available for private use. The size of the add-on depends on the mileage of the car and comes on top of the regular taxation of company cars. More controversially, a DKK 3,000/year ( 400) add-on to taxable income was introduced for employees with (partly or fully) employer-paid telephone, PC or Internet available for private use outside the workplace. This corresponds to a tax of DKK 1,200-1,700/year ( 160-230) depending on income (top income tax payer or not). This "multi-media tax" has been hotly criticised and, late in 2010, the tax was amended so that married couples if both are eligible for the tax receive a 25 percent discount on the tax. More fundamental, the value of most tax deductions to the personal income will be gradually reduced, beginning in 2012. Today, expenses related to the earning of income (e.g. unemployment insurance contribution, labour union membership fee, and a standardised transportation expense based on the distance between home and work) as well as any net negative capital income are deductible against municipal taxes and the 8 percent
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health contribution, which replaced the county tax in 2007 (making for an average tax value of 33.6 percent). Beginning in 2012 the health contribution will be gradually phased out one percentage point per year, while the bottom tax rate will be increased correspondingly. By 2019 the health contribution will be abolished and the tax value of most standard deductions will thus be reduced to 25.6 percent (average municipal and church tax rate). As part of the tax reform, some standard deductions have been raised to (fully or partly) offset the effect, and the first DKK 50,000 (6,710) in net negative capital income (double for married couples) will still be deductible at against municipal taxes plus 8 percent. However, the amount will not be indexes and thus be reduced in real terms by inflation. Higher "sin taxes" The tax reform was also financed through increased taxes on tobacco, alcohol, sugar and fat. In 2010 there was a 25 percent increase of the tax on ice cream, chocolate and candy (sugar-free candy exempt) as well as an increase in the tax on soft drinks containing sugar (and lower tax on sugar free soft drinks). Also, taxes on tobacco and cigarettes were increased. Later in 2010, as part of a "service check" with various amendments to the reform, the tax on tobacco was increased even further, and so too were taxes on wine and cider and "alcopops".
More controversially, the tax reform also included a tax on saturated fats. Originally, the tax was supposed to take effect from January 2011 and to include only oil and dairy products (except milk) at a rate of some DKK 20-25 ( 2.7-3.4)/kg saturated fat. This proposal, however, proved unacceptable to the EU, and as part of the "service check" of the tax reform, the tax was expanded to include meats, while the rate was lowered. A final proposal has not yet been put before parliament, and the tax will not take effect till July 2011. At present it looks like the final rate will be DKK 16 ( 2.13) per kg of saturated fat Higher taxes on pollution and energy consumption The tax reform included a number of tax increases on pollution and the use of energy, most of them related directly to businesses, while others have an impact on private individuals as well. One such example is the DKK 1,000 ( 134)/ year surcharge for diesel powered cars without particle filter. The surcharge not only applies to new diesel cars, but also existing passenger cars (existing, but not new, cargo vans are exempt from the surcharge). The surcharge was supposed to lower particle pollution, but has been hotly criticised because most existing diesel cars cannot easily (and without substantial costs) be fitted with particle filters. As a consequence, only around 1000 out of more than 350,000 diesel driven pas-
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senger cars have been fitted with a filter. In 2010, the tax on waste for landfills was also increased from DKK 375/ tonne to DKK 475/tonne ( 50 to 64), and in 2011 the taxes on pollutants in sewage will also be increased. Beginning in 2012 the government has introduced a tax on toxic waste (hitherto exempt from tax to prevent illegal dumping). The tax will be DKK 160/tonne, rising to DKK 475/tonne in 2015 ( 21 rising to 64). The increases in energy taxes consist first and foremost of a 15 percent increase of the tax on fossil energy consumption and electricity, which took effect January 2010. But there was also a number of other energy related tax increases in 2010 such as the reintroduction of tax on lubricating oil based on the energy content (DKK 60 / 8 per GJ), and a tax on green house gasses other than CO2 used for energy consumption at DKK 150 ( 20) per ton CO2equivalent. Beginning in 2013, toxic waste used for energy will be taxed at DKK 19.6 ( 2.6) per GJ. More controversially, 2010 also saw the introduction of a tax on energy used in the processing industry. Hitherto, energy consumed in the manufacturing process has been exempt from energy tax (but not CO2tax) in order to preserve the competitiveness of businesses exporting out of Denmark. But as of January 2010 this "process energy" is taxed at DKK 4.5/GJ (fossil fuels) and
DKK 16/ MWh (electricity) ( 0.6/GJ and 2.15/MWh). The tax was originally supposed to more than triple from 2013, but as part of the "service check" of the tax reform, it was decided that this would be too detrimental to competitiveness. Instead it was decided to bring forward the increase one year, while at the same time reducing the increase. The rates will thus be DKK 8/GW and DKK 31/ MWh ( 1.07/GJ and 4.16/MWh) respectively from 2012 onwards. In the next couple of years, the production industry will also be affected by the gradual reduction of the tax exempt CO2-emissions granted to heavy industry not part of the European Trading System (ETS), which were part of the tax reform, and which are set to mirror the reduction in free CO2-quotas in the ETS. Finally, it was decided that all energy taxes should be adjusted yearly to account for inflation. In 2007 it had already been decided to do this for the period 2008-15 (to finance a lowering of the income tax in 2008 and 2009), but it has now been decided that this regulation will continue after 2015 in theory indefinitely. The controversial part of this decision is not so much the decision itself, but more the fact that the generated revenue was not used to finance lower taxes, but rather to improve the public finances (see later). Other tax increases for companies
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In addition to the increased taxes on energy consumption and pollution, which will mainly be felt by businesses, the tax reform entailed a number of other tax increases on companies, including a nominal freeze on funds allocated as state aid in the years 2010 to 2015, as well as a reduction of the (already very low) number of VAT-exempt services. In 2010 and 2011 estate agents and travel agencies respectively will no longer be exempt from VAT. Banks and other financial institutions are still exempt from VAT, but have instead been paying a special tax based on their total payroll. As part of the tax reform, it was decided to increase this special payroll tax for the financial sector from 9.13 percent to 10.5 percent. The rise was not supposed to happen till 2013, but as part of an emergency tax relief package for the farming sector (lowering the tax on farm land), it was decided in the summer of 2010 to move the tax increase forward to 2011. Effective from 2010, the tax reform also reformed the way shares held by companies are taxed. Hitherto, taxation depended on the number of years the shares had been held with no tax on shares held for more than three years. Now, taxation depends solely on the number of shares held by the company. If a company owns less than ten percent of another company ("portfolio shares"), any capital income (dividends, capital gains) from these shares is added to corporate income and taxed accordingly; whereas capital income from daughter
companies (ownership of ten percent of the shares or more) is tax-free. At the same time, the tax system was changed so that companies are now taxed based on the value of their portfolios at the end of the year compared to the beginning of the year (any losses may be carried forward), rather than when assets are sold (unlisted shares may still be taxed when sold, rather than based on current value). The new system for taxing companies' financial assets was generally welcomed by the business community, especially when companies were given the option to exclude unlisted portfolio shares from the yearly taxation (and choose to have them taxed when sold instead). However, for some business angels and entrepreneurs, the new 10 percent limit proved troublesome. As newly founded companies grow and bring in new investors to fund the expansion the share owned by the original investors (through parent companies) may drop below the 10 percent limit, meaning that profits will be taxed twice (once in the expanding company and then again in the parent company). This fact was strongly criticised,
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and in the fall of 2010, the government made an amendment that will ensure tax freedom to the capital invested in the earliest stages of a small or medium sized enterprise, providing the shares are kept for at least five years. The tax reform also included a reform of the registration fee for taxies (which is much lower than the standard fee for passenger cars). The change effectively lowered the (taxi) registration fee on cheaper cars and increased the registration fee on more expensive cars. This was done to encourage taxi companies to choose cheaper and more fuel efficient cars. With the same intention, the base for the yearly tax on cargo vans was changed from weight to mileage and increased. It now follows the same principles as the yearly "green" fee on passenger cars. The change only affects new cargo vans, as existing vans will continue to be taxed based on weight. Finally, the reform included the introduction of road pricing for lorries / trucks, which were originally planned for 2011. Due to technical difficulties, the introduction has been postponed several times, and is now not due till 2013 at the earliest. Death of the "tax freeze" As already mentioned, the tax reform was constructed in such a way, that while the tax cuts would initially be underfinanced, this would soon change as tax increases took effect. Officially, the reform was to be underfinanced in the years 2010-12, to balance in 2013, and then give a net profit to the treasury from 2014 onwards. In the long run, taking into account interest, the reform would be net neutral to the public finances, ensuring that the reform conformed to the general principle of the
government's "tax freeze" which had been in place since 2001 (see box). The tax freeze Upon taking office in November 2001, the centre-right government of Prime Minister Anders Fogh Rasmussen instituted a so-called "tax freeze": No tax or duty could be increased. If the tax was defined in terms of a percentage, that percentage could not be increased. If defined as an amount, that amount could not be increased (and was thus effectively lowered by inflation). Furthermore, the property tax on owner-occupied property (one percent of the public property value) was fixed in nominal terms, so that the basis of the tax was the lower of the following: The 2001evaluation of property value plus five percent; the 2002-evaluation; or the most recent evaluation. The original tax freeze could only be violated, if it was deemed absolutely necessary, e.g. for environmental reasons. But then any revenue from higher taxes had to be reserved for lowering other taxes. Also, should the EU or other international obligations force Denmark to lower a tax, the lost revenue could be recovered through other taxes. This very rigid tax freeze was generally observed from 2001 to 2009. Some minor tax changes did violate the principle of being "absolutely necessary", but in these cases, the overall principle of the tax freeze was observed by using the extra revenue for other tax reductions. In connection with the preparation for the tax reform, the government announced that the rigid tax freeze would be suspended during the reform: any tax could be raised, but only as long as the overall tax freeze was observed, i.e. the revenue from
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tax increases had to finance lower taxes elsewhere. After the reform, the rigid tax freeze would once again be in effect.
In the end, however, this proved not to be the case. Firstly, the tax reform directed some of the extra revenue raised by higher taxes towards covering the inflationary loss arising from the nominal tax freeze of property tax and some duties in the period 2016-19. Without the reform, the government would have had to cover the inflationary loss by cutting expenses (or increased the deficit), and thus effectively saved almost DKK 3% billion ( 470 mill.) on the yearly budget by this manoeuvre (permanently). Secondly, the government used the pretext of the tax reform to simply abolish the nominal freeze of energy taxes from 2016 onwards. The freeze had already been suspended for the period 2008-15, but this was in accordance with the tax freeze in order to finance lower taxes on income. From 2016, energy taxes will automatically be inflationary adjusted, and revenue will not be redirected to the taxpayers but simply go to the state purse. The long run effect of this change is quite substantial, with the public finances being improved by some DKK 15 billion ( 2 billion) per year. Lastly, the increased tax revenue from the supply side effects of the tax reform estimated at some DKK 5% billion ( 740 million) per year - will also not be used to lower taxes (in violation of the overall tax freeze). Instead, the revenue will be used to increase the public budget. This all adds up to a net effect of the tax reform of increasing long run tax
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revenue to the tune of DKK 24 billion ( 3.2) per year. In addition, the economic recovery package, which was passed in 2010 as an emergency measure to ensure that the Danish state budget would adhere to the EU budget requirements, added another DKK 8% billion ( 1.1) per year in permanent tax increases, primarily by extending the one-year freeze in tax thresholds (already part of the tax reform) another three years. So while Denmark now has the lowest marginal tax rates in a generation if not more, the tax burden already the world's highest is set to rise even further in the years to come.
France Vesselina Spassova IREF Faithful to a tradition several years old, France is using taxation as a tool for economic policy, rather than a mean for funding specific public services. The new fiscal law is introducing a myriad of changes, serving one main purpose: the maximization of tax revenues for the rescue of shaken public finances. The way chosen by the government this year consists in the abolition of several tax loopholes, as well as the introduction of some new taxes, an increase of marginal income tax rate, taxes on capital gains and social contribution taxes. Public finances and economic context Following the huge increase of public deficits of the past two years, the government is claiming the beginning of a new era and promises to limit the budget deficit to 6 GDP points in 2011 (down from 7.7% in 2010). If this 1.7 GDP points reduction of deficit is reached, it will
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be the first time in 50 years that such an effort to restrict public spending ends with success. But will the government reached the target this time? One should indeed keep in mind that public deficit has been increased by 4.4 GDP points in the past two years, and the public debt by more than 15%. According to the latest data, the total amount of government expenses reached 422.5 billion in 2010 including 70 billion classified as "exceptional expenses". A bizarre naming since almost half of those 70 billion has been used to compensate for the fall in local communities' revenues due to the suppression of the professional tax; and we don't see why things should be different in the future. Meanwhile, the social security system's deficit in 2010 sadly
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but not surprisingly broke a new record at 23.1 billion. At this point, it is easy to understand that any reform that would save money or increase revenues is good for the government to take. For example, until 2013, only one out of two retiring public servants will be replaced (except in the education sector). Also, the pensions' reform, harshly contested in 2010, is expected to reduce public deficits in the following years by some 0.5 GDP points (everyone knows, however, that the effects of this reform will be short-lived and a new reform will soon have to follow). Also, the government is committed to keep public spending stable in nominal value in the 3 coming years, except expenses for the service of the debt and pensions. To reach that goal, an impressive panel of no less than 150 measures has been announced. Abolition of tax loopholes The economic crisis of 2008 has spurred a lively debatewidely echoed in the mediaon the fairness of the current fiscal system. Many voices came out claiming the system is unfair and the rich should be taxed more heavily. On the other side, the government must take into account the fact that the economic recovery would be impeded if higher taxes were to be forced in. The choice went therefore to the middle way the abolition of tax loopholes that often
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favour the highest incomes. Indeed, in the fiscal law 2011, there are several measures that abolish or reduce some advantages granted to specific groups of taxpayers. For most of the remaining tax breaks, the law introduces a 10% decrease of the allowed tax credit or tax deduction .The additional fiscal charge resulting from those measures is estimated to reach 9.4 billion in 2011. Local taxes Local governments have increased taxes by 2.8% on average in 2010. The increase is about to follow its way in 2011. Let us simply recall that, in the past 10 years, the average increase of local taxes in France has been around 37%. Personal Income Tax Any income exceeding 5,963 is subject to the personal income tax in France. The tax rate is starting at 5.5% for the lowest bracket and reaches 41% (previously 40%) for those earning more than 70 830 : Income____________Tax rate Below 5,963_______0% From 5 963 to 11 896 5.5% From 11 896 to 26 420 14% From 26 420 to 70 830 30% _____Above 70,830_ 41% (up from 40% in 2009)
Value added tax The rates remains unchanged but the base is increased. In France, the service of providing television signal for the final user has been traditionally benefiting from a reduced VAT rate of 5.5%. Many people, however, are now receiving their TV signal as part of a larger triple offer including the internet and telephone. Since 2007, the law stipulated that the reduced VAT rate can be applied to 50% of the composite offer. Obviously, the fiscal authorities realized that there were some gains to be realised here (near 1.1 billion, according to the estimations). Consequently, they decided that from now on the reduced rate would apply only where television is provided to the consumer separately from other services. Social contributions In France, a social contribution is levied on the quasi-totality of taxable income categories-- the so-called "prlvements sociaux". Those contributions are there to fit the deficits of the social security system (pensions, health insurance, social benefits). Interestingly this is a flat mostly withholdingtax. Initially fixed at 1.1%, those taxes are matching today 12.3% (0.2% of
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increase this year), distributed as follows: CSG 7.5% on personal (Generalized incomes and 8.2% social on contribution) capital gains 0.5 CRDS % (Contribution to 2.5 the refund of social debt) % Prlvement social (Social 1.1 contribution) Contribution to % the RSA (minimum revenue guaranteed by the State)
Taxes Capital gains
on
Several of the reforms in the 2011 Tax Law concern capital gains. Unfortunately for investors and savers, the news is not exactly cheerful. In France some capital gains are taxed with the so-called "prlvement libratoire", which is a proportional tax applied, for instance, on dividends or revenues from fixed-rate securities. Its rate will be increased from 18% to 19%. The same rate will be applied on
revenues from shares' transfer; revenues which previously were also taxed at 18%. Capital gains from real estate will be taxed at the rate of 17%, instead of 16% in the past. To this must be added the 12.3% compulsory social contribution taxes mentioned above. Moreover, and curiously, those increases will not be taken into account by the fiscal administration when calculating the amount of taxes paid to see whether the fiscal shield must be activated. That is, if those additional imputations are toppling the total amount of taxes paid by the taxpayer over 50%, the fiscal administration will not make him benefit from the shield and will not refund the amount exceeding the 50%. Arithmetically speaking this is of course equivalent to a weakening of the shield. In order to finance the crushing pensions load, the new tax law is repealing the 50% tax credit on distributed dividends. This measure is estimated to save some 600 million to the State. Another fiscal reform is expected to contribute to the (empty) social security funds with another 180 million - the taxation of capital gains realized from the sale of securities. Previously, for each household, the first 25,830 were exonerated (this amount is referring to the total volume of the sale, not just the gain). Starting in 2011, this will no longer be the case.
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Other taxes Real estate: In 2011, the government is actively promoting "zero rate loans", that is a loan without interest, to those who attempt to access to property for the first time (58% of French leave in their home). This measure, which is going to entirely substitute for the tax credit policy introduced after the 2007 election of President Sarkozy, is targeting low incomes households. Nevertheless, as the US credit market recently taught us, the danger behind the ambition to encourage access to property is the expansion of risky loans to under-qualified borrowers. Green taxes: Following the fashion of green taxation, France put in place several fiscal tools designed to encourage some environment-respectful activities. Nevertheless, the government seems to revise this policy and several tax advantages are cancelled or reduced. For instance, the State encourages agriculture, especially when it comes to biologically clean agriculture, because of its positive effects on environment and, supposedly, on employment, and because of the increasing demand for its products (which, in a way, makes the encouragement unnecessary!). In the past years, the tax credit granted to those businesses was 2,400 , plus 400 per hectare, in the limit of 1,600 . This measure is prolonged to 2012, the amount being however reduced to 2,000 from this year on. Also, the
50% tax credit for investment in photovoltaic is reduced to 25%. 2011 also announces the end of the scrappage premium - a benefit given to people in order to encourage them to get rid of their old vehicles and replace them with new, more environment-friendly, vehicles. This means less public spending, but also less tax revenues from car industry for the near future. Tax on the banking system: According to the logic behind the new fiscal law, the banking system crisis of 2008 revealed the importance of systemic risk and, in order to prevent similar situations in the future, there is a need for a new tax on banks. Of course, one can doubt the validity of this logic and wonder whether this is not just another pretext for increasing short-term tax revenues. Nevertheless, the capital stock of the bank will serve as tax base and the rate applied has been set at 0.25%. The details of the logic are that not all assets will be taxed alike. Instead, the riskier the assets of the bank, the higher will be the rate. This tax is going to add to the State budget another 500 million in 2011 and is expected to earn even more in the following years. It will come on top of the "supervision tax" introduced at the beginning of 2010, and of the "exceptional" contribution to the fund for the guarantee of deposits (fonds de guaranties des depots) that is still active. In 2013 those three taxes are expected to bring more than a billion euro to the State budget.
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Future trends As we enter 2011, several possible reforms are being discussed. The first one, that would fit an ambitious strategy of tax harmonization between the French and German systems, is the abolition of the wealth tax today levied on real estate property worth more than 800 000 . A good decision for the French economy, since France is one of the last European countries to levy such a tax. Also, a decision that would save taxpayers some 4 billion. The problem, of course, is that the government desperately needs revenues and this is why the minister of
the economy and President Sarkozy are already speaking about a new tax to be applied on the gains realized through the sale of the main residence. There are also rumours that the unpopular fiscal shield will be withdrawn, which in fact is already almost done, since, as explained earlier, most of the 2011 tax increases are set with the express condition that they will not enter into the calculation of the total tax burden. It is however questionable if such a populist measure is really needed at that point. Indeed, it will save the State not more than 450 million, while increasing the (unfortunately difficult to measure) problem of tax evasion and pushing more wealthy people outside the jurisdiction's borders. Putting things together, a package of "no wealth tax, no tax shield" could be interesting, especially if you add to it a return to lower marginal personal income tax rate.
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Germany Jan Schnellenbach, PD Dr. Ruprecht-KarlsUniversitt Heidelberg Alfred-Weber-Institut fr Wirtschaftswissenschafte n The big picture As we have reported here in last year's IREF report, the German government that has been newly elected in autumn 2009 did have plans for a comprehensive tax reform. These plans included the introduction of an income tax schedule with stepwise increasing marginal tax rates, and possibly only three rates of 10, 25 and 35 percent. There had already been some doubts last year that a majority for such an ambitious reform could be organized. And indeed, the conservative-liberal federal government was characterized by almost complete fiscal policy inertia in its first months. The plan apparently was to sit out important state elections in Northrhine-Westphalia before introducing potentially controversial legislation on income tax reform. This plan, however, failed miserably when the state elections, and with them also the majority in the Bundesrat, the upper chamber of parliament at the
Germany Jan Schellenbach 111
federal level, were lost to the leftleaning opposition parties. Under this new set of political restrictions, a large-scale reform of the German income tax along the lines of the federal government's initial plans becomes very unlikely. Rather, inertia is likely to persist indefinitely, since a window of opportunity with a centreright majority in both houses of parliament is very unlikely to open up again within the next years. The second major project announced in 2009 was a reform of municipal taxes, which included plans to abolish the local business tax (the Gewerbesteuer) and to substitute it with other sources of revenue for the local level, such as an increased share in VAT revenue or a local surcharge on the personal income tax. Such plans would have led both to a significant simplification of the tax system (the Gewerbesteuer is quite costly to administer, since its tax base is different from that of the corporate income tax), and to a large reduction of the tax burden on corporate income. The remaining tax burdens on the corporate level would have been only the corporate income tax at a rate of 15%, and the solidarity surcharge of 5.5%. However, this second major reform project is also in danger of failing. In November 2010, Wolfgang Schuble, the federal minister of finance, has introduced a novel proposition for the reform of local
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taxes. The main pillar of the Schuble Plan is to allow municipalities to levy a surcharge on the personal income tax. However, in contradiction to the coalition accord between the centreright parties, and contrary to the pundits' initial understanding, this proposition does not include the abolishing of the local business tax. Instead, Schuble proposes to lower the federal income tax burden in order to compensate for municipal surcharges. His aim is to adjust the federal income tax schedule such that the overall tax burden remains roughly the same for individuals residing in a typical municipality that levies an average surcharge. The main thrust of Schuble's concept is somewhat surprising, since the abolishment of the local business tax is a major political goal of his liberal coalition partners, and the coalition accord explicitly mentions it. But in the discussions on local tax reform, the aim of granting municipal governments more flexibility to adjust their tax revenues to local financing needs currently overrides the aim of reducing the tax burden on businesses. Quite to the contrary: Plans to even revitalize the Gewerbesteuer by also forcing self-employed freelancers such as attorneys, tax advisers or even doctors to pay the tax are currently gaining some political momentum. From the opposition parties and from some representatives of municipal governments, there are even
suggestions to extend the tax base further beyond profits and to include capital employed, or the sum of wages in order to have a tax base that is less volatile over the business cycle. While there is no acute danger of such more extreme propositions turning into actual policy, one has to bear in mind that any reform of municipal taxes needs a majority in the Bundesrat. Since the centre-right government does not have a majority there, any piece of legislation on comprehensive local tax reform will necessarily have to be a compromise and include some measures favoured by the left-leaning opposition parties. Postponing the reform and remaining in the status quo indefinitely may, on the other hand, not be an option. Local jurisdictions have become increasingly indebted in the recent years, and there is a structural incongruence between their revenue and their financing needs, where the latter follows to large extent from spending decisions made on the central level. Some changes in detail There is a long list of small changes to the tax system coming into effect in 2011. The purpose clearly is to facilitate fiscal consolidation, and the method is to increase (or even invent) many small taxes, each of which is not felt to a large extent by the
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taxpayers. The aggregate revenue from all these small taxes is, however, expected to be significant. From a theoretical perspective, it is rather obvious that the government attempts to exploit the phenomenon known as fiscal illusion. The most important of these small tax increases are the following: The option for degressive writedowns will be removed. From 2011 onwards, only linear deductions are possible. The degressive option had been introduced in 2009 in order to provide an investment stimulus during the economic crisis. Flying from Germany will become somewhat more expensive in 2011. Short flights up to 2.500 km are charged an air travel tax of 8 per person, flights up to 6.000 km are taxed at 25 and longer flights are worth 45. A fee on electric energy intended to finance transfers to suppliers of ecologically sustainable energy rises from 2.04 ct. per kilowatt-hour to 3.53 ct. Given the market situation, it is expected that this will translate into an increase of 10 to 15% in the price of electricity in Germany. Smoking will become more expensive. From May 2011, the tax on a standard pack of cigarettes will increase by 8 ct. Taxpayers have a right to receive interest payments by the tax administration if refunds take more
than 15 months. From 2011 on, these interest payments themselves will count as taxable income. On the other hand, there are also a few small changes that will benefit taxpayers. The lump-sum tax allowance for employed persons will increase from 920 to 1000. If they do not have additional income e.g. from self-employment, then employed taxpayers and retired persons now have an option to file a tax declaration only every two years and not annually, and it is again allowed to deduct costs for a home-office from the taxable income. By and large, 2010 has however been an extraordinarily calm year in German tax policy. As can be seen above, the legislative and judicial steps taken all are piecemeal changes. Taxpayers' rights There has been some political and legal controversy recently over the question if illegally obtained data can legally be used in the prosecution of tax evaders. In several cases during the recent months, law enforcement authorities had been offered to buy copies of data CDs containing client data of banks from Switzerland and other countries. With the tax law being enforced by state-level authorities in Germany, some states decided to buy stolen data, while others did not due to legal concerns.
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Moreover, there have also been several ethical objections against the state paying seven-digit amounts to criminals who trade stolen data. However, in late November 2010 the Constitutional Court has ruled that this process is legal: The fact that data on clients of foreign banks has been collected illegally does not protect tax evaders from prosecution, even if the accusations rely entirely on illegal sources of information.
Tax evasion has therefore become significantly more risky for German citizens in the past years, given these legal clarifications, and given also the inability of many foreign banks to protect their client data. At the same time, and following another high court decision, the government has decided to narrow the conditions that allow tax evaders to avoid prosecution by voluntarily submitting a corrected tax declaration. So far, a taxpayer had the opportunity to salve his conscience without fear of punishment by reporting previously underreported income before the formal process of law enforcement began. This was also the case for partial revelations. Suppose a tax evader has some income underreported from x, and some from y. If he has reason to believe that his secret on x is not safe, then under the old law he had an opportunity to declare x, and even if y were also discovered by the tax authorities later, his evasion of income from x would not be punished. This option for a tactical and partial voluntary correction of tax declarations is now void. Germany is also currently in negotiations with Switzerland. In October 2010, revisions to the German-Swiss-Double-TaxationTreaty have been agreed upon. Switzerland now follows the OECD standards on tax-related information exchange with Germany. This agreement, however, only concerns new cases of tax evasion. Further negotiations will have to clarify how old cases of tax evasion are to be treated. The German ministry of finance mentions as goals for these negotiations, among others: to legalize untaxed funds hidden in Switzerland,
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and to enforce retrospective taxation of these funds. In Germany itself, every taxpayer is now associated with a unique tax identification number that identifies him vis--vis the tax authorities. In the near future, employers will report the identification numbers of their employees to the tax authorities, and in return receive information regarding personal tax allowances of their employees, which in turn allows them to calculate the monthly tax amounts that are to be deducted from gross wages.
Outlook Despite 2010 having been a calm year for tax policy, there are significant fiscal issues looming at the horizon. Germany has enacted a constitutional debt brake that will gradually come into effect until 2016 (on the federal level) and 2020 (on the state level). It will require low regular deficits at a maximum of 0.35% of GDP on the federal level, and a strict zero deficit policy on the state level. It remains to be seen whether the debt brake will actually discipline fiscal policy, or whether it will turn out to be hapless cheap talk similar to the European Stability and Growth Pact. It is, however, likely that the German government will attempt to avoid the embarrassment of an immediate failure of the debt brake. Given the high level of current deficits for 2010, a deficit of 4 percent of GDP is predicted the necessity for fiscal consolidation is obvious. Some recent developments will support consolidation. Earlier in 2010, the Constitutional Court has ordered a re-calculation of benefits for longterm unemployed persons. The Court has, however, not enforced an increase in benefits, as has been feared by the government beforehand. The problem identified by the Court was a lack of transparency in the calculation of benefits, not the actual amount. The result of the new, transparent calculation is that appropriate benefits are not higher
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than the status quo. In terms of the fiscal burden, this was a huge relief relative to alternative scenarios that have been considered prior to the ruling of the Constitutional Court. Similarly, the current, relatively rapid growth of Germany's GDP and the positive macroeconomic indicators for the near future lead to an expectation of increasing tax revenues and a relatively smooth path of fiscal consolidation. There are, however, also significant risks. Amidst the turmoil of the European debt crisis, interest rates on newly issued German public debt are increasing, albeit from a very low level. Even if there will indeed be no formal introduction of Eurobonds, as the current political situation suggests, debt service is likely to become gradually more expensive for Germany, with the eventual extent of the
effect still being very uncertain. Summing up, it is not unlikely that current macroeconomic developments, in conjuncture with the newly introduced debt brake, will force Germany to choose between significant spending cuts and tax increases sooner rather than later.
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Italy Giorgio Brosio University of Torino A fiscal status quo expected to last Tax policy changes have been practically absent during 2010. This is understandable considering the working of two forces pulling in opposite directions. The first one refers to tax reductions. Italian taxpayers are expecting the tax reductions long time promised to them by the government and which are badly needed. The second one refers to the precarious financial conditions of the public sector. International financial investors would severely penalize any reduction in revenue that would not be accompanied at least by an equivalent reduction in public expenditure. In other words, an alleviation of the tax burden could take place only at the cost of a greater reduction of public expenditure that is quite difficult to implement in the present times. Hence, tax changes are to stay almost necessarily minimal, until a substantial recovery in the economy will take place. This remains quite unlikely in the short run. Italian GDP growth remains among the lowest in the euro area and has been slowing down during the year. According to the most recent estimates by the Bank of Italy, GDP growth has been in the order of 1.0
per cent in 2010, will stay the same in 2011 and will slightly increase to 1.3 per cent in 2012. The main impetus to economic activity continues to come from exports, but the international competitiveness of the Italian economy remains insufficient and there are no government efforts to improve it. The contribution of domestic demand remains not only modest, but has even diminished in connection with the slowdown in investment in machinery and equipment following the termination of tax incentives. Households' spending continues to be governed by caution, in view of the weakness of disposable income and the bleak perspectives about resumption of employment. A good fiscal stimulus through tax concessions would greatly help, but it is presently incompatible with EU regulations and with the present situation of the Italian public finance. Tax policy As mentioned above, actual tax changes, adopted with Decree Law 78/2010, have been minimal. They consist in a few measures aiming at increasing revenue, partially matched with other measures impacting negatively on collections. As a result of their combination, a net additional revenue of 4.1 billion is expected for 2011. The measures that increase revenue are mainly in connection with the
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fight against tax evasion. The most important provisions concern: the introduction of caps on the possibility of offsetting tax credits and debits; the strengthening of assessment and actual collection of tax dues, above all by reducing the time between the notification of assessment and forced execution; the strengthening of controls on firms that systematically make losses or close within a year of opening for business; the obligation made to taxpayers to give electronic notification to the Fisc of any transaction of 3,000 or more subject to VAT; some changes to the rules on table-based assessment of income; the application of the OECD guidelines on the documentation of transfer prices; and the application of a withholding tax to payments for restructuring works in residential property subject to tax benefits. Other increases in revenue derive mostly from the introduction of charges on sections of the motorway network that were still exempt and from increases in the cost of motorway concessions and the updating of the property register with the inclusion of previously unrecorded buildings. The measures that decrease revenue mainly concern the possibility of reducing, in a future decree, the size of the payment in advance of personal income tax due for 2011.
As it can be seen, all these measures should concur to reduce tax holes and opportunities for evasion that remain very high. Fiscal federalism and debate on tax reform Mention has been made in the previous Report on Italy of the approval in June 2009 by Parliament of law 42. The law authorizes the government to issue decrees to determine the revenue system of regional and local governments implementing the constitutional reform of 2001. The law is quite complex. Some progress has been made concerning the financing system for Regions, whose basic functions will be funded mostly by grants. During 2010 the government has advanced a proposal for Municipalities that is currently under discussion. The proposal is based on the introduction of a new municipal tax that will merge together a number of existing taxes, such as: the present property tax that is presently levied only on commercial and industrial property; the tax on refusal collection and, other minor taxes. In addition, Municipalities will also benefit from the devolution to them of the existing tax on the transfer of property and of the part of the personal income tax that refers to the rent from property. More precisely, the income from rent of property is presently included in the personal income tax, which is a central government tax and on which sub-national governments can levy their own surtaxes (which are, however, presently frozen). According to the proposal the rent from property will be taxed with a separate 20% flat tax and the collections will be
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transferred to Municipalities. By ceding to Municipalities the revenue from the transfer tax on property and the revenue on income from rents on property, the government intends to compensate them for the loss of municipal real property tax on the first residences that was introduced since 2009.
Italy Giorgio Brosio 83 Table 1. Summary of recent tax policy measures Tax change s Tax leading to revenue rebate increases s 5 063 955 700 628 741 633
Fight against tax evasion Of which Strengthening of assessment and collection Ban on offsetting credits Electronic invoices New presumptive income tables Regularly lossmaking and "open and shut" firms 10% withholding tax on building renovation payments Application of OECD transfer pricing guidelines Other
756
651 1 351
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Reduction in personal income tax payments on account - 2 300 Other - 18 Net effect 4 097 Budget policy In 2010 tax revenue recorded in the state budget fell by 1.0 per cent. The fall is mainly due to the expiration of the foreign assets disclosure scheme that had been introduced the previous year and that had contributed in a substantial, although temporary way, to revenue collection. A factor of opposite sign was the postponement of receipts to 2010 as a result of the temporary reduction in the percentage of the personal income tax payment on account due at the end of 2009. Personal income tax receipts, buoyed by that measure, rose by 4.5 per
cent. VAT receipts registered relatively high growth of 4.6 per cent, fuelled particularly by those from imports, while receipts from flat-rate withholding taxes on income from financial assets fell significantly, by 42.5 per cent, due to the fall of dividends (particularly from banks) and to the generally very low rate of interest on bonds and other fixed income instruments and those from excise duties decreased by 5.7 per cent. The government has also tried to contain expenditure operating in the two areas: sub-national finance and social protection, where there still is some substantial meat" to cut. More specifically, Regions, Provinces and Municipalities are required to reduce significantly their expenditure following a substantial cut to grants to them. A significant contribution is also expected from the measures regarding social security, which are expected to produce progressively larger savings over the three years. In particular, these measures concern: the postponement of the starting date for pensions that mature after 31 December 2010 (setting the interval between the retirement date and the payment of the first monthly instalment equal to 12 months for employees and 18 months for selfemployed workers); the payment of public-sector severance pay in excess of 90,000 by instalments (in two or three annual payments depending on whether the amount is less or more than 150,000); and the tightening of
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checks on disability pensions and of the requirements for eligibility for such assistance. The government has also mandated cuts in the spending of Ministries by reducing budget appropriations by 10 per cent, including on capital account, which reduce expenditure by 2.1 billion on average per year. Major adjustments are also made to the compensation of better-paid employees in the public sector with cuts amounting to 1.4 billion on average per year. This result derives from the freezing of individual pay at the 2010 level, the extension to 2012 and 2013 of the 20 per cent limit on the replacement of departing staff in central government (excluding the police forces, firemen and university teachers, to whom less stringent limits apply), and the postponement to 2011 of the effects of the reorganization of careers in the security sector and the armed forces. Provision has also been made aimed at re-
Italy Giorgio Brosio 85 ducing pharmaceutical expenditure, primarily by reducing the margin of wholesalers and pharmaceutical companies. As a result, the deficit of the public sector has been contained. More precisely, the ratio of net borrowing to GDP fell in the first three quarters of 2010 compared with a year earlier by 0.4 percentage points to 5.1 per cent. It has also to be mentioned that primary expenditure decreased by 0.4 per cent: capital expenditure contracted more sharply, by 18.2 per cent, while primary current expenditure expanded by 1.2 per cent due to the growth of 2.4 per cent in social benefits. The available information suggests that net borrowing in 2010 should be lower than expected and should contract further in the following years. Despite all these efforts the ratio of public debt on GDP continues to raise, given the practical immobility of the denominator of the ratio. Italian public finances are still in a precarious state that could worsen abruptly should the world economy recovery and monetary policies lead to an increase of interest rates. Table 2. Italy Net borrowing and debt as a % of GDP 2009 5.3% 2009 116.0 % Net borrowing 2010 2011 5.0% 3.9 % Debt as a % of GDP 2010 2011 118.5% 119.2 %
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Lithuania Kaetana Leontieva Policy Anlyst, Lithuanian Free Market Institute, Vilnius Lithuanian taxpayers experienced drastic tax increases in 2009, yet higher tax rates did not bring in as much revenue as the government had expected. Despite widespread public encouragement for lowering taxes, the government decided to decrease only the corporate income tax back to its previous level, while other tax increases remained in effect. At the end of 2010, personal income tax for individual business activities decreased threefold and double taxation of payments to board members was abolished. Although some beneficial changes were indeed made, the government failed to sort out very sensitive issues such as a requirement for all individuals to pay health insurance tax even if they have no income. Budget Deficit and Public Debt Lithuania had quite a low public debt to GDP ratio when it was hit by an economic crisis in late 2008. Since then, the growth of public debt has been staggering: total public debt in
absolute terms has more than doubled between 2008 and 2010. The ratio of public debt to GDP has grown from 16 percent of GDP in the end of 2008 to 36 percent of GDP in September 2010. According to official forecasts, at the end of 2011 total public debt will reach 40 percent of GDP. As projected by the law on state budget, state budget deficit in 2010 will amount to 37 percent of state budget revenues (excluding revenues from EU funds), while state social security fund budget deficit in 2010 will be around 27 percent of its revenues (5.2 and 2.8 percent of GDP, respectively). According to 2011 budget laws, budget deficits are expected to be lower state budget deficit is projected to be 15 percent of its revenues, and state social security fund budget deficit is expected to come up to 24 percent of its revenues (5.6 and 2.7 percent of GDP, respectively). Total deficit of the public sector in 2011 is projected to be 5.8 percent of GDP. It should be noted that the state budget revenue projections appear to be very optimistic. However, for the first time in Lithuania's history the law on state budget includes a clause ensuring that if revenue projections are not being met, a draft law amending the law on state budget will be drawn up to prevent the total deficit from exceeding 5.8 percent of GDP.
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Lithuania's Total Public Debt, million Litas 4 0. 0 0 0 3 5. 0 0 0 3 0. 0 0 0 2 5. 0 0 0 2 0. 0 0 0 1 5. 0 0 0 1 0. 0 0 0 5. 0 0 0 0
2004.09.30 2005.09.30 2006.09.30 2007.09.30 2008.09.30 2009.09.30 2010.09.30 Source: of Ministry of Finance the Republic of Lithuania Most Important Tax Law Changes Personal Income Tax As of 2010, new rules on taxing income-in-kind came into effect. Previously, a governmental decree specified which income was regarded as income-in-kind. This list included property or services provided to an employee instead of salary payments, which had to be evaluated according to the market value of that property or services. After the law on personal income tax was changed at the end
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of 2008, the law specified which income was not regarded to be income-in-kind, while a new governmental decree produced in mid2009 stated how to evaluate certain types of income-in-kind, among them the use of automobiles belonging to an employer or any other person and privileged loans with lower interest rates. The government's original plan was for the new decree to come into effect on July 1, 2009, yet due to public outrage it pushed back its coming into effect to January 1, 2010. It should be noted that since 2002, companies cannot deduct VAT of purchased automobiles and even though income-in-kind from automobile use is now being taxed, VAT taxation of automobiles has not changed. At the end of 2010, a new law on personal income tax came into effect which decreased personal income tax on individual business activities and agriculture from 15 to 5 percent. The lower tax rate will not be applied to "free professions" (which include lawyers, bookkeepers, doctors, journalists, and the like) and to income from stocks. Prior to the new law, tax-exempt income from agriculture was based on the size of farming area, yet as of 2011 agricultural income is tax-exempt for those farmers not registered as VAT payers (registration as VAT payer is mandatory if the total value of goods supplied in any one calendar year exceeds 100,000 LTL or 29.000). The new law excludes selling or renting real estate from the definition of individual business activities. This means that income from real estate will be taxed at the standard 15 percent rate, unless that property was
the seller's residency or has been in his possession for more than 5 years (previously, this limit was 3 years). As of 2011, individuals will be able to deduct bad debts from their individual business income if certain criteria are satisfied, for example, if an individual cannot retrieve them for more than a year. As of 2012, individuals who pay a fixed amount income tax and then register as VAT payers will no longer be able pay a fixed income tax and will have to pay 5 percent income tax.
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Lithuania Kaetana Leontieva 89 Mandatory health insurance contributions Until 2009, Mandatory Health Insurance Fund was funded by personal income tax revenues, while during the reform personal income tax was decreased and new mandatory health insurance contributions were established. In the first year of these contributions' existence, some of their most illogical provisions were abolished. In 2009, mandatory health insurance contributions were levied on such inactive income as dividends and rent income, yet as of 2010 such income is exempt from mandatory health insurance contributions. Scandal broke in early 2010, when taxpayers received preliminary tax declarations and learned that even if they did not receive any income during the year they were obliged to pay mandatory health insurance contributions based on a minimum wage (monthly contribution payments amount to LTL(Litas) 72 or 21). Thus, individuals were forced to pay for "insurance" they were never able to benefit from and if they had used public health services in 2009, their expenses were not compensated by the state. Since the state pays mandatory health insurance contributions for those registered unemployed, there was a surge in unemployment figures after this scandal as a number of individuals officially registered unemployed in order not to pay the contributions. This provision of the law remained in effect throughout 2010, meaning that some individuals may learn in early 2011 they owe taxes to the state. Beginning 2011, individuals whose mandatory health insurance contributions are paid by the state and
who buy business certificates and pay a fixed amount of mandatory health insurance contributions will be able to pay this tax based on the number of days their business certificate is valid, rather than for the whole month. However, even though the most obvious mistakes were abolished, further illogical provisions remain in place. For example, individuals who receive salaries and simultaneously receive income based on author's contracts have to pay this tax twice, even though paying more does not mean they get more or better ser
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vices. This is because these contributions do not buy an insured person a definite set of products: all individuals gain access to exactly the same services regardless of contributions paid. This tax is mandatory for all individuals, while the state pays contributions for more than 2/3 of the population (pensioners, children, etc.). Corporate Income Tax Corporate income tax rate was increased from 15 to 20 percent as of 2009, yet the higher rate was in effect for only a year as the Coalition government admitted increasing the rate was a mistake and brought it back down to 15 percent. Dividends are still taxed at 20 percent personal income tax rate. Along with the lower rate for regular businesses, corporate income tax rate was also reduced for small businesses. Before 2010, tax rate of 0 applied to the first LTL 25 000 of small businesses' taxable profit; further profits were taxed at a rate of 20 percent. As of 2010, a tax rate of 5 percent applies to all taxable profit of small businesses. The definition of a small business was revised, with the maximum amount of income to qualify being reduced from LTL 1 million to LTL 500,000 ( 290 000 and 145 000, respectively). An important change to corporate income taxation was that group
taxation of corporate profit came into effect on 1 January 2010. Groups are able to balance profits and losses: losses can be transferred among different entities of a group if the controlling entity holds at least 2/3 of the shares of the controlled entity. Beginning 2010, interest income when its source is in Lithuania and it is paid to companies registered in the European economic area became taxexempt. This provision makes it cheaper for local companies to borrow abroad. Other new provisions of the law on corporate income tax allow companies to deduct expenses on employees, if those expenses are included in the base of the employee's personal income tax. An important change to corporate income taxation just came into effect on January 1, 2011: payments to board members will no longer be treated as expenses that are not deductible, thus, double taxation of these payments will be eliminated and they will be taxed only with personal income tax. Value Added Tax Numerous changes were made to the law on value added tax that came into effect on 1 January 2010. The most important concerned the relevant location of services' provision, in accordance with the new services' VAT directive 2008/8/ EB. Prior to the new rules, location of services' provision was deemed to be where the
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provider of a service was established. Since 2010, in business-to-business transactions the location of services' provision is that where the buyer of the service is established. The new rule ensures that the VAT is paid in the country where the service is being used. One exception to this rule was cultural, art, education and similar services, which were considered to be provided in the country of the seller if they were physically provided (or performed) here. This will change in 2011, when such services provided to VAT payers will be considered as being provided in the country of the buyer. When services are provided to individuals who are not VAT payers (business-to-consumer), the old rule applies, that is, the service is deemed to be provided where the service provider is established. Council directive also envisioned a "one-stop" principle for receiving refunds of VAT paid in EU member states. As of 2010, VAT payers registered in Lithuania can submit electronic requests for VAT refund to the local tax administrator, rather than deal directly with other EU tax administrators, which is a considerable simplification for VAT payers. At the end of 2010, the parliament amended the law on value added tax and extended the use of VAT reduced rates. Reduced rate of 9 percent applied to heat energy, hot and cold water was set to expire on August 1, 2011 and the parliament extended it to December 31, 2011. Reduced rate on
books and non-periodicals was set to expire on December 31, 2010, while the parliament abolished a reduced rate expiration date for such products. Deadline for applying a reduced rate on medicine and other medical services compensated by the state was extended from December 31, 2010 to December 31, 2011. Importantly, a new reduced rate can be applied to hotel and special housing services throughout 2011. Reduced rate on hotels was previously abolished in the end of 2008. Excise Duties As of 1 January 1 2010, electricity in Lithuania became an object of excise duties. The rate for business use of electricity is LTL 1.8 ( 0.5), twice less than for non-business use LTL 3.5 Litas ( 1.01). Excise duty on electricity is not levied on electricity used in electricity production, distribution or transmission; electricity produced by energetic renewable resources; electricity used by private households; electricity exports or delivery to other member states, etc. In the end of 2010 the Parliament voted in favour of reducing excise duty levied on alcohol products from LTL 4,416 to LTL 3,200 per hectolitre of pure alcohol ( 1,280 and 928, respectively). However, President of Lithuania Dalia Grybauskaite vetoed alcohol excise duty reduction as a sign of her fight
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against widespread use of alcohol products and alcoholism. The parliament decided not to overturn the president's veto. Some changes were made to the law on excise duties in late 2010, namely, an increase on excise duty levied on gas oil from LTL 947 to LTL 1,043 per 1,000 litres ( 274 and 392, respectively), on cigars and cigarillos from LTL 38 to LTL 80 ( 11 and 23, respectively), and on smoking tobacco from LTL 111 to LTL139 ( 32 and 40, respectively) as of 2011. Excise duty on smoking tobacco is set to increase throughout the next decade, rising to LTL163 ( 47) in 2013, LTL187 ( 54) in 2015 and LTL 208 ( 60) in 2018. During the past few years, excise duties on tobacco in Lithuania were increased threefold in order to meet EU minimum requirements. As of 2011, a new rule of minimum excise duty on cigarettes applies, which states that minimum excise yield of 64 per 1000 cigarettes applies not only to cigarettes of most popular price category, but to all cigarettes. This rule increases excise duty on cheaper products without proportion. Social Security Contributions Social security contributions rate for regular employees remained stable throughout 2010 and is not set to change in the near future. The contributions rate did increase for recipients of royalties, sportsmen,
performers and farmers, who were brought into the state social security system as of 2009. Beginning 2010, a distinction was made between those individuals who simultaneously have employment contracts and those who do not. Social security contributions are levied on half of the royalty, performance etc. income received by individuals without employment contracts. For others, contributions are levied on full income. In 2010, social security contributions for individuals with employment contracts amounted to 16% of their income. and in 2011 the rate will be increased. Throughout 2010, changes were made to social security contributions paid by owners of individual businesses. Since owners of individual business by law cannot have employment contracts with their business, social security contributions are levied on all income taken out from the business. As of 2010, a minimum amount of social security contributions came into effect and owners had to pay it regardless of their business income. This change caused uproar among the public, which regarded the change as being unfair. In mid-2010 parliament passed amendments to the law on social security, making social security contributions temporarily optional for individual business owners. This provision is set to expire on 1 January 2012.
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Real Estate Tax Currently, real estate tax is levied on real estate owned by companies or by individuals that use it to engage in business activities, while residential real estate is not taxed. Current rightwing government has included introducing real estate tax on residential property in its program and in May 2010, Ministry of Finance produced five possible alternatives for this tax. Four of the five alternatives deal with different ways to calculate tax-exempt value of the first property, while the fifth alternative suggests taxing second, etc. property. No agreement was reached on which of the alternatives to choose and the debate on introducing residential property tax has died down, although it may resurface in 2011. Future Prospects It would be difficult to predict whether Lithuanian tax rates will remain stable throughout 2011. A moratorium on tax rates was in place in 2010, yet it has expired, so in case of a budget revenue shortfall, there could be attempts to increase standard VAT rate. Discussions on progressive income taxation will likely continue without any results, while discussions on taxing residential property may gain a more concrete form as the government could seek to implement its program.
Luxembourg Serge Tabery 147
Luxembourg Serge Tabery Avocat a la Cour Tabery & Wauthier, Luxembourg After two difficult economic years in 2009 (with a yearly economic recession of 3.4% of the GDP) and 2010 (with a yearly economic recession estimated at 2.2% of the GDP), the recent encouraging macroeconomic figures in the last months of 2010 have induced Luxembourg government to lighten a series of tax measures aiming at increasing state resources. The measures are brought together in the 2011 financial Law regarding the financial and economic crisis. The law has been drafted with clear goal to return to a balanced budget in 2014 at the latest although a deficit amounting to 1.2% of GNP is still forecasted in 2011. From the projection made end of 2010, the overall financial ambition would be to reduce public debt so that it reaches between 17.8 billion in 2014, if general expenditure were not drastically reduced, and 12.9 billion with appropriate measures. Early in 2010, OECD experts have warned the authorities on the heavy burden that could generate the retirement charges the payment of
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pension monies should nothing be done to substantially revise the present system. This system is indeed among the most generous ones in Europe and it depends for its survival from a sustained and continuous growth, which is by no means certain. It could therefore simply become unaffordable within the 20 coming years. Are also criticised the automatic indexation of wages, linking wage increases to inflation as well as the extremely high level of the minimum salary 1.724,81 (at the index level of 1.719,84 on 1 July 2010). Needless to add, politicians hope that an economic turnaround in the two coming years will save them one knows however well enough that this scenario is overoptimistic , or that inflation will painlessly help blow up the public debt one also knows that this is no longer regarded as a serious threat and that it generates, anyway, other pains in the long run, unless they carelessly hope for the two. Tax measures for individual taxpayers New measures applicable as from the 1 January 2011 are as follows. A new, higher, maximum tax rate of 39% has been set. All tax payers earning income exceeding 41,793 for single tax payers (tax payers of class I) and 83,586 for married tax
payers (more precisely, married or in partnership) (tax payers of class II), will be subject to a maximum tax rate of 39% versus the rate of 38% applicable until 2010. A "crisis contribution"-- in clear, a new tax--set at the rate of 0.8% will also be levied. It is supposed to be temporary for the years 2011 and 2012 only, although in a subsequent release the government has indicated that it would not even be applied in 2012. The so-called "solidarity tax", that already was in place, will be increased in 2011 from 2.5% to 4% or 6% of taxable income for taxpayers earning respectively over 150,000 (if class I taxpayes) and over 300,000 (if class II taxpayer). This means an effective maximum tax rate of 42.14% for high income. It is a very bad signal for non-residents possibly contemplating moving to Luxembourg and in particular HNWI (High Net Worth Individuals) which the authorities endeavour to attract. In contrast, the situation for residents earning income from sources other than lucrative activities--salaried or self-supporting person whose income is essentially derived from ones own estate, remains luckily unchanged. If carefully planned, even the 10% withholding tax on interest (2005 "Relibi Law") can be avoided. Further cuts in tax benefits have also been introduced such as notably the
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withdrawal of children allowances after the age of 18, which is particularly harsh for parents having children pursuing university studies who so far could count on such allowances during the whole course of studies. Meanwhile a new system of "cheap" loans is put in place for local resident taxpayers if and only if their children continue university level studies abroad. This measure is therefore causing a lot of damages to the thousands of inhabitants of the neighbouring countries who commute every day to come to work in Luxembourg. They immediately loose all children allowances, as they will not be entitled to receive them in their country of residence where they are not contributing to the national security system. Tax measures for companies The novelties for 2011 are: The provision of a minimum corporate income tax effectively for SOPARFIs A minimum corporate income tax is set at 1,500 for companies incorporated under the form of ordinary commercial limited liability companies which do not need to obtain a business permit from the authorities. Luxembourg imposes that, before starting its activity, any company
irrespective of its form must apply for a so called business or trading permit from the Ministry of the Middle Classes. The permit is granted, if in line with its corporate object clause, on the basis of the future company's management education and competences. This tax is therefore mainly geared towards financial companies, that is those for which more than 90% of the assets consists of participations, securities or bank deposits and in particular the SOPARFI. This financial investment company enjoyed so far the very favourable tax exemption on participations dividend and capital gains income (for further details see: S. Tabery "The SOPARFI, Financial Investment Companies in Luxembourg August 2010" see www.tabery.lu ). This amount will be increased by the special contribution for the employment fund and therefore reach 1,575 for any such company. Increase of the overall contribution to the employment state fund by 1% from 4% to 5%. Increase by 1% of the investments tax credits. Tax credit for global investment increases from 6% to 7% for investments up to 150.000 and from 2% to 3% for amounts above. Also, tax credit for complementary investments increases from 12 to 13%.
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Increase of the maximum rate for special depreciation from 60% to 80% for investments in the interest of the protection of environment and in energy savings. Cap of tax deductibility for companies of farewell or departure monies effectively golden handshakes which will no longer be deductible for the portion exceeding 300,000. The tax treatment of such monies, in the hands of the beneficiaries, is not concerned by this measure. Since the 1 November 2010 regulation, a much tighter and tougher control of employees or workers on sickness leave is applicable. Outings are no longer permitted during the first five days of the sickness leave, absolute prohibition, unless for a medical visit and from the 6th day on, outings are not permitted before 10 am and after 6 pm. One can only support this new regulation which is deemed to prevent abuses as it legitimately prohibits sport or social activities or going to a restaurant when one is supposed to be ill. Effective controls will for sure take place. No corporate tax rate or municipal business tax rates increases are to be expected. However due to the increase of the overall contribution to the employment state fund, the total corporate taxes rate will be of 28.8% in Luxembourg City in 2011 instead of 28.59% in 2010 (21% for corporate
income tax increased of 5% and 6.75% for municipal business tax in Luxembourg which is the most expensive municipality: 21x 1.05 + 6.75) Overall grants for companies will be reduced by 10%.
Luxembourg Serge Tabery 99 Tax highlights The well-known 1929 Luxembourg Holding Company, whose tax privileged status has been abolished by the law of The 28th of December 2006, has been in operation until the 31st of December 2010. It no longer is possible to set up such companies that will have served many purposes since 1929, which is a very good example of the Grand Duchy's stability and of the length of service of Luxembourg laws. If they have not been converted into SPF (socit de patrimoine familial private family estate company) before the 31st of December 2010, all remaining Luxembourg 1929 Holding companies have automatically been converted into fully taxable companies subject to the ordinary corporate tax regime. As of the 1 January 2011, the standard corporate tax is at the rate of 28.8% including the Corporate Income Tax at 22.05% (increased with the employment fund contribution of 5%) and the Luxembourg Municipal Business Tax of 6.75%. The Luxembourg tax authorities have published two tax circular letters on the 12th of January 2010 (direct taxation) and the 17th June 2010 (registration tax and VAT) concerning Islamic Finance that allow the implementation of transactions and instruments conforming to the Charia without domestic tax downsides or obstacles. As of the 1 January 2011, more than 60 tax treaties are in force with Austria, Armenia, Azerbaijan, Belgium, Bahrain, Brazil, Bulgaria, Canada, Czech Republic, China, Denmark, Estonia, Finland, France, Estonia, Germany, Great Britain,
Greece, Hungary, Iceland, Indonesia, India, Ireland, Israel, Italy, Japan, Latvia, Lithuania, Malaysia, Malta, Mauritius, Mexico, Monaco, Mongolia, Morocco, Norway, Poland, Portugal, Qatar, Romania, Russia, Saint Martin, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, The Netherlands, Trinidad and Tobago, Tunisia, Turkey, the United Arab Emirates, the United States of America, Uzbekistan, Vietnam. 100 Taxation in Europe 2011 Conclusions 2011 is expected to be the last transition year, from crisis to growth, as was 2010. In this context, the burden of taxation is being increased significantly for individuals and companies that, until now, had been relatively protected in order for the Grand Duchy to remain an attractive place for business. Indeed, Luxembourg's economy is much dependent from its attractiveness for foreign investments and this attractiveness comes in large part from its tax and legislative assets. Hence, any tax increase inevitably harms its competitiveness. In addition, it is worth mentioning that from an internal point of view, the top 3.79% of the tax payers contribute to 42.5% of the total direct tax revenue and that 15% of them contribute to 75% of it or that 5% of them contribute for 51% to total direct tax revenue (Prime Minister's declaration on the Nation state of May 2010), thereby making of any tax increase a very dangerous weapon to use.
Regrettably, one hardly sees courageous measures for fundamental structural reforms. The biggest part of the effort does indeed lie on the taxpayers, big and small, not on the beneficiaries of the State expenses, including State's management. It is clear that States' expenses continue to grow faster than its revenues permit; which is unacceptable. It is obvious from the EUROSTAT figures and from the 2011 budget that the ordinary State current operating charges have and will continue to increase, for some of its segments by double digits figures. But on top of that one must considers the fact that other expenses are coming from entities which are not "the State" but are nevertheless "controlled or mainly financed by the State" have been separated from the State's budget. Not only do those expenses substantially increase but also it may become more difficult to draw a complete and trustworthy picture of public finances because of the lack of transparency that consequently prevails. This trend has severely been criticised and will hopefully
be corrected in the very near future. Should one add the all but reassuring pension issue, which, as the OECD experts have underlined, will become unbearable if the nave belief remains intact that growth will pay for the future generations retirement monies, one can conclude that Luxembourg must during this year prepare for the huge challenge that a sound management of public finance demand.
158 Taxation in Europe 2011
The Netherlands Hans van Engelen Tax partner at Independium International Tax Advisers, Amsterdam A first step towards recovery The Netherlands are gradually recovering from the credit crisis and its consequences. Unemployment is falling and positive economic growth, partly driven by the export to Germany, is back (3% in 2010). The government has also set a new trend, reducing the deficit of the State Budget. No major changes in the tax system were introduced, although a fully new income tax system is considered which might involve a flat tax considering the preference for such system by one of the major political parties currently associated to the government. Budgetary changes per 2011 On September 21, 2010 the State Budget 2011 was presented. This budget gives rise to many questions about the path chosen for economic recovery. Dutch public finances have, due to the credit crises, substantially
deteriorated so that strong measures are needed to keep them afloat and healthy. In the newly issued Miljoenennota 2011 presenting the State Budget 2011, the first step is made towards financial recovery; the idea being to replace last year's stimulus package with measures aiming at fiscal consolidation. In the Netherlands the transition from stimulating the economy to improving the public finance situation coincides with a change of political power. In 2011 to further reduce the deficit of the State Budget, extra expenditures undertaken to stimulate the economy will gradually be cut. In the Miljoenennota the package of savings on public expenditures should reach 1.8 billion in 2011,
The Netherlands Hans van Engelen 103 including the supplementary savings agreed upon by the coalition. Furthermore, a package of measures to save 3.2 billion on structural expenditures has been adopted. More than half of this amount is supposed to be realised in 2011 already. The public debt is likely to increase the next years from 382 billion in 2010 to approximately 406 billion in 2011 (66 percent of GDP). The budgetary deficit will, however, decrease substantially with the combined effects of rising income and expenditure savings. It will nonetheless remain high, around 4 percent of GDP: The consequences of the credit crises will be tangible for a long time, even when the economy picks up again. In 2011 Dutch economy is expected to grow with 1,75 percent of GDP. This means that the Dutch economy, after a historical negative growth of 4 percent in 2009, will face a relatively normal growth in 2011. The Dutch government claims it has chosen a balanced package. The expectation is that the purchasing power will slightly decrease. The consequences for people becoming unemployed can however be substantial. The unemployment rate is expected go up from 4% percent in 2009 to 5% in 2010 and 2011. Tax changes per 2011 A number of tax changes have been introduced per 2011. The majority of these changes concern the corporate income tax:
In 2010 the royalty box was converted into the innovation box, enabling companies to reduce the tax burden on the exploitation of selfdeveloped patents to 5% corporate income tax (in 2009, 10%). Also the ceiling for profit falling under the scope of the 5% taxation was abolished. In 2011 the innovation box will also be applicable on profits generated before the patent is officially recognized. A further reduction of the corporate income tax will be applicable: the first bracket up to 200,000 remains unchanged at 20% CIT, but the second and last bracket drops from 25,5% to 25%.
The temporary measure for an optional carrying back of losses from 1 to 3 years is extended for another year. Losses carried forward, if preferred to the carrying back of losses over the past three years, will be reduced from 9 to 6 years. Furthermore the loss compensation is limited to a maximum of 10 million per year. The temporary measure for flexible depreciation, as a result of which assets can be depreciated in 2 years, is extended for another year. In order to reduce the administrative burden, the different non-taxable fixed remunerations for expenses paid to employees will be replaced by a fixed 1.4% of the employees income. There is a transitional period of 3 years in which the employer can decide to use the old system or the new system. The wage tax credit of 46% paid to employers engaged in a business involving research & development is maintained. The wage tax credit is maxed to a total of wages not exceeding 220,000. Above this amount, the wage tax credit is 16% of the wages paid, above 11 million of wages there is no wage tax credit. The State old age pension AOW will per 2020 no longer start at the age of 65 but at 66. Privacy and individual rights The tax administration will get further legal possibilities in 2011 to
enable automatic exchange of information to non-EU countries regarding bank and savings accounts. For the EU countries, the current possibilities will be amended in such a way that other bank information, like insurance products and portfolio investments, can also be exchanged. Future developments On 1 November 2010 the majority of the Dutch Parliament has declared that it is time to review the current income tax system and to investigate the possibili-
The Netherlands Hans van Engelen 105 ties of a fully new system. Currently this is being investigated; a proposal for a draft plan for a new system is expected by the end of March, 2011. One of the two parties forming the government coalition, the CDA, has embraced the introduction of a flat tax already a number of years ago. It goes without saying that the flat tax will be part of the considerations when coming to a new tax system. The introduction of a new tax system would help the tax administration to realize the objective to cut expenses in the next 4 years by a total of 400 million. In this respect, it was announced that 5,000 jobs would be cut in the tax administration in the coming years. Currently 30,000 people work for the tax administration. The Dutch government also announced a plan to cut the administrative burden for entrepreneurs in 2011 by 10% in comparison to 2010. Currently the Dutch economy seems to pick up, sparked by the increasing export, of which a large part is linked to Germany which country seems to flourish despite the credit crisis. Whether the Netherlands will be able to maintain its growth depends for a large part on the economic achievements in our neighbouring country Germany.
Norway Jan I. Frydenlund Attorney at Law Advokatfirm a Frydenlund Macroeconomy - General The oil and gas activity in the North Sea puts Norway in a rather enviable position in relation to most other countries. In recent years, we have seen that more than 25% of the general government revenues have been generated from this activity. These revenues are deposited in the Government Pension Fund Global*) and the return from the Fund is used to finance the public sector. The Government Pension Fund Global and the Government Pension Fund Norway constitute the Government Pension Fund. The purpose of the Government Pension Fund is "to support Government saving to finance the pension costs of the National Insurance Scheme and long term considerations in the spending of Government petroleum revenues". The Norwegian economy has performed better since the financial
crisis than most other industrialised countries. Following a downturn in the second half of 2008 and a few months into 2009, economic activity picked up in the second half of 2009. Nevertheless, I believe it is fair to say that the performance of the Norwegian economy in 2010, on the whole, was somewhat weaker than expected. However, according to the Ministry of Finance, several indicators suggest a somewhat brighter future with increased growth. Mainland economy is expected to grow by approx 3.1% in 2011 (compared to approx 1.7% in 2010). The unemployment rate in 2010 averaged approx 3.5%, which is just a tad better than expected for 2011. By the end of 2010, The Central Bank's (Norges Bank) key policy rate had increased by 0,75% since its lowest level ever in 2009. It is expected that this trend will continue and that the Central Bank will carefully coach the increase of the key policy rate in 2011, which will subsequently cause higher interest rates on bank lending to households and to trade and industry. Fortunately, Norwegian industry is less concentrated on ICT-products, cars and other products that were most severely hit by the downturn in the global economy. Furthermore, households' debt ratio is high and since most borrowers have floating rate loans, the speed and extent of the reduction in the interest rates have
kept and are still keeping households' demands on a high level. With the prospect of growth above trend in the Norwegian mainland economy in 2011, and expected stabilization (more or less) of unemployment, the Norwegian Government proposed a budget for 2011 on par with the rather expansionary budget for 2010. The estimated non-oil and gas deficit is NOK 128 billion ( 17 billion according to the exchange rate NOK/EUR by the turn of 2010). The proposed 2011 budget implies an unchanged spending of petroleum revenues in real terms. Measured as a share of the trend GDP for Mainland Norway (ex oil and gas that is) the structural non-oil deficit is reduced by 0,2% from 2010 to 2011. This indicates a mild fiscal tightening. Some of the main elements in the 2011 budget are: A structural, non-oil budget deficit estimated at NOK 128,1 billion. A structural non-oil deficit estimated at the same level in 2011 as in 2010 in fixed prices. A maintained overall tax level and tax revenue. A real, underlying growth in the Fiscal Budget's expenditure expected at approx 2,25 %, which is slightly below the average over the past 25 years.
The State's net cash flow from oil and gas activities is estimated at approx NOK 288 billion in 2011. Net allocation to the Government Pension Fund Global is estimated at NOK 153 billion. The fund is estimated to reach a market value of about NOK 3,360 billion by the end of 2011. Employment The turnaround of the Norwegian economy in the wake of the financial crisis resulted, as predicted, in a somewhat weaker labour market. The increase in unemployment, however, has turned out to be substantially less than in most other industrialised countries; on average, only slightly higher in 2010 than in 2009. In 2011, unemployment is expected to reach an average of approx 3,6 % of the labour force; - fairly low both in historical and international context. However, the government still face the fact, compared with the OECD average, that sick leave and the percentage of individuals on disability- and other social security benefits are high in Norway. Approx one out of five individuals in the "working age" of the population are currently receiving benefits from health-related schemes. No doubt some unemployment is hidden in these figures.
In the 2011 budget, the Government states its commitment to continue the key features of what they call the "Norwegian welfare model". In addition to "cooperation and joint efforts, universal income insurance schemes and a broad range of public services that includes health care, child care and education" are stated as other key factors in the process of enhancing the Norwegian welfare model. Taxation Total tax revenues in 2011are estimated at NOK 1 113,1 billion. The figures consist of direct and indirect taxes from oil and gas activities (NOK 173,9 billion), other oil and gas revenues (NOK 139,1 billion), direct and indirect taxes from Mainland Norway (NOK 737.6 billion) and other (mainland-) revenues (NOK 62.5 billion). The Norwegian tax system is characterised by a relatively high share of indirect taxes by international standards. Value Added Tax (VAT) and excise duties currently amounts to approx 32% of total tax revenue. Personal income tax and tax on net wealth levied on individuals represent about 24% of the total tax revenues. Corporate tax, (including employers' part of social security contribution), amounts to approx. 21% and tax
levied on petroleum activities approx. 20% of total tax revenues. In the 2011 budget, the Government states the objective for its tax and fiscal policies to be "to ensure public revenue, contribute to a fair income distribution and a better environment, promote economic growth and employment in the entire country and improve the functioning of the economy." The Government claims to have "strengthened the redistributive aspect of the tax system through more stringent taxes on dividends and gains on equity investments, [and] a fairer net wealth tax and inheritance tax". All in all, in my opinion, a rather bold statement about the fairness of taxes and, I believe, a statement liable to rather strongly-worded protests from quite a few Norwegian taxpayers. Oddly enough, considering the tax level for individual taxpayers, the Government, in the 2011 budget, expresses a wish to "encourage people to work". In order to achieve this goal, the Government is changing the tax rules to make it more attractive for elderly people to continue to work, also when receiving pension benefits. These rules are, without doubt, the most important issue in the 2011 budget, from a tax point of view The previous tax limitation rules for early retirement and old-age pensioners have been replaced by rules granting tax allowance for pension income. By way of this
allowance, the Government intends to insure individuals who only receive the minimum pension that they will be spared from paying income tax (but not net wealth tax) also in the future. In order to maintain Norway's position as (allegedly) one of the champions among the countries fighting for a better environment, the Government continues to claim that further steps are taken to strengthen the tax system's contribution to a "fair income distribution and to a better environment" ("green" taxes); including to ensure revenues for common endeavours, - unemployment being one. The Government still claims to maintain 2004 tax level on a whole, at least for a couple of more years, and that the changes of tax rules and/or the tax system as a part of the yearly budget, mostly represent redistribution of the overall tax burden, so that the rich will pay more and the poor will pay less. I dare say, we have heard that "tune" before, and in my opinion, without any noticeable effect for most common taxpayers. Keeping the "2004 tax rates" represents a nice try and little more. For instance, new rules for calculating the taxable value of houses, cabins and cottages and other real estate, as well as some other "tactical moves" result in an increased tax burden for a lot of people and hits not only the so called "rich", but also a lot of "innocent bystanders", including elderly people that has worked hard
all their life to be able to repay the loans they had to obtain to purchase the house they are living in. That said, I believe it is only fair to mention, in favour of the lawmakers, the increased tax allowance and lower rates for inheritance tax enacted and put into effect a couple of years ago. That was a step in the right direction, if only a small one. Heirs still have to pay inheritance tax, not only on inheritance but also on gifts they receive from individuals, which they (by law or testament) will inherit in the future. Looking to our "big brother" in the east, Sweden, the picture is, for some reason or another, quite different. Not only were the inheritance tax and net wealth tax abolished in Sweden some years ago, but special taxes on consumer goods like cars, food, liquor etc., are also noticeably lower in Sweden than in Norway. But, according to the Norwegian Government, the 2004 2006 tax reform has been a success: "By continuing the systematic changes in the tax reform within a stable tax level, the Government is ensuring predictability in the tax system, making it attractive to invest and do business in Norway. In 2010, [and 2011] the redistributive aspect of the tax on net wealth will be enhanced further, environmental taxes will be strengthened and important measures will be taken to combat tax evasion".
In regard to tax evasion, it is worth mentioning that Norwegian Tax Authorities has since 2006, (in cooperation with the other Nordic countries), reached agreements with a number of countries to exchange information in tax matters in order to avoid tax evasion. Jersey, Guernsey, Isle of Man, Cayman Islands, Bermuda, British Virgin Islands, Aruba and the Netherlands Antilles have all signed such agreements in 2009. As for Switzerland and Luxembourg, information exchange clauses have been included in the existing tax treaties between these countries and the Nordic Countries. Furthermore, information exchange agreements have been negotiated and expected to be signed in the near future between the Nordic countries and Gibraltar, Samoa, Cook Islands, Turks & Caicos Islands, Anguilla, San Marino and Andorra. Taxation, social security contributions and allowances: rates and amounts Further to the amended rules for taxation of pensioners, (see above), the following amendments (not exhaustive) deserve to be mentioned:
VAT is introduced on purchases of electronic services from abroad when the buyer is an individual. Tax on snuff and chewing tobacco is increased by 10%. Tax on other tobacco products and alcohol is increased by 5%. Gains on sale of holdings in housing cooperatives and housing companies are no longer tax free. Municipal authorities are allowed to tax all commercial property that is not explicitly exempt under the Property Tax Act. The figures below show tax rates for 2010 and 2011 with the 2010 rate in brackets.
Corporate/companies income tax Ordinary income, incl. capital income and capital gains (28%) 28% Dividends distributed from a Norwegian resident (for tax purposes) limited liability company to another Norwegian resident company or to a comparable company resident within the European Economic Area (EEA) are normally tax exempt under current Norwegian rules. The same normally apply for dividends received by a shareholding company resident (for tax purposes) in Norway distributed by another Norwegian resident company or by a comparable company resident within the EEA.
A company not able to prove to be comparable with a Norwegian limited liability company, fully and legally established according to the ordinary corporate legislation in its country of residence and performance of genuine industrial activity, will normally be hit by Norwegian CFC-rules ("NOKUS"), meaning the above mentioned tax exempt rules on dividends do not apply. Dividends received by a Norwegian resident (for tax purposes) limited liability company on shareholding in a comparable company domiciled outside the EEA are normally taxed in Norway as ordinary income, but with a right for the receiving company under tax treaty rules or Norwegian domestic tax rules, to deduct ("credit") taxes withheld in the country of residence (for tax purposes) of the distributing company. Dividends distributed by a Norwegian resident (for tax purposes) limited liability company to a comparable shareholding company resident outside the EEA, is subject to withholding tax in Norway (normally 25%), unless protected by tax treaty rules in force between the two companies' countries of residence. In tax treaty cases the "participation privilege" normally apply for companies, implying reduced tax rates conditional upon a certain extent of shareholding, normally minimum 10% of the share capital in the distributing company.
Personal income tax (28% Ordinar ) 28% y (28% income ) Capital 28% income Dividends received by a Norwegian resident (for tax purposes) individual on a shareholding in a Norwegian resident limited liability company or as shareholder in a comparable company resident (for tax purposes) abroad, are subject to ordinary income tax. Withholding tax paid to the distributing company's country of residence, are normally deductible in the Norwegian taxes levied on the same income. Also, please see below under "Maximum effective marginal rates". Surtax on wage income and income from self-employment: From (threshold) (NOK 456 400) NOK 471 200 (+3.2%) Rate (9.0%) 9.0% From (threshold) (NOK 741 700) NOK 765 800 (+3.2%) Rate (12.0%) 12.0% Social security contribution
Lower threshold for payment of employee's contribution to the National Insurance Scheme (NIS): (NOK 39 600) NOK 39 600 Wage income (7.8%) 7.8% Income from self-employment in the primary sector (7.8 7.8 (forestry, farming, %) % fishing) Other (11. income 11.0% 0% from ) self4.7% (3.0 employ %) (+1.7% ment ) Pension income Employer's social security contribution Varies, depends on the geographical location of the business 0.0% - 14.1%) 0.0% - 14.1% Maximum effective marginal tax rates Wage income, incl. employees' contribution to NIS (47.8%) 47.8% Self-employment, primary sector, incl.
contribution to NIS (47.8%) 47.8% Other self-employment, incl. contribution to NIS (51.0%) 51.0% Dividends and withdrawals, including 28% corporate tax (48.2%) 48.2% Special rules apply for calculating the basis for tax on dividends; - in some cases also on interest income. (43.0%) 44.7% In some cases pension income is taxed at a maximum rate of 55%. Allowances - Personal allowance in Class 1 (single) is NOK 42,210 for 2010. Increased to NOK 43,600 in 2011, i.e. + 3.2%. - Personal allowance in Class 2 (supporting/single parent) is NOK 84,420 for 2010. Increased to NOK 87,200 in 2011, i.e. + 3.2%. - Basic allowance in wage income. The 2010 rate, 36%, is unchanged for 2011. Lower limit is NOK 4,000 in 2010 and unchanged in 2011. Upper limit is NOK 72,800 for 2010 and NOK 75,150 in 2011, i.e. + 3.2%. Pension income
Basic allowance in pension income. The rate is 26.0% in 2010, proposed unchanged in 2011. Lower limit NOK 4,000 in 2010, also unchanged for 2011. Upper limit for 2010 is NOK 60,950 and NOK 62,950 for 2011, i.e. + 3.2%. - The sum of basic allowance in wage income and the basic allowance in pension income is limited upwards to the maximum basic allowance in wage income. - Special wage income allowance is NOK 31,800 for 2010 and unchanged for 2011. Taxpayers who only have wage income shall have the higher of the basic allowance in wage income and the special wage income allowance. - There are special allowances for: Disability etc., special tax allowance for pensioners, taxpayers living in the northernmost areas of Norway (Finnmark and Nord-Troms), seamen, fishermen, self-employed within farming/agriculture, high expenses due to illness, payments to individual pension schemes, travel between home and work site, union fees, saving schemes for young individuals under 34 years of age, documented expenses for childminding and child care.
-
Tax on net wealth Threshold, municipal tax Rate,
exceeding threshold Threshold, state tax Rate,
exceeding threshold (NOK 700,000) NOK 700,000 Inheritance tax

(NOK (NOK Thresholds: Level (1) Level (2) Rates: Children/pa rents, level (1) Children/pa rents, level (2) Others, level (1) 470,000)
(0.7%) 0.7% (NOK 700,000) NOK 700,000 (0.4%) 0.4%
(6.0 %) (10. 0% ) (8.0 %)
NOK 470,00 0 NOK 800;0 00
Others, level (2) 15.0%
6.0% 10.0% 8.0% (15.0%)
Discount on non-listed shares. The discount applies to shares in nonlisted limited liability companies and shares and shares in general partnerships. The ceiling on the amount that enjoys this discount for inheritance tax purposes is limited to NOK 10 million for shares as mentioned. Depreciations rates
Depreciation rates for tax purposes varies from 2% (business buildings) to 30% (office equipment etc.) per annum calculated on a declining basis and depending on type of asset. Value Added Tax (VAT) The Ordinary rate is 25%. Reduced rate (14%) or Low rate (8%) and even zero-rating apply in some cases. Norwegian VAT legislation contains rules for adjusting the basis for VAT when certain assets (real estate, for example) change ownership. Stamp duty Stamp duty on acquisition of real estate is 2.5% of the sales price. Summing up Thanks to a rather sound economy, (mainly due to oil and gas revenues) at the time the financial crises hit, the recovery of the Norwegian economy has continued through 2010, although at a somewhat slower pace compared with 2009. This however, must be viewed in light of the fact that the impact of the financial crisis on the Norwegian economy was less severe than on the economies of most of Norway's trading partners.
The growth is expected to continue in 2011, supported by relatively low interest rates, greater optimism among households, increased investment in the oil and gas sector and increased demand from export markets. Unemployment has increased slightly, and substantially less than expected, over the past couple of years, a trend expected to continue in 2011. Tax rates and bases tend to increase over time. For a given structure of the tax system this provides increased tax revenues to the public sector. For the years ahead, the underlying growth of the tax bases is estimated to strengthen the budget by approx NOK 12 billion per year. This estimate takes into account that increasing real wages implies higher average price growth for budget items than the average price growth for the tax bases. The spending of oil and gas revenues in 2011 is expected to equal (more or less) the real return on the Government Pension Fund in 2012, which indicates more room for spending some extra oil and gas revenue the next couple of years. Sources: Publications of Finansdepartementet (Ministry of Finance) and Statististisk Sentralbyra (Statistics of Norway).
Poland Jaroslaw Kantorowi cz Aleksande r Laszek FOR (Civil Development Forum Association) Associates In 2010 Poland was still among the leaders of the economic growth. However, the Polish economy is no longer the sole "green island" of growth in EU. The state of public finance in Poland is deteriorating. The deficit rose to 7.3% of GDP and public debt oscillated around 55% of GDP. 2010 was a year of extensive debate on taxes. Among other topics, the discussion concerned increase in VAT rates, cost of tax preferences and administration costs (including taxes), but also tax on banks. In 2010, Poland increased its rank in the 'paying taxes' category of Doing Business report by 27 positions. It still ranks very low 121 among 183 economies examined by Doing Business. As a consequence, Polish entrepreneurs perceive taxes as one of the major obstacle for business. General overview on Polish economic performance and public finance In 2010, Poland was not the sole "green island" of growth in Europe as
it had been one year previously. In 2009 Poland achieved economic growth of 1.7%. All other EU countries experienced a recession. According to IMF forecasts, only 5 out of 27 EU countries had negative economic growth in 2010. Polish GDP rate on the level of 3.4% was overtaken by Swedish and Slovakian GDP growth: 4.4% and 4.1% of GDP respectively. Although Poland is still among the leaders of growth, the state of public finance is alarming. According to the European Commission Autumn predictions for 2010, the public deficit was at 7.3% of GDP. Among new member states, only in Lithuania (8.4% of GDP) and Slovakia (8.2% of GDP) the deficit was greater than in Poland in the last year. The public debt grew to 55.5% of GDP and is supposed to increase to 57.2% and 59.6% of GDP in 2011 and 2012 respectively. In the latter case it will be on the verge of exceeding the constitutional limit for debt. According to the Polish constitution and Public Finance Act, during peacetime, public debt should not exceed 60% of GDP. In case it does, harsh expenditure cuts are written into both Acts to reduce debt below threshold. Instead of cutting on public spending to reduce the general government deficit and to minimize the risk of exceeding the constitutional threshold of 60% GDP
for gross debt, the Polish government made some minor spending cuts and decided to increase basic VAT rate by 1 percentage point from 22% to 23% - with further temporary tax raises still possible (a decision which is widely criticized by economic experts). Furthermore, at the end of 2010 Polish government decided to partly undo pension reform by reducing the contributions to private pension system by 5 percentage points from 7.3% to 2.3%. Although switching back from a capital pension system to a pay-as-you-go system renders immediate savings for budget, it undermines the long-term sustainability of Polish pension system. New legislation should be held in April 2011; it is worth noting that this step should be considered as breaching the social agreement of 1999. Growing public debt is not caused by the costs of the private pension system itself, as was reported by some of governmental officials. Expenditure on it (1.6% of GDP) is marginal to the total public spending (45% of GDP). Furthermore in 1999 it was assumed that revenues from privatization would fund the pension reform, but subsequent governments used them for current expenditures. In 2011 the state of public finance will constitute the biggest threat to economic growth in Poland. The taxation system in Poland
In 2010 tax revenue in Poland constitutes nearly 91% of all budget revenue. Tax revenue came in with approximately 72% from indirect taxes, in particular VAT (48% of all tax income). CIT and PIT all together constitute 28% of tax revenue, 12% and 16% respectively. From 2009, two rates were applied for PIT: 18% and 32%. CIT was flat and was equal to 19%. In 2010, there were four rates for VAT. Base rate amounted to 22%. The reduced VAT rates were equal to 7%, 3% and 0%. From the beginning of 2011, new VAT rates were applied. As already mentioned, the base VAT rate was increased by 1 percentage point, from 22 to 23%. New reduced VAT rates amount to 8% and 5%. The latter is mostly applied to food products but also to books. Taking into account the Polish level of development, one can regard taxes in Poland as relatively high. In 2008 the tax burden, measured by tax revenue to GDP, was equal to 34.2%. Although the fiscal burden in Poland was lower than in the majority of EU countries with high GDP per capita, lower tax burdens in the EU-15 were recorded e.g. in Ireland (29% of GDP), Greece (32.3% of GDP) and in Spain (33.4% of GDP). However, when highly developed countries in EU were at the same level of development as Poland currently is, they had lower tax burdens. For
instance, in the Netherlands in 1965 and in Germany in 1968 the fiscal burdens were lower by 2 percentage points than in Poland nowadays. The tax burden in the United Kingdom in 1965 was lower than in today's Poland by 4 percentage points. The largest gap of 10 percentage points was between Italy in 1970 and Poland at the present time. Almost all new accession countries have lower fiscal burdens. In 2008 higher tax burdens have been reported solely for the Czech Republic and Hungary, by 1.6 and 5.9 percentage points respectively. On the other hand, e.g. Estonia and Slovakia had lower tax burdens by 2 and 5 percentage points respectively. What is more, in both abovementioned countries GDP per capita was about 20% higher than in Poland. Also in Latvia and Lithuania, which are at the same level of development, the tax burdens were lower than in Poland by 4 and 5 percentage points accordingly. As demonstrated above, against the background of the new accession states the fiscal burden in Poland is high. This weakens competition and undermines the prospects for bridging the gap to the high-developed countries. Low taxes are beneficial
for economic performance. For instance, high economic growth in Ireland in the second half of the 90s was a result, inter alia, of public expenditure cuts. This, in turn, gave the opportunity to permanently reduce the fiscal burden. During 19942002 the fiscal burden in Ireland was lowered by 7 percentage points. The decreased tax burden induced the increase of economic growth. Medium-term growth of GDP during 1994-2002 accounted to on average 7% per year. Whereas GDP per capita in Ireland was lower than in Belgium, France, Germany and the Netherlands in 1994, just eight years later, Ireland was a leader in terms of GDP per capita. Administration costs of the Polish tax system for companies In 2010 The Ministry of Economy published a most comprehensive database of all information obligations imposed on companies by Polish business law. Also the administrative costs for companies of fulfilling each information obligation were estimated. The total annual cost of administration for all enterprises was estimated at the level of PLN 77.6 billion (6.1% GDP). Nearly half of this amount (PLN 33.7 billion) was generated due to information obligations stemming from 3 tax acts (on CIT, PIT, VAT). Furthermore the administrative costs were divided into business as usual but also administrative burdens. The former are connected with information obligations that the majority of companies would fulfil even if they were not required to do so by law (e.g. the majority of firms would do the bookkeeping for their own record, even without appropriate laws). The total cost of information obligations in
the second group (administrative burdens) was estimated to be around PLN 37.3 billion (2.9% GDP). 60% (PLN 20.8 billion) of this amount was due to 3 major tax acts (for further information see Table 1).
Table 1. Estimates of annual administration costs for companies of main tax acts
In the study conducted by the Ministry of Economy there were also questions for participants regarding what changes to the current system they would propose. One of the main answers was wider usage of the internet platform instead of paper copies when dealing with different information obligations. This general comment is also true when it comes to tax administration, where usage of internet is still rather marginal. We are not aware of any dedicated study of the costs of public tax administration. It can be said, however, that with approximately 43 thousand civil servants working there, which means about 1.12 employee per 1000 citizens, Poland is slightly below the European average (1.34 for CEE countries and 1.21 for the rest of EU countries), which might indicate rather moderate costs. Perception of taxes by business Poland advanced by 27 positions in 'paying taxes' category examined by Doing Business 2011 (DB 2011)
Administration cost forAdministrationRevenue 2009Act oncompaniesburden for companiesbn PLN (bn )bn PLN (bn )bn PLN (bn )VAT5.9 (1.5)4.1 (1.1)99.5 (26.0)PIT14.8 (3.9)9.9 (2.6)62.7 (16.3)CIT12.9 (3.4)8.8 (2.3)30.8 (8.0)Excise0.6 (0.2)0.5 (0.1)53.9 (14.0) Source: Ministry of Finance, Ministry of Economy; the study was conducted at the end of 2009/beginning 2010, so the results can be compared with tax revenues from 2009
report. Everyone should be pleased about this, if not the fact that this was "a jump" from place 148 to 121 (DB examines 183 economies). Despite of the fact that business perceives the Polish tax system as better than the systems from Czech Republic, Italy, Slovakia and Romania, there is still a lot to reform to catch up with. According to DB 2011, the entrepreneur of a limited liability companies in Poland has to deal with 29 tax payments (Including social security contributions) within a year. In addition, he or she devotes on average 325 hours to fill out all forms and fulfil procedures related to paying taxes. The total tax burden, in turn, amounted to 42% of firm's profit. In Denmark, where the tax system is one the most business-friendly in the EU, entrepreneurs dealt with 9 payments, devoting on average 135 hours to filling in forms, and paid taxes equal to 22% of their profits. The gap between Poland and Denmark in terms of ease of paying taxes is significant (for other comparisons see Table 2.). Table 2. Paying taxes 2011 (selected group of EU countries) Paymen Time Total Ran ts (hours/ (number year) tax rate (% k /year) profit) Ireland 7 9 76 26.5
Denmar 13 9 135 k United 16 8 110 Kingdo m Estonia 30 7 81 Sweden 39 2 122 Lithuani 44 11 175 a Latvia 59 7 293 Hungary 109 14 277 Poland 121 29 325 Source: Doing Business 2011
29.2 37.3 49.6 54.6 38.7 38.5 53.3 42.3
Another interesting observation can be made while reading subsequent editions of Global Competitiveness Report. For 4 years in a row, tax regulations were mentioned as one of the main obstacles for doing business in Poland. It can be speculated that while the other bottlenecks are mitigated (e.g. infrastructure gap), entrepreneurs are becoming more focused on cumbersome tax regulations. In the latest edition inadequate supply of infrastructure, with 8.8% votes, was overtaken by tax rates, with 10.4%. Surveys for Global Competitiveness Reports are conducted mainly among representatives of big companies. More balanced and larger sample can be found in World Bank Enterprise
Survey. When only one top constraint for doing business could be chosen (votes add up to 100%), tax rates (22% votes) come first, with tax regulations coming tenth (2.5%). However, when respondents were asked to name major constrains (more than one, votes add up to more than 100%) the main three were: tax rates (59% of respondents), labour regulations (27%) and tax administration (27%). The public debate on taxation in 2010 2010 was a year of special concern on taxation in Poland. Besides debate on VAT, much of the attention has been devoted to taxes on banks and tax preferences (that is, tax relieves, deductions etc). The latter, as was demonstrated in the report prepared by Ministry of Finance in co-operation with World Bank, are mostly ineffective. According to the estimates, the costs of preferences are equal to PLN 66 billion ( 17.1 billion). That constitutes 4.9% of GDP. It is the fraction of tax revenue that the budget loses by applying different tax exemptions and deductions. The result for Poland should be considered as the average: Losses vary elsewhere from 0.74% of GDP in Germany up to 12.79% in the United Kingdom. In Poland there are 402 tax preferences on the national level and 71 tax preferences on regional level.
A great deal of preferences was found in PIT (138) and CIT (54). Preferences in these two types of taxes induced the loss of almost PLN 42 billion. The largest flow of public funds in the form of preferences was directed primarily to support families (PLN 29 billion) and agriculture (nearly PLN 9 billion). In addition, the exemption that has the most striking impact on reducing budget revenue was 7% VAT rate on housing construction, child allowance and joint settlement of spouses for PIT The report demonstrated that preferences are wrongly directed. They do not support the employment, philanthropy, culture, science, education or sport, which should be of great interest. To make matters worse, some of the relieves and deductions show reduced efficacy. It means that the preferences are used by different social groups that were initially overlooked by the legislator or do not impose the right incentives. Next, taxes imposed on banks were widely discussed. In spite of the fact that Polish banks did not contribute to the financial crisis and did not get support from the state, politicians want to introduce a new tax on them. The proposals have, however, negative influence on economic performance and the financial sector in particular. The latter is not sufficiently developed in Poland. This can result in lower economic growth since a modern economy needs wellfunctioning financial system. The levy of a new tax will reduce the incentive
to broaden the range of activities of banks and investment funds. This will be harmful for the development of the financial system. The tax on banks could also stop the flow of credit to the economy and delay economic recovery. Concluding remarks In 2011, the main aim of Polish government will be to keep public debt below the threshold of 55% GDP. However, due to general elections in the second half of the year, no breakthrough reforms should be expected. Instead a mixture of small tax raises, non-controversial expenditure cuts and some accounting tricks should do the job. At the moment the only far reaching action of the government is the recent attempt to undo previous pension reforms in order to save some expenditures today, at the expense of the long term sustainability of public finances. The paper contains personal opinions reflecting the views of the authors, not the institution they represent. We would like to thank Mr. Alexander Waksman for his language support.
Portugal Ricardo Campelo de Magalhaes Financial Advisor at Banco Best The State grows, the economy languishes Every year, Portuguese tax code goes through many changes. 2010 was no exception. And the changes were so numerous and across the board that it is impossible to enumerate them all: from rates, to exemptions, to deductions, the highly indebted Portuguese state grew receipts in every possible direction. Still, the budgetary situation remains precarious, with the state needing at least a fifth (and probably not the last) austerity package before or at the presentation of the next budget, making it easy to predict that next year Portugal will experience a new surge in taxes. Commission forecast of a rise in State Deficit for 2012 just highlights this need. Tax Policy strategy Despite the economic crisis, Portuguese state is trying to maintain its revenue. For that purpose, a major fiscal shock is inflicted to taxpayers: all major taxes went up in 2010, are raised in 2011 and it is foreseeable that the same will occur in the near future. If some measures were taken
to reduce the deficit on the expenditure side, the mantra remains that "we are the state, so we all need to unite to help the state", that is, both taxpayers and civil servants. The following is the account of the main changes in the main taxes for 2010 and its effects in 2011. Income Tax The State Budget for 2011 brought a whole new array of measures to increase taxes, despite the severe reduction of the tax base, both from unemployment at a record level of 11% - and from a reduction in per capita income according to IMF, 11.75% down from the 2008 maximum and 4.27% down from 2009 (in current USD prices). As part of the Stability and Growth Program passed in May 2010, a new maximum bracket applicable to taxable income exceeding 150,000 was introduced, with a tax rate of 46.5%. Also, for the brackets bellow 17,979 the rate was increased 1 percentage point and for the other brackets, 1.5%. After the tax hikes in mid-year (that went into effect immediately, in what some rightly considered an attack on the Principle of Certainty), several other measures were taken to further increase tax revenue. Deductions (on education, healthcare and housing) were intended to be severely restricted, but during negotiations to approve the budget it was agreed that those restrictions would only be imposed on the two top brackets, lowering significantly their effect on the deficit. On the other hand, fiscal benefits are now limited (to 100 or
bellow), except for the two lower brackets. Independent Workers were also affected and pay now a single rate of 29.6% (from sector rates of 24.6%, 28.3% and 32%). Also, if a single company represents more than 80% of the independent worker income, the client company owes an extra 5% in taxes. Finally, losses from independent workers and rental income can only be deducted within the 4 following years. Socrates was Guterres' environment minister and for some years environmental items received special tax treatment. However, with this budget, this no longer holds. Biodiesel (6.75% of diesel) is no more exempt, leading to a 2.5 cents increase in diesel price from this tax (for a 4.5 cents total, together with the VAT raise). Also the 30% deduction one could make with renewal energy equipments is now substituted by fiscal benefits (which, as mentioned before, are limited to all but for the two lower brackets, that people making less than 7,250 per year not big consumers of those equipments). Please also note that these benefits can only be used once every four years. Socialist governments were always very keen on culture. However, in another effort to raise income, literary, artistic or scientific prizes that were previously excluded from taxes are now only exempt if they do not surpass 10 times the minimum wage ( 4,850). Also, subsidies to highperforming athletes and cash prizes for sport results that were previously excluded from taxes are now only exempt if they do not surpass 10 times the minimum wage.
Judges admitted to go on strike for the first time in Portuguese democracy. Suffering from several pension cuts (detailed in the budgetary chapter, under the budget cuts title), and suffering from the 10% wage cut and from the new top bracket rate (with taxes up from 42% to 46.5% in one year), they are also the most affected by the end of the tax exemption on housing subsidies, which in practice almost halves them. Numerous other changes include dependants who had undergone civic or military service not being anymore considered as dependants for tax purposes, the obligation to state the fiscal number of the dependants and, most significantly, the end of banking secrecy. In the Anti-corruption package, the government had already authorize itself to access accounts whenever there were debts to Social Security. With the Decree 70/2010, anyone who receives social benefits like the Family Subsidy, the Unemployment Social Benefit, or the Social Inclusion Subsidy must first "voluntarily, specifically and unequivocally" allow access to any fiscal or bank information. Finally, with the budget, even the smallest tax debt authorizes the administration to access the accounts - both balances and transactions - of those taxpayers present in a newly created account database at the Central Bank. Many legal advisors consider it a violation of the Constitutional Principle of the "Private Intimacy Reserve" (Article 26), but few obstacles remain to the complete end of any banking secrecy in Portugal.
Corporate Income Tax As part of the Stability and Growth Program passed in May 2010, the rate applicable to taxable profits over 2 million was increased by 2.5%. Hence profit below 2 million are taxed at the normal rate of 25% and the part exceeding 2million at 27.5 % After several months of discussions about the "sovereign crisis", the state budget introduced several further tweaks to "make the rich pay". Holding companies lose their fiscal exemption on the profits of their subsidiaries, except if they own more than 10% of the capital and the income had already been subject to taxes. The banking sector paid a very low effective tax rate: in 2009 it was 4.3% of the profits and 18% of the taxable profits, well below the normal 25% + 1.5% of municipal surtax; the difference between the two effective rates being the deduction of losses of owned companies and the use of several fiscal benefits. Both of those numbers are frequently used in parliament to attack the banking sector, especially in a year the state is spending billions to try to keep BPP and BPN afloat. Thus, special contributions were created to further penalize the banking sector: 0.01% to 0.05% on passive minus equity and 0.0001% to 0.0002% on off-balance derivatives. Details are not known, as its implementation is to be defined within a specific law, still not published at the moment of the printing of this yearbook (and yes, it
will have retroactive effects on 2011 taxes). In last year's budget (2010), after the closing of IREF's yearbook, bonus got an autonomous tax. The rate is 35% for general companies and 50% for banks, if the bonus represents more than 25% of the person yearly income and its value is above 27,500. Regarding fiscal and banking secrecy, the fiscal administration not only may access any account as is the case with the Personal Income Tax, but furthermore banks are mandated to communicate any debit or credit movements on those accounts every July, without any request. For owners of medium or small companies, the legal spread they can fiscally deduct from lending to their own companies was raised from 1.5 to 6 percentage points (on top of the 12month Euribor). This is a major way to avoid corporate income tax for those companies, but it is also a powerful tool for the state to find "wealth manifestations" and therefore expand the tax base. Last but not least, benefits received could not exceed 40% of the owed taxes in 2009; this ceiling was cut to 25% in 2010 and is now set at 10%. Value-Added Tax As forecasted in the previous yearbook, the rate of this tax went up during 2010. When 2010 started, the rates were 5% on the "first need" goods bracket, 12% on the intermediary bracket and 20% on the "normal" bracket. On July 1st, the rates were increased to 6%, 13% and
21%, a measure included in the Stability and Growth Program passed in May 2010. In 2011, the government will not wait for July: as of January 1st, the rates increased again, this time to 6%, 13% and 23%. Many products were to be "upgraded" from lower brackets to the "normal" bracket, but budget negotiations in parliament combined with pressure from some conglomerates forced the government to apply the change only on gymnasiums, fire related products, and flowers. During 2010, the VAT on car tax was finally abolished, but the car tax itself was raised accordingly, rendering the change neutral. Several basic services, like energy and transportation, increased 3.5% to 4.5% in January, due to the VAT increase and the inflation expectations. Private Solidarity Societies (mostly Christians) will no longer be able to deduct the VAT they pay on several goods and services, like construction and car purchases. The same applies to all religious confessions, except the Catholic Church (as that would imply a violation of the Concordata with the Vatican). Other factor to consider is the difference between the new Portuguese top rate and the Spanish top rate: 23% vs. 18%. This difference will put further pressure on shops near border cities and will lead shopping trips to Spain to be a stronger trend in coming months. Madeira and Azores continue to have lower VAT rates than continental Portugal.
Budgetary Policy One of the main objectives of the Prime Minister is to avoid IMF intervention at all costs. For that, he raised taxes, cut spending, raised extraordinary revenues and sold Portuguese state debt directly to Brazil, Venezuela, East Timor and China. The opposition claims it is because he cannot accept IMF's scrutiny, both related to his numerous "boys" and to some judicial matters, while the Prime Minister claims it is a matter of national pride and of "Portugal being able to rule itself". In response, the opposition demanded elections when the IMF intervenes. As of the printing of this yearbook, the intervention has not been made, but it is seen as inevitable. After being elected, in November 2009, Portuguese Prime Minister Socrates stated "the main concerns of government's economic policy are economic recovery and employment, which is not compatible with a tax increase". In February 2010 he added: "we will do a fiscal consolidation based on budget cuts and not on tax increases, because that would be negative for Portuguese economy". In April he assured there would not be a VAT increase and that a 6,000 million new Lisbon airport, a 2,000 million third Lisbon bridge and a 7,700 million TGV railway system would stimulate the economy. In June he rejected a wage cut for the state employees. In September the government still planned a railway system with a price tag of 2,765 million.
Main Receipt Increases As described in the Fiscal Policy, and contrary to what the Prime Minster had promised, both Income Taxes and the VAT increased. But the government for
2010 and 2011 implemented many other increases. Most increases were in the health care sector. To give a bit of a perspective, when one uses health care services in Portugal, one must pay a fee: not the real cost, but a fraction, to control over-consumption. Those fees rose across the board. For example, vaccines to go to tropical countries were 15 cents. They are priced at 100 now. And not only they are higher, now they are paid by more people: unemployed, pensioners and those transported with urgency must now also pay the bill, if their income is above the minimum wage (currently at 485). In practice, that implies that a person transported in an ambulance needs not only a clinical note, but also a proof of "economic insufficiency". Finally, doctors whose service to the state was smaller than the duration of their specialization studies must now pay the state some compensation. Many incomes already taxed under Personal Income Tax but exempt from Social Security contributions will now cease to be exempt. Also, when hiring someone, companies must now transmit the information to the Social security at least 24 hours before the contract is signed (24 hours after in special conditions) to make sure the Social Security will stop paying the benefits related to unemployment. All kind of fees increased. For example, the fee paid to "unblock" your car after being taken by the police increased from 50% to 100%. Judicial fees were also raised considerably across the board. A last example would be toll free highways. Before October, the state paid an amount per vehicle to the private owners of the highways, with the
users paying nothing. Now, the state pays a fixed amount and charges a toll to the users. As a result, the private owners (whose executive president was also Guterres' minister, like the current prime minister) receive more risk free -, users in less developed areas pay tolls, and the state loses more than it was losing before, due to the (expected?) decrease in users and the remaining fix payment to the private company. Main Budget Cuts Some measures implemented in mid-2010 will be maintained. These include a cut in some benefits and ability to hold more than one job, admissions restrictions to civil servant jobs, non-renewal of workers under contract and a 25% cut in family subsidy in the lower brackets, while eliminating it on the top Personal Income Tax brackets. According to the 2011 state budget, some cuts will be considerably expanded, while many were implemented to fulfil the deficit reduction target. The most surprising extension was the admission freeze, according to which now any public administration that needs a new employee will have to recruit internally within the state employees. From the new measures, the most surprising was the wage cut. All state employees who receive more than 1500 per month will be subject to a wage cut, from 3.5% to 10%, accompanied by a reduction in benefits, overtime and night compensations and summer and Christmas subsidies. Career progressions will be frozen, while prizes for performance will not be granted.
Table 1: Detail of wage cuts (averaging 15%) Levels of wage per Percentage Cut month 1,500 to 2,000 3.5% 2,000 to 2,500 3.5% to 6% 2,500 to 4,200 6% to 10% above 4,200 10% On the Azores islands, governed by a powerful Socialist that may succeed Socrates in the party leadership, a special subsidy was given to state employees in the 1500 to 2000 bracket. Seen as a slap in the face of the prime minister, the expense passed despite doubts on constitutional grounds (equality!). In January unions entered with several (at least 14) injunctions to stop the wage cuts. The cuts were classified as unconstitutional on the grounds that the private sector is not cutting accordingly (equality). Government answered with "unpostponable public interest", a move the unions considered as the final proof of the illegality and unconstitutionality of the decision. It is now to the courts to decide whether state employees can have their salary cut or not throughout 2011. Communists and Leftists presented the issue to the Constitutional Court. Pensions (including the lowest, at 246 per month, received by more than 400 000 persons) will be frozen. All pensions above 1,607 were affected by the reduction in deductions to Personal Income Tax,
while the ones that exceed 5,000 were also subjected to a new contribution of 10% on the "surplus". Also, one will no longer be able to receive both a pension and a statepaid wage. People receiving the "Social Inclusion Subsidy" will experience a 20% cut. Not only the social benefits will lose purchase power (if not nominal value), they will also be granted to fewer beneficiaries, as the state now requires further information on financial resources and general assets and crosses information to decide to whom social and school support shall be given. Health Care Services cut 5% in the budget of their cabinets and hospitals also reduced the size of their boards, from 5 to 4. Furthermore, medicine support decreased across the board. This decrease is total if the medicines are not subject to medical prescription, if they were receipted in a non-electronic format, or if the beneficiary is caught abusing the benefit (in this case, just for 2 years). The diagnostic examinations will also be limited, but the details of such limitations are only to be known later, especially what is meant by examination "without benefit to the patient". The most important healthrelated measure however is the possibility open to state employees to opt-out the state health-care insurance, ADSE, which is also likely to reduce its benefits during 2011. Education services cut 17% of its central services budget and 20% of their managers. Adjunct directors were also cut and most wage supplement cuts (from 600 to 750 it went to 200 to 750). Teachers no longer receive extras for night work after 20 o'clock, but after 22,
like other state employees. The high school curriculum no more includes "Project Subject", and "Accompanied Study" was reduced to the students who need it most (to compensate, the government decided that students will not be failed during mandatory education). Also, private schools now receive 30% less funds (as all households pay taxes, whether their kids go to private or public school, all have the right to education, therefore the state pays many private schools a subsidy per student). The plan to close state-run schools in rural areas (known as "grouping") will continue and an undisclosed reduction in the number of teachers is also included (Portugal is 3rd in number of teachers per thousand students, only behind Lithuania and Greece). Regarding higher education, 4000 students will lose their scholarship. Madeira and Azores will experience a transfer cut. The PIDDAC program will suffer a cut equivalent to 0.2% of GDP. Police cars cannot go on patrol longer than 80 kilometres from their police stations (in Braganza; distances seem to differ according to districts). 50 of the 13 740 "Public Institutes" will also be cut (though it was pointed that many were already non-existent!). Main Extraordinary Measures With bond rates growing to unbearable levels, the main focus on the short run was to convince old political allies to buy directly Portuguese debt. Socrates started with Brazilian President Lula da Silva, continued with oil-rich East Timor, finished 2010 with the rulers of Portuguese former colony of Macau, China and started 2011 with a trip to
Qatar. Numbers were not made public, but are certainly in the billions. Angola also agreed to pay most of its debts to Portuguese companies in July, at the time valued at 2,000 million. Venezuela also agreed to help buying computers and using Portuguese shipyards in October, an agreement estimated at 1,500 million. Venezuela had already agreed to buy 2500 mass-produced houses, an agreement valued at 685 million. The first Libyan Portuguese Expo in February, ongoing agreements with Petrobras (Brazil), Sonangol (Angola) and ENI (Italy) and several other agreements are key to supply Portugal with oil for years to come. Finally, Portuguese "Cash for Clunkers" ended in December 2010, leading to lower state expenses and less expected car sales for 2011 (with this distortion, in 2010 were sold 38.8% more cars than in 2009). On 30 December 2010 was published the decree by which the pension fund of Portugal Telecom the previously state-owned telecommunication operator - was transferred to the state, along with 2,700 million (a fund whose deficit increased from 59 to 1,530 million during 2009). Privatizations were referred on the SGP, and they will include 17 companies, including the mail service and the recently bailed out BPN (although no bidder was found for the latter in a first attempt). For the years 2010 to 2013, the expected incomes are respectively 1200, 1870, 1580 and 1350 million Euros in a total of 6 billion, almost enough to pay 2011 government-estimated interest on "public" debt.
Several infrastructure projects were postponed, including Oporto's underground second phase (marked at 1200 Million). Also postponed was the bill on the bailout of BPN, marked at 5,500 million. Early in 2011, the state has injected 500 million, but most of the debt will be passed to societies created for that purpose and its cost to future budgets. With all the previously described effort to cut the deficit by 4,500 million in 2011, it would be political suicide to reveal the true cost of the bailout at once, like Ireland did. To convince the people something is being done, the government agreed to the creation of 2 new Commissions: the Public Finance Council and the Technical Commission for the Private-Public Partnerships. Their precise roles and composition are still to be defined by a government decree, although they were the outcome of a negociation with the main opposition party during the budget negotiations. From what was made public, the stated purpose of the first is to comment on budget and macroeconomic scenarios put forward by political parties, while the second must comment on the Private-Public Partnerships. These partnerships are an instrument used by the last governments to build very expensive infrastructure investments (like hospitals and toll free highways) while postponing the cost for future decades, evaluated by a former Portuguese Court of Auditors judge as 50 billion, or 2/3 of the total state receipts last year. Another promise to appease concerns regarding the debt is a ceiling on debt growth. From 2010 to 2013, the debt growth of the nonfinancial state-owned companies cannot be higher than 7%, 6%, 5%
and 4% respectively. But after seeing what happened to the agreement to raise the minimum pension or the minimum wage (the state postponed its promise arguing "force majeure"), and the 2010 track record (according to 2011 budget, 6 of 19 companies saw their debt growing between 7.4% to 798.6%), and considering the lack of sanctions, one must doubt its usefulness. The state continues to use off-budget institutes to minimize its deficit. Final Remarks Political parties can now register fines on them or their leaders as expenses. This way, as with any expenses, they are paid back by the state to the parties as subventions. Portuguese Court of Auditors in a recent December 2010 official report on 2009 State Accounting stated that it "violated the principles and budget rules of 'annuality', unity and universality", accusing the government of accounting juggling and creativity. Such bold words are not usually used to characterize the behaviour of the one that nominates the president of that institution, namely the Prime Minister. Portuguese stock index ended the year 2010 with a lost near 6,300 million (almost 10%), despite the 7.3% of GDP deficit that, according to the government, was to stimulate the economy. According to the budget, the country still spends more on education than in interest on the "public" debt (6541 vs 6326 million Euro), but it already spends more on the "public" debt than in Defense, Security (Police) and Justice com
Portugal Ricardo Campelo de Magalhaes 213
bined (6326 vs 5678 million Euro). And, in January 2011, the country paid on short-term (6-month) debt 6 times what it paid in January 2010 (3.686% vs 0.592%). If the ECB stop buying Portuguese debt (and it bought more than a billion in 2010), the previous mentioned value may skyrocket. In fact, after the first bond emission in 2011 the estimate of the interest on the debt to be paid in 2011 was increased to 7,134 million. The 808 difference will absorb all the wage cuts the state is still trying to impose. According to the organic classification, the amount available to the Finance Minister increased 20.1% from 2010 to 2011, while Work and Solidarity experienced a 12.6% decrease, Defense a 11.9% decrease, Education a 11.1% decrease, Justice a 10% decrease and Foreign Affairs a 9.6% decrease. Combining all the 200 measures taken in 2010 by the government, the expenses will decrease from 124.05% of the receipts to 111.27%. What draconian measures will the government further impose before actually starting to pay some of the mounting debt? When will the government wake up from the Utopian dream of the perfect Social State to the reality of a possible Social Model? The two last elected Prime Ministers fled (Guterres to United Nations High Commissioner for Refugees and President of the Socialist International, Barroso to the Presidency of the European Commission), but the policies remained basically the same. One can only hope things will be different when Socrates decides to do the same. On the short run, Horta Osorio points to exports, privatizations and a more flexible labor market as solutions. Zero base budgeting, privatization of healthcare institutions,
Swedish school model, Danish Labor Laws, Hong Kong' regulatory environment, Spanish VAT levels, and Barroso's promised fiscal shock (slashing taxes) would all be welcome, but are very unlikely.
Useful links: Portuguese Investment Agency State Agency: http://www.portugalglobal.pt 2. Portuguese Data Independent Database https://www.pordata.pt/azap _runtime/? n=1&LanguageId=2 3. External Debt (click "Portugal") ECB data http://dsbb.imf.org/Page s/SDDS/ExternalDebt.as px 4. Portuguese Society for Innovation - Private Company: http://www.spi.pt/ en.index
1.
Slovakia Radovan Durana INESS, Bratislava The election year 2010 brought the center-right parties into government. The change in the governing coalition quickly translated into changes in economic and tax policies. Similarly to other center-right European governments, the Slovak government attempts to attack the inherited budget deficit, tackling both the revenues and the expenditures. Despite its rightwing orientation and election pledges, the new coalition government decided to moderately increase the tax and contributions burden. However, it must be noted that this increase mirrors the planned reduction in government expenditure. The greater emphasis was placed on broadening the bases than on changes in rates. Year 2010 in Review The election in the mid-year resulted in the absence of significant changes in tax policy (see Box below). Facing the approaching election, the incumbent government attempted to maintain the status quo in the first half of the year. The second half of the year was marked by the new government's un-preparedness to
interfere in the tax system. The expansionary fiscal policy of the outgoing government resulted in a budget deficit of 7.9% of GDP in 2009. The passivity of the government in the following year left the budget deficit virtually unchanged, when it reached the value of 7.8 percent of GDP despite the growth in GDP. As a result, the public debt rose from 21.3 billion in 2009 by approximately one third to 27.4 billion (or 43.8 % of GDP in relative terms) in 2010. In 2010 a year-to-year growth in tax and contribution revenue was 1.8%. The total revenue equalled 27.3% of GDP (mandatory contribution to the second pillar not included). Taking into account the 4.1% growth in GDP and 3.4% growth in average nominal wage, the budget revenue growth seems rather low. This was mostly due to high unemployment, weak domestic consumption and fast export growth, the later translating into tax income growth only with lag. 2010 changes in tax poli cy
The only relatively significant change of tax rate has been the lowering of fuel tax on diesel by 23.5% to 368 per 1000 litres. Prior to
this move, this rate was the second highest in the EU. The government gave in to professional drivers at strike in January, who were highly disappointed from high costs of just installed satellite road toll system. Lower fuel tax should compensate them for high toll costs and at the same time attract the transit carriers to tank in Slovakia. According to current estimates of Ministry of Finance, lower tax rate draw the demand from abroad and led to 14,5% growth of diesel consumption in 2010. Nevertheless, this growth was not strong enough to cover total dropout of tax revenues resulting from lower rate (not surprisingly for a demand with very low price elasticity). Outloo k 2011 Changes in the tax policy are expected to increase the tax revenue including contributions - by 0.5 billion (out of which 0.3 billion are tax revenues without contributions). This equals 2.5% of the overall tax plus contributions revenues in 2010. Considering the additional effect of the economic growth, average wage growth and a modest consumption growth, the overall tax plus contributions revenue are expected to increase by 11.3% in 2011 compared to 2010, reaching the pre-crisis levels of 2008. Nevertheless, despite growing
revenues the deficit is expected to reach 4.9% of GDP. This will increase the public debt to 30.7 billion, or 46% of GDP. The adopted changes in tax legislation touch upon all sorts of taxes and contributions. In general, the main emphasis was on the abolition of tax exemptions and harmonization of rules for the calculation of taxable income. These measures should enable the introduction of unified tax and contributions accounting. Individual changes affect many groups of taxpayers but from the viewpoint of the overall tax revenues, no single significant change is taking place, except for the VAT rate (see below). The fact that tax changes lead to a reduction in exemptions may decrease their fiscal impact. However, the reality at the end of the year will show how many of the affected taxpayers have modified their tax status or move into the shadow economy, that is, whether the planned increase in tax revenues obtains. The adopted changes affected income tax, contributions and consumption tax. The most significant was the change in the VAT rate, which is discussed in more detail. Changes in other taxes and contributions are discussed after VAT. VAT
The rule of the so-called flat tax-rate of 19% for corporate and personal income and VAT became a symbol of a successful tax reform of 2003, which brought to Slovakia many new investments, as well as fast-growing tax revenues. The rule was violated for the first time in 2007, when the tax rate was lowered to 10% for books, medical drugs and medical devices. As the sales of these products are not high, the public did not perceive the change in the 19% tax rate as significant. Paradoxically, it was the new government, whose main representatives were behind the original tax reform, which increased the flat tax rate to 20%. Law limits the rate increase to the period during which the budget deficit remains above 3% of GDP, as indicated by Eurostat. The government refused to discuss the possibility of increasing the rate only for a year. At the same time, it refused to discuss the abolition of the 10% tax rate (it abolished only the little used 6% rate used for sale of domestically-produced agricultural products), which would not generate the same revenue (approximately 60%) but would remove the unreasonable tax preference enjoyed by some products. The government opted for a simpler solution, which reduces the pressure to increase the efficiency of the public expenditure by increasing the tax revenues. The changes in tax rates are expected to increase budget
revenues by 185 million (approximately 2% of tax revenues). Changes in taxes and contributions besides VAT Adopted changes of the income tax code should increase the tax revenues by 78.3 mil. in 2011 and 142 million in 2012, as most of the measures will apply to tax returns for 2011. Individuals will bear half of the burden, Personal income tax revenues should grow by 18.5% due to planned decrease of basic allowance for taxpayer to 3559.3 (it was temporarily increased to 4025.7 during the crisis. Other important changes: Basic allowance for taxpayer can be applied only for "active" income (employment, entrepreneurship). Capital income will be excluded and taxed by full tax rate. Capital savings and life insurance will not decrease the tax base anymore. Consumption taxes Following the EU requirements, tobacco taxes are being raised. New tax from sale of emission quotas will be applied at rate 80%. In fact it is kind of income tax, and it will be applied mostly on revenues from sale of not consumed quotas, which previous government allocated among
selected companies for free. Expected tax revenues are 75 million. The preferential tax regime for heating fuels consumed by households has been terminated. In 2011, additional changes resulting from further elimination of exemptions should be adopted with potential tax revenues increase by 135 million.
144 Taxation in Europe 2011 Health Contributio ns Elimination of exemptions resulting in broader base should increase government's revenues from health contributions by 51.8 million in 2011 and 80 million in 2012. Higher contribution rates will apply to voluntarily unemployed persons. Individuals have to include their revenues from dividends and rent income into their contribution base first in 2011. The contribution rate for dividends will be 10% (other income 14%), dividends below 329 will not be subject of contributions. Expected related growth of revenues is 14 million. Social Contributions Amendments to social contributions code will broaden the group of contributions payers to include statutory representatives of businesses. Hence, members of the managerial team of a company, who are not officially employees but represent the company, will have from now on to pay contributions. This is an important amendments due to the fact that, in Slovakia, employees were often cheating the tax system by setting up ltd company in order to pay only income tax, no contributions - now the government tries to rip off their fruits. Also the base for contributions will be broaden (e.g. severance pay). Together with other small changes, the revenues should increase by 133 million in 2011. Expected changes in the tax policy in 2011
The new government committed itself to the simplification of the contributions system, introduction of the Contributions bonus (see Box below) and the fiscal council. At the same time, the government continues its program of unifying the collection of taxes, customs and contributions, which are collected by three independent institutions at present. It is therefore probable that year 2011 will witness technical changes in tax and contributions system. However, these changes will not have a direct impact on tax and contributions burden of employees. At the same time, it is reasonable to expect that the broadening of
Slovakia Radovan Durana 225
taxable income will lead to an increased tax burden for selected groups of labor force. The fiscal council is expected to provide an impartial and regular audit of the budget balance and evaluate the longterm impact of the budget on the state property. A constitution law on the maximum public debt is planned as well. The simplification of the contributions system requires introduction of the "super-gross" wage (superhruba mzda in Slovak). This means that the employer will not be obliged to pay social and health contributions for the employee anymore. The payer of the contributions will be only the employee, in whose name the employer transfers the contributions. Thus, the wage will express the total labor cost. This is in stark contrast to the current state when the employee does not "see" contribution paid by the employer. The introduction of the super-gross wage will have no direct impact on the contribution burden of employees but it increases the transparency of the financial relationship between the citizen and the state. The simplification of the contributions system is conditional also on the duty to pay contributions from all types of income. This condition applies in particular to income from the so-called "dohoda", which is a specific flexible type of employment contact without the trial period and with a limited period of notice. The law limits the number of
working hours and other conditions, under which an employee may enter this type of contract. The shortness of these contracts was the main reason why these contracts were not subject to contributions payment. In this case the government underestimated the motivation of citizens to minimize their tax burden and exploit the benefits of this type of contract. In 2010 more than 800 000 people (40% of labor force) entered into this contract (approximately 430 000 had also a full-time job). Such a development necessarily leads to a decrease in contribution revenues. The government therefore plans to introduce the mandatory payment of contributions also for this type of contract. This will lead to a modest increase in the overall tax burden despite no changes in the tax rates. The government also faces a complicated problem of how to increase the contribution revenue without lowering the net income of low-income groups, who are often employed under this contract. The political impact of this solution can significantly affect the popular acceptance of the reform. There is a wide discussion about the taxable income for the calculation of health contributions. In an attempt to abolish all types of exemptions, the government decided to require payment of contributions also on income from capital. Since the beginning of the year, the contributions are paid also on dividends (lowered tax rate of 10%)
and on rental income (health contribution on income from interest was not introduced because of political reasons and high administrative requirements). This will negatively affect the behaviour of capital investors. This type of contribution is contrary to the very foundation of the health contribution. In Slovakia there is a health insurance system but once the income from capital is included, the contribution de facto changes to a general tax payment with a single contribution feature existence of maximum payment. In this context, the Ministry of Finance proposed to abolish the health contribution and move the burden to higher VAT and income tax rate. Conclusion In an attempt to decrease the budget deficit in 2010 and 2011, the government decided to broaden the base of the taxable income, maintain the existing income tax rate and moderately increase the consumption tax. The government does not attack the high budget deficit inherited from the previous government by strict fiscal tightening but rather relies on economic growth and higher tax revenues. It is expected that in 2011 and the following years there will be technical modifications in tax and contributions system. These, however, will have no impact on the size of the rates. Although 2011 will witness a
modest increase in the tax burden, the overall tax burden will remain low compared to other countries. The main problem will be the persistent high contribution burden of labor, which complicates the job creation and is one of the main reasons behind the high unemployment rate. Romania Radu NECHITA, PhD Faculty of European Studies, University "Babes-Bolyai", ClujNapoca, Romania In 2010, Romanian authorities set new standards of fiscal instability, amending the Fiscal Code by emergency ordinances more than a dozen times. The most visible measure was the increase in VAT from 19% to 24%, decided on June 26th for July 1st. In this environment of uncertainty, it is remarkable that tax rates for personal and corporate income remained constant, at 16%. Social contributions rates did not change either, remaining among the highest in Europe, between 44.5% and 55.7%, depending on work conditions. However, the tax base was extended in different ways. The destructive minimum corporate income tax -introduced in 2009 and responsible for thousands of business closures was abolished on October 1st. There was no significant measure of reducing administrative burden for taxpayers. For 2011, there are some good news (the reintroduction of the
option between 16% corporate income tax and 3% turnover tax for microenterprises) and some nice promises (the replacement of five monthly fiscal and social statements by only one). Taxes Personal Income Tax The 16% flat tax on personal income (introduced in 2005) survived another year, despite the crisis and repeated attacks from Social-Democratic Party and so-called independent analysts. This is remarkable in a period characterized by fiscal instability and increases of many other taxes. Personal allowances (applicable only for salaries) remained unchanged. They increase with the number of family members and decrease with gross salary's level according to the same formula presented in 2009 edition of IREF taxation report. The most controversial debate concerned taxation of personal income other than salaries, like income from intellectual property (such as copyright income). Tax allowances for these contracts were 40% of gross income. Moreover, these incomes were exempted from social security contributions, which in Romania are at a very high level (see below for details). As a consequence, employees and employers substituted intellectual property contracts for labour contracts, as a tax avoidance mechanism. Beside artists, writers and
journalists, many other liberal professions benefited from the lighter taxation of intellectual property rights. Government reduced by Emergency Ordinance (58/2010) the amount of tax allowances from 40% to 20% of gross income, increasing therefore the effective tax rate. (Moreover, income from intellectual property rights became subject to social security contributions, as explained below). The modification, decided on 26th June 2010, became effective on July 1st 2010. Initially, it increased also the administrative burden for taxpayers earning this type of income, by the obligation to submit personally his/her fiscal statement. Facing queues and protests from VIPs with high media coverage, government transferred the obligation to file fiscal statements from the employee to the employer. Corporate Income Tax In 2010, corporate income tax remained at the same level (16%) for the fifth consecutive year, which represents one of the rare instance of stability in the Romanian fiscal system of Romanian fiscal stability. This rate concerns undistributed profits. Dividends distributed to individual stockholders are subject to the personal income tax (16%). Under certain conditions, dividends paid to another EU company are exempt from this supplementary taxation.
In 2009, government introduced a minimum corporate income tax that had to be paid even by enterprises incurring losses. The minimum corporate income tax was about 500 and increased with the level of 2008 turnover, up to 10,000. This measure, supposed to reduce tax evasion, increased dramatically the number of business closures. It represented also a barrier to entry with strong dissuasive effects on entrepreneurial activity. The minimum corporate income tax was abolished on 31 October 2010, as planed when it was introduced. Despite keeping some of its promises, government maintains uncertainty on corporate income taxation in 2011. For example, government officials declared publicly their intention to introduce a bettertargeted version of minimum corporate income tax for industries prone to tax evasion. But by the end of 2010, no detail on this topic was available. Since 2001, micro-enterprises (less than 9 employees and less than 100,000 turnover) could opt for turnover taxation as an alternative to profit taxation. The tax rate changed almost every year, its level fluctuating between 1.5% and 3%. Employers make an extensive use of microenterprises as tax-avoidance device by incorporating highly paid employees. Authorities amended the Fiscal Code in order to close the loophole, with a limited success because other taxavoidance devices were adapted to the
same purpose. In 2010, the turnover tax option was eliminated (all companies paid the standard 16% corporate income tax) but it has been made available again for 2011, at a level of 3%. The rumours concerning the reintroduction of turnover tax option started almost immediately after its suppression, but an official decision was taken only end December 2010. Capital gains are taxed in general at 16%. Gains from transfers of listed shares held more than one year benefited from a preferential taxation (1%) until 30 June 2010, but after 1 July they are submitted to the general regime. Value Added Tax Facing a drop in fiscal revenues and confronted with its incapacity to reduce public spending, on 26 June 2010, Romanian government decided to increase VAT from 19% to 24%, starting 1 July 2010. This 25% increase in one of the most important taxes, up to a level very close to the maximum allowed by EU treatises came after recurrent official declarations that excluded such possibility. Beside its explicit and obvious monetary fiscal burden, it generated an incalculable administrative burden on businesses for two reasons. First, it was an unanticipated change that occurred during the fiscal year. Second, the aforementioned administrative burden was magnified by the absurdly short period of time left for businesses to
comply with new regulations. For example, all cash registers in Romania had to have their software modified in a couple of days by just a few authorized companies. There are also two reduced rates and a limited list of exemptions. The highest one (9%) concerns cultural services, books, newspapers, medicines, hotel accommodation, dental and medical services. The lower rate (5%) was introduced in 2009 and maintained in 2010 for new houses and apartments, as a social and anti-crisis policy. The exemptions are those listed in VAT European Directive. End June, the Government modified by emergency ordinance some of the rules concerning the enterprises involved in intra-community trade and the enterprises involved in production or trade with excisable products and duty freeshops. The ordinance increased opportunity costs for businesses (it eliminated the possibility of excise suspension in the case of goods' transportation between two fiscal warehouses; it increased or required new warranties for some operations involving excisable goods etc.) The ordinance increased the administrative burden because enterprises involved in intracommunity trade must be registered in the Register of Intra-community Operators, created on 1 August 2010. Enterprises had to provide many documents in order to register, even if most of them were delivered by public authorities. The ordinance increased
legal risks for entrepreneurs and employees via higher fiscal fines, joint fiscal liability, etc. Enterprises can make an application for VAT refund. The normal processing term for the application is 45 days. After this delay, the firm is entitled to claim late payment interest. On 1 July 1 2010, the interest rate was reduced from 0.1% to 0.05% per day of delay. As a consequence of the increase in VAT rate (by 26%), the corresponding collected revenues increased with about 10%. Obviously, this represents an equivalent drop in available resources from the private sector. Excises Excise duties on energy, tobacco and alcohol continued to increase in 2010, in order to achieve conformity with EU regulation, usually in advance relatively to deadlines established in pre-accession agreements. Excises remain inferior to EU minima level. Government modifies them in a rather unpredictable way. For example, excises on cigarettes for 2010 were established in 2009, but they were modified many times. The last modification took place 30 December 2009, when the minimum excise was set at 67.34 for 1000 cigarettes for the whole year 2010. However, on 28 June 2010, the minimum excise was increased at 71.04 for
1000 cigarettes, starting with 1 July 2010. This is a supplementary step towards the target of 90 for 1000 cigarettes, set for 31 December 31 2017 by the agreements with the European Union. Excises on gasoline and diesel gas increased in 2010 up to 452 /t and, respectively, 347 /t. The upward trend will continue in 2011, the scheduled levels being 467 /t and, respectively, 358 /t. Social contributions Romanian legislation maintains the conventional but flawed distinction between employers' and employees' social contributions. Table 1 outlines the recent evolution of social contribution rates. There are no modifications expected for 2011. The tax base is usually the gross wage, including bonuses and all workrelated income. As remarked also by World Bank's Doing Business Report, Romanian social contributions remain among the highest in EU, in strong contrast with social benefits. This explains the low social acceptance of these contributions and the efforts made by employers and employees to avoid them.
Table 1: Recent evolution of social contributions rates in Romania 200820092009**** 201020112011Type of contributionFiscal liabilityDecaryFebruary-DecJanuaryFebruary -Dec.Employee**9,5 (2%)9,5 (2%)10,5 (2%)10,5 (2.5%)10,5 (3%)10,5 (3%)Pension*1818,520,820,820,820,8Employer2323,52 5,825,825,825,82828,530,830,830,830,8HealthEmploye e5,55,55,55,55,55,5 Employer5,25,25,25,25,25,2UnemployEmployee0,50,50,50,50,50,5mentEmployer0,50,50 ,50,50,50,5Risk and accidentsEmployer0,420,150,850,150,850,150,850,150,850,150,85Labour inspectionEmployer0,250,750,250,750,250,750,250,750,250,750Salaries'guarantee fund0,250,250,250,250,250,25Sick leaveand indem-0,850,850,850,850,850,85nities40,9541,20-44,50-44,50-44,50-44,2543,0542,4045,7045,7045,7044,95Total***45,9546,20-49,50-49,50-49,50-49,2548,0547,4050,7050,7050,7049,9550,95-51,20-54,5054,50-54,50-54,25-53,0552,4055,70,55,7055,7054,95
* Employer's contributions are for "normal", "uncommon" and, respectively, "special" conditions of work. ** Since 2008, employee's pension contribution (9.5% or 10.5%) is split between the first pillar ("pay-as-yougo", public) and the second pillar (capitalization, privately administrated) of the pension system. The value in brackets represents the contribution to the second pillar in the case of eligible employees. *** The tax base differs slightly from some contributions and changed over time, but in most cases, it is gross salaries (payroll) or very close to it. Therefore, the total is not always rigorously precise but represents a useful approximation. Source: Romanian legislation **** On 2 February 2009, government announced an increase effective immediately in pension contributions from 27.5% in
December to 31.3% (10.5% employees' contribution to 1st and 2nd pillar + 20.8% employers' contribution). Government limited the contribution to the second pillar at 2%, although it was scheduled to increase at 2.5% in 2009, according to Pensions' law The tax rates for social contributions were not modified in 2010, but the authorities increased the tax base. For example, in the case of intellectual property rights, deductions were reduced, which increased the level of taxable income. Pension contributions represent the major component of social contributions. Other contributions are for health care, unemployment insurance, risk and accidents, labour inspection, salaries' guarantee fund and for sick leave and indemnities. For eligible employees, the 10.5% employee's mandatory contribution to the pension system is split between the public pension fund (first pillar, "pay-as-you go", 8%) and the privately owned and administered pension funds (second pillar, capitalization, 2.5%). This transfer of contributions from first pillar to second pillar is supposed to increase by 0.5%, up to a contribution of 6% to the second pillar in 2016. In 2010 Romanian authorities intended to delay further the scheduled increase of the contributions to the second pillar of the pension system, a measure already taken in 2009. Facing protests, authorities decided in March 2010 to allow the increase from 2% to 2.5%. However, a couple of months later,
they proposed a decrease to 2% for the second half of 2010. Of course, this debate generated uncertainty. Eventually, the contribution remained at 2.5% for 2010 and is set at 3% for 2011. This is still 0.5% less than the level scheduled by the original version of the private pensions law of 2008. There has been no major change officially announced for 2011 concerning social contributions rates. On 30 December 30 2010, Emergency Ordinance 123 suppressed the contribution to the Labour Territorial Inspectorate (0.25% or 0.75% of gross salary), starting February 2011. Public pension fund, health insurance and unemployment funds are facing huge deficits (covered from state budget). The Constitutional Court invalidated government's strategy of reducing pension benefits; therefore the options available are the following: Erosion of benefits via inflation, which increased significantly in 2010, at 7.73% (From November 2009 to November 2010), more than twice the inflation target announced by the central bank, 3.5%; Erosion of benefits via taxation of pensions or other direct cuts. For example, Romanian Government decided to lower the ceiling of pensions submitted to health insurance contributions from 1000 Lei ( 233) to 740 Lei ( 172), a level still higher than minimum wage. The maternity leave will be reduced from a maximum of two years to one year, but the bonus of 500 Lei ( 116) for
going back to work earlier will be maintained; Increasing the legal retiring age at 63 years for women and 65 years for men (already decided end of 2010) and discouraging early retirement by stricter conditions and enforcement (some symbolic measures were announced); Reducing social spending by clarifying the multitude of social programs, by a better targeting and by reducing the frauds (officially estimated at 25%, after the verification of about half of beneficiaries of the minimum income); Further increasing of public debt. This strategy was already overused recently and would not be wise to rely on it, except as a way to finance the transition from a PAYG pension system towards a Chilean-style capitalization system. However, it is unlikely that Romanian authorities regardless of their political affiliation would adopt this approach. Local taxes Revenues for local budgets are mainly transfers from national budget. Transfers' amounts are calculated as a percentage of locally collected corporate income tax, personal income tax and VAT. Besides these "entitlements", national authorities can decide supplementary transfers, allegedly based on national solidarity and/or national strategy criteria, but
the beneficiaries are usually municipalities run by mayors from the same political party (coalition) as the government. Taxes on real estate (land and buildings) and on vehicles (different for individuals and companies) are another important financing source of local authorities. The fiscal value of buildings increased starting with 1 January 2010. Local taxes for real estate and vehicles cannot be considered wealth taxes. However, for individuals, the "normal" real estate taxes were increased by 15%, 50%, 75%, 100% for, respectively the first, second, third, and fourth building owned, other than the main residence. Since 1 July 2010, owners of more than one building had their "normal" real estate tax increased for the first (65%), second (150%), third and more (300%) houses (apartments, buildings), aside the main residence. Quasi-taxes and other administrative fiscal burden Quasi-taxes and administrative burden represent one of the most important barriers against economic growth in Romania (see previous reports). Even those who are actually responsible for it, public authorities, publicly acknowledge this problem. Their promises to reduce the number of so-called "self-financed agencies" weren't followed by significant effects. Similarly, regrouping them reduced the number of taxes and
quasi-taxes which is a step in the right direction but the resulted new tax was often superior to the total amount of the corresponding cumulated taxes. Therefore, the budgetary income generated by quasitaxes increased in 2010 by 21.4% compared to 2009. They are contributing with about 12% to the total budgetary income, more than corporate income tax or personal income tax. The good news for 2011 is so far just a promise. The Finance minister announced that businesses will be required to make only one social and fiscal statement per month, replacing the five monthly statements they must file and submit in physical AND electronic format (the latter one, on a floppy disk. Not on USB storage device, or on a DVD or CD...). The administrative burden is still high because all data must be reloaded every month for all the employees, even if there are no changes. Maybe an improved version of the software will correct this. Of course, businesses have already the possibility to submit exclusively electronic forms, but only if they buy an electronic signature certificate from one of the only TWO authorized companies to sell them. They are expensive and valid only one year, which means that this opportunity is beyond the reach of small businesses. After 30 June 2011, all businesses will have to submit their fiscal statements in electronic form.
Another promise is the possibility for any taxpayer to make online all the necessary payments. Actually, the Ministry of Communication and Information Society announced that the system is 100% operational, but until most important public administrations are connected, the respective webpage (www.ghiseul.ro) will not be very useful. Selected references Law 19/2000 on public pensions system and other social security rights, Monitorul Oficial, No 140, April 1st, (With all its modifications). Law 346/2002 on labor accidents and professional diseases insurances, Monitorul Oficial, No 454, June 27th, (With all its modifications). Law 399/2006 on the approval of the Emergency Ordinance 158/2005 concerning sick leave and health insurance indemnities, Monitorul Oficial, No 372, April 28 th, (With all its modifications). Law 53/2003 on the Labor Code, Monitorul Oficial, No 72, February 5th, (With all its modifications). Law 571/2003 on the Fiscal Code, Monitorul Oficial, No 927, December 23rd, (With all its modifications). Law 76/2002 on unemployment insurance, Monitorul Oficial, No 103, February 6th, (With all its modifications). Law 95/2006 on the reform of healthcare, Monitorul Oficial, No 372, April 28th, (With all its modifications).
Spain Angel Martn Oro 243
Spain ngel Martn Oro Instituto Juan de Mariana, Madrid The financial and economic crisis in Europe has brought about a series of severe interdependent problems. The fragile health of public finances has been one of the most worrying issues, especially in countries like Greece, Ireland, Portugal and Spain, because of soaring public deficits and a growing cost of sovereign debt. Now, fiscal consolidation measures have been approved, although they seem to be far too timid, and serious problems remain. An overview of the Spain's case Spain has been one of the most badly hit European countries in the downturn. The decade before 2007 was one of fast economic growth, relatively huge increases in employment, low unemployment rate (according to Spanish standards), buoyant tax revenues and government spending, and balanced public finances. But, as in many other countries, this was mostly based on an unsustainable credit-induced boom that fuelled the Spanish housing
bubble and over-expanded other sectors of the economy. The bust that followed revealed the sad truth of the economic structure of Spain: an economy heavily dependent on the housing and construction sector, with very low productivity and competitiveness, and an extremely deficient and rigid labour market unable to face severe crisis. It should be noted that the Spanish unemployment rate is the highest in the European Union, above 20%. Moreover, it revealed a high structural public deficit, a reality that was previously hidden by the effects of the unsustainable boom period. The sharp deterioration of public finances, caused by increasing expenditures and decreasing
revenues in a very similar proportion, is illustrated in the following chart. Public deficit of the Spain's economy, 2004-2009 (% GDP)
4,0 ~|
2004
2005
2006
2007
2008
2009
Tax revenues evolution In terms of the tax-to-GDP ratio, the Spain's figure has fallen without parallel in any of the European countries, due to a dramatic decrease in tax revenues -not to a significant reduction of tax rates. While the taxto-GDP ratio barely fell from 45.3% in 2007 to 44.4% in 2009 in the EU15, in Spain it plummeted from 41.1% to 34.7%. (Source: Eurostat. "Government Finance Statistics"). This fall has been led by the Corporate Income Tax and the Value Added Tax -- this reflects the severity of the economic downturn. Particularly, the soaring unemployment rate (going from 8% in 2007 to almost 21% at the end of 2010, while the EU average remains at 10%) and the serious difficulties of small and medium enterprises are the
two key factors that may explain the fall in revenues. The deficient regulation of the Spanish labour market, among other things, may be seen as partially responsible for this. Fiscal consolidation: Expenditure cuts As a consequence of the weaknesses of the Spanish economy mentioned above, international capital markets have been increasingly reluctant to trust Spanish government debt, pushing its risk premium over German debt (which is considered the benchmark) to record levels. The first dramatic episode took place in May 2010, when financial markets' fear over Spain's sovereign solvency risk was at its highest. The lack of credibility of the Spanish government was being highlighted by the financial markets after he had denied, first the existence and then the severity of the crisis (when it was more than evident), and after having opted for an expansionary fiscal policy during 2008 and 2009. Pressured by the financial mark ets, political leaders and international organizations such as the IMF, Mr. Zapatero's Socialist government proposed a package of fiscal consolidation measures in May. Together with previous cuts, these austerity measures mainly consisted of civil service salary cuts and a
reduction of the supply of new public sector jobs, public investment cuts, pension payments freeze, and other current expenditures cuts. The savings estimated from these cuts would amount to a total of 20,000 between 2010 and 2011 (about 1% of GDP each year). However, these austerity measures were not enough. Confidence did not return, and even deteriorated in the context of the European debt crisis, particularly the Irish bailout process by the Euro members, and the lack of any meaningful recovery in the Spanish recession. Thus, in November and December, the government launched a new package of austerity measures. On the expenditures side, it consisted of abolishing an extraordinary unemployment transfer for those without the conventional unemployment benefits, and a series of partial privatizations (e.g. Air Traffic management). Moreover, a pension reform has been proposed by the Socialist party, which will effectively cut pension payments by extending the retirement age from 65 to 67 and the period used to calculate pension payments from 15 years to 20 or 25. (Nowadays, only the Social Security contributions of the last 15 years of a work-life are taken into account to calculate the amount of an individual's pension). Tax policy measures
As shown above, tax revenues declined sharply in the last years, as a consequence of the burst of the bubble and the severe recession that followed. The recent tax policy measures have had two main goals: stimulate economic activity and employment (especially in the first part of the crisis until 2010), and reduce the public deficit (especially after 2010). Let us analyze these according to the tax figure. Personal income tax (PIT) Impuesto sobre la Renta de las Personas Fsicas (IRPF) The PIT taxes labour income and capital gains, although the first contributes to about 90% of the total. Since the last reforms taken by the government in September 2010, income is taxed according to the following brackets: 24%, 28%, 37%, 43%, and two new brackets of 44% from 120,000 to 175,000, and 45% beyond that amount. This latest reform was presented as a tax increase against the "rich", with the argument that the burden of the fiscal consolidation had to be imposed on the rich as well as on the low and middle-classes (who, it was said by the Left, were suffering from the previous spending cuts of May). But, as was explicitly recognized by the government, this change wasn't going to increase revenues in any meaningful way. Which tend to prove that is was more an ideological signal
sent to left-wing government's supporters, such as the Unions. In addition to this reform, throughout 2008 and 2009 several transitory measures were taken to deal with the effects of the economic crisis, in the form of tax credits the most relevant being the one granted to working and self-employed taxpayers of 400 during 2008 and 2009, social security rebates and deadlines of payments to specific categories of workers. Other additional measures were the abolition in 2011 of a childbirth allowance of 2,500 that had been introduced in 2007, and the removal of a tax deduction for housing acquisitions for taxpayers whose tax base is more than 24,170 since January 2011. Regarding savings income and capital gains, since 2010 they are taxed at a progressive rate of 19% and 21% for income above 6,000. Corporate income tax (CIT) Impuesto de Sociedades (IS) Spain suffers from a higher than average CIT. Despite decreasing the general tax rate from 35% to 32.5% in 2007 and to 30% in 2008 (with a lower rate of 25% for small and medium enterprises, and a higher rate for hydrocarbon related companies), this drop was far lower than in the EU-16 (as measured by the arithmetic average). Particularly remarkable are the cases of Germany and Ireland; two countries that decreased their CIT
considerably, as following table.
shown
in
the
EU 16 Ger ma ny Irel and Spa in
Tax on corporate income 200 2010 0 Difference 34. 2000-2010 9 25.7 - 9.2 51. 29.7 - 21.8 6 12.5 - 11.5 24. 30.0 - 5.0 0 35. 0
Source: Eurostat. Taxation trends in the European Union, 2010 In the context of the crisis, some measures have been applied to alleviate the fiscal burden on small and medium enterprises. For instance, CIT rate for small companies that maintain or increase their workforce has been temporarily decreased by 5 percentage points for the years 20092011. Additionally, more recently, the government announced a tax reduction for small and medium enterprises (SMEs). On the one hand, the tax base will be increased for companies which pay the reduced CIT rate, so that now turnover up to 300,000 (instead of 120,000) will pay 25%. On the other hand, the concept of small and medium
enterprises subject to the reduced rate is extended. Also, businesses will not be legally forced to pay fees to the Chamber of Commerce any more. Nevertheless, given the size structure of SMEs in Spain (most of them are micro-enterprises), it is estimated that only about 3% of the total SMEs will benefit from this measure. Value added tax Impuesto sobre el Valor Aadido (IVA) - and excise duties Perhaps the most important tax reform has been the increase in the Value Added Tax (VAT) since July 2010. The standard rate rose from 16% to 18%, and the reduced rate from 7% to 8%, while the super reduced stayed constant at 4%. Yet, Spain still has one of the lowest VAT rates and consumption taxes as a percentage of GDP of the European Union. Minor additional changes in the VAT have included the application of reduced rates for repairs and refurbishing of own dwelling, presumably in an attempt of the government to encourage depressed housing activity. Furthermore, tax rates for tobacco and hydrocarbons have been increased, first in June 2009, and then again in December 2010 for tobacco.
Doubts over fiscal consolidation measures In spite of all these fiscal consolidation policies, there are important doubts over the ability of the Spanish government in its globality (the central, state and local governments) to fulfil its deficit target of 3% in 2013. Firstly, the projections of GDP growth and employment (and consequently unemployment benefits and tax revenues) contained in the 2011 Budget Plan seem to be far too optimistic. Secondly, 2011 may be a year of problems in the Spanish banking sector, especially in its semipublic branch, the so-called Cajas de Ahorro, because of its high exposure to the construction sector. This might be a temptation for the government to bail-out troubled institutions. Thirdly, additional turbulences in Spanish debt markets (which should not be discarded at all) might mean higher costs of debt, a factor that may destabilize public finances even further. Besides, given the deficiently designed fiscal federal system, it is hard to control state and local governments' public spending, which is aggravated by their lack of transparency and accountability. Additional tax hikes? Given these doubts, some are calling for additional tax hikes. The government has been defending this from
time to time, creating uncertainty over the tax regime. Their argument has been often based on the thesis that 1) taxes are much lower in Spain than in our neighbour European countries, and that 2) taxes are too low to maintain or improve- the current government-run social safety net and the level of public infrastructures. While it is true that the fiscal pressure (as measured by the tax-to-GDP ratio) is considerably lower in Spain, we believe this thesis is biased and misleading. To show this, the Institute) Juan de Mariana has published a detailed report called "The fallacy of low taxes in Spain: A comparative study of taxation" (27 December 2010). Basically, the argument of the supporters of tax hikes creates confusion between tax revenues to GDP (which is low mainly because of the very high unemployment rate and low productivity) and the actual tax burden that Spanish citizens and businesses have to bear. The reality is that, for homogeneous levels of income, the idea that Spain has low taxes cannot be sustained. Thus, the individuals of a rich country with a 50 percent fiscal pressure are not affected equally as the individuals of a poor country with the same fiscal pressure. Other measures, such as an indicator of the tax and administrative burden on medium-sized companies (elaborated by the Doing Business project of the World Bank), or a disaggregated analysis of the different
tax figures, reinforce our conclusion. (For more details, see "The fallacy of low taxes in Spain: A comparative study of taxation", www.irefeurope.org, 15 February 2010) Our assessment In addition to the arguments presented above, we think that a substantial tax increase is a wrongheaded policy because of two main reasons. Firstly, it might put an additional drag on the economic recovery process, which is being already quite difficult on its own. By reducing the disposable income of economic agents, it would hinder the adjustment of their financial positions after the excessive indebtedness of the boom era, a necessary condition for a healthy recovery. Secondly, it might be used as a boost for a bigger and more burdensome public sector in the longer term. This would not be a welcome outcome for us, given the costs on society and the loss of competitiveness it would generate. Rather than raising taxes, the Spanish economy urgently needs to lay the institutional foundations of a healthy market economy by introducing structural reforms to solve structural problems. There are many areas that need ambitious reform, but the following are the most remarkable ones in the context of our study:
The extremely rigid and inefficient labour market should be largely liberalized in order to cut the cost of hiring and make labour relations more flexible. The heavy administrative and bureaucratic burden that entrepreneurs face should be drastically reduced, to provide them with a more attractive environment for their wealth-creating activities. These two measures are essential if we
want to create employment. The expenditures of the public sector as a whole which has to adjust its financial position as wellshould be cut in a considerable amount, through the elimination of inefficient public spending programs and subsidies, or the rationalization of the inefficient and extremely expensive federal government system.
Spain ngel Martn Oro 257
Sweden Anders Ydstedt, Partner at Captus, Malmo Lower taxes but higher tax revenues In 2006 Sweden got a new centreright government. This government has made major tax reductions during the last four years, mainly as earned income tax credits (a tax credit for certain people who work and have low wages that reduces the amount of tax owed and in some cases gives you a refund). The total taxes as percentage of GDP has decreased from 48.8 to 45.2. During that period the yearly amount of tax revenues has increased with over SEK 80 billion ( 9 billion). Sweden is an example that shows that lower tax levels can give more tax revenues. In September 2010 Sweden had a general election and the centre-right government was re-elected for another 4-year period. A successful, extremely conservative fiscal policy was considered as an important reason for the re-election of the centre-right government. Sweden was hit by a financial crisis in the early 1990s and has since then made measures to keep
the budget targets and even reach a budget surplus. Tax policy: an important issue in the general elections in 2010 Tax policy was a major subject during the election campaigns in 2010. The objective of the earned income tax credits, that the centreright government introduced during 2006-2010, was to make it more profitable for people to work than live on allowances. Senior citizens were not included in this tax scheme and the socialist opposition made this an important issue in the political debate. The socialists called the earned income tax credit "a tax on senior citizens" because senior citizens did not get this tax reduction. As a result, all political parties made it their highest priority to promise lower taxes for senior citizens. The socialists also wanted to reintroduce a wealth tax on capital over SEK 1.5 million ( 170,000). The Swedish wealth tax was abolished as late as 2007. After the general election the many socialists have pointed out that their proposals on fiscal policy, such as reintroducing a wealth tax, partly explain their defeat. Today it seems like the idea to reintroduce a wealth tax is a dead issue in Sweden.
Due to extremely high total tax wedges for individuals (the difference between what employers pay out in wages and social security charges and what employees take home after tax and social security deductions), cleaning services and house maintenance has been small sectors with few regular businesses, although there have been many illegal house maintenance workers. The centre-right government introduced a scheme with tax deductions for cleaning services and house maintenance where 50 percent of the total cost is deductible up to SEK 50,000 ( 6,000) per person and year. This has been seen as a success, especially for house maintenance services, with many new jobs and a total of SEK 14 billion ( 1.6 billion) paid in subsidies during 2010. Critics argue that the tax deduction has made it possible to increase prices for services. For taxes on businesses there has been few initiatives during the last four years. In the election campaigns both the centre-right government and the socialists promised to introduce a lower VAT on restaurants. Today the VAT level on restaurants is 25 percent and after the election the re-elected centre-right government has decided to start a state committee that will investigate the effects of a 12 percent VAT on restaurants. The government has also appointed a state committee that will look into
the taxation on businesses. This committee will evaluate the corporate tax and the tax level on capital income. It will also find solutions to make it more tax favourable to use equity than debt to finance business investments. The moderate party, which is the biggest party in centreright government, has preferred to lower the corporate tax level. In 2009 they lowered the corporate tax level from 28 to 26.3 percent. The socialist party is also in favour of lowering corporate tax levels. Both the moderate party and the socialist party consider lower corporate taxes a competitive advantage, which will attract businesses to Sweden. Taxation of capital income has not been of political interest, except for the inheritance tax and the wealth tax, which were abolished in 2004 and 2007 respectively. Perhaps will the new committee on taxation on businesses change this situation? High tax on capital income is probably one reason why successful Swedish entrepreneurs such as Niklas Zennstrm (Skype) and Ingvar Kamprad (IKEA) have placed the ownership of their businesses in other countries (Luxemburg and Netherlands). Sweden has highly progressive taxes on personal income
Sweden now has the highest marginal tax rate on income since Denmark lowered their top marginal tax rate in 2009. The government has lowered income taxes quite substantially with an earned income tax credit but they have not lowered the top level of marginal tax. The level of the earned income tax credit depends on the total income. It is constructed to give the highest tax credit for lower income levels. The earned income tax credit makes it more worthwhile for people outside the labour market to work, but it is also extremely complicated to calculate. The earned income tax credit, or inwork tax credit as the government prefer to call it, was introduced in 2007. Three more steps have followed in 2008, 2009 and 2010. The moderate party talks about introducing at least two more steps in this scheme of earned income tax credits. At least one of the other parties in the centre-right government is not as happy about this and they propose a lower top marginal tax rate. When the centre-right government was elected in 2006, they promised to lower the top marginal tax rate but it is likely that there will be a compromise where the bracket for the highest marginal tax rate will be changed so that fewer will pay the highest marginal tax. The personal income taxes start with local taxes, which are decided on a
local level. The local taxes are in average 32 percent, from 29.08 to 34.70 percent. In 2011 only 20 out of 290 municipalities will change their tax level. Some municipalities will raise the level and some will lower it. Above an annual income of SEK 395,600 ( 44,000), working Swedes have to pay state tax, which is 20 percent. Retired citizens start to pay state tax from an annual income of SEK 418,200 ( 47,000). This difference is probably a result of the debate about the earned income tax credit, which until now have not given the same tax cuts to senior citizens. Senior citizens were as mentioned above an important factor in the general election. The top marginal tax level is a state tax of 5 percent. This tax starts at an annual income of SEK 560,904 ( 63,000) for working citizens. The tax bracket for this top level has been raised from SEK 545,196 ( 61,000). In total this makes the top marginal tax rate 20 plus 5 plus the local tax, which varies from 29.08 to 34.70 percent. This is unfortunately not the whole truth. Employers have to pay taxes and mandatory social charges on wages. In total they are minimum 31.42 percent and are divided into e.g. charges for retirement costs, healthcare costs and labour market activities. Most of these charges can be seen as taxes. If we include employers' taxes on wages the total top
marginal tax rate in Sweden is 70 percent. The earned income tax credit system has made it extremely complicated for individuals to calculate how much tax they will have to pay. For an annual income of SEK 180,000 ( 20,000) the average tax paid is 20.7 percent, for an annual income of SEK 300,000 ( 34,000) the average tax paid is 24,5 percent and for an annual income of SEK 420000 ( 47000) the average tax paid is 28.1 percent. The Swedish income tax system has been so complicated that the most reliable source of information is a privately owned an operated website (www.jobbskat-teavdrag.se). At this website it is possible to calculate the actual tax level. Most Swedes has got substantially lower taxes due to the earned income tax credit system but public polls shows that many Swedes don't recognize this. A poll made by Statistics Sweden in 2009 showed that only 40 percent of all Swedes knew about the earned income tax credits. Among unemployed, those who should be targeted by this policy, the knowledge about the earned income tax credits was even lower. A budget with a surplus target Sweden has an extremely conservative fiscal and budget policy. In the early 1990s Sweden was hit by a financial crisis and after that a surplus target for the budget was
introduced. The surplus target requires public finances to show a surplus of 1 per cent of GDP on average over a business cycle. In the fiscal plan for 2011 the government says: "The goal of economic policy is to create the highest possible sustainable welfare by means of high sustainable growth, high sustainable employment, welfare that benefits everyone and macroeconomic stability." In the general election this cautious budgetary and fiscal policy gave the Swedish language a new expression. Instead of talking about election promise, Swedish politicians started to talk about "reform ambitions". A "reform ambition" will be realized as soon as there is room for the reform in the state budget. From 2009 to 2010 the public debt has actually decreased from 41.7 to 39.1 percent of GDP. In the fiscal plan for 2011 the government predicts, "...some further room for reform is expected to arise for 20122014. The estimate is, however, subject to considerable uncertainty. Further reforms can therefore only be implemented if the estimate does not change when the uncertainty declines over time." During the financial crisis Sweden has had a deficit of 1.2 percent of GDP in 2009 and 1.3 percent in 2010. The fiscal plan from the government forecasts a deficit of 0.4 percent in 2011 and from 2012 there will be a surplus again. In Sweden most critics
argue, not against the deficit, but quite opposite they say that Sweden should invest more in infrastructure and education during the financial crisis to make Swedish industry more competitive and promote future growth. In the fiscal budget for 2011 total tax revenues will be SEK 1,531 billion (172 billion) but political reforms amounts only to SEK 13 billion (1.5 billion). The forecast for GDP is that it will rise with 3.7 percent in 2011. In 2010 it increased with 4.8 percent. The unemployment was above 8 percent in 2010 and the forecast is that it will be above 8 percent also in 2011. The system with twofold punishment for tax crimes is challenged The Swedish tax system has special sanctions for tax crimes. The Swedish tax authorities can sentence a taxpayer to pay a penalty tax, usually 20 or 40 percent extra tax. Tax crimes are also a part of the regular judiciary system and the offender can thus also be sentenced with a fine or in severe cases to jail. Sweden has twofold punishment for tax crimes. A "tax crime" can be a mistake as simple as a typing error on a tax form. This twofold punishment is not in conformity with judgements by the European Court of Justice. Recent
judgments in Swedish courts have challenged the twofold punishment in the tax system. The trend towards higher energy and environmental taxes was stopped in 2010? Sweden was the first country in the world to introduce a tax on carbon dioxide emissions in 1991. Despite strong public protests all political parties have been in favour of higher taxes on energy and emissions since the 1990s. Total tax revenues on energy, carbon dioxide and sulphur dioxide exceeded SEK 65 billion ( 7.3 billion) in 2009, about 5 percent of total tax revenues. In 2011 the energy tax on diesel fuel was raised with SEK 0.50 ( 0.06) per liter but a majority of politicians rejected further proposals for higher taxes on emissions. Proposals
for higher taxes on energy and environment from the socialist opposition have been seen as one of the reasons for their defeat in the general election in 2010. The centreright government has been very clear about not introducing higher taxes on environment for the future four years. Perhaps, the trend towards higher energy and environmental taxes was stopped in 2010?
Switzerland Pierre Bessard Liberales Institute, Zurich and Institut Constant de Rebecque, Lausanne Switzerland's issues with the European Union regarding certain cantonal corporate tax regimes and savings taxation continued to impact policy in 2010. The Swiss government adopted an ordinance for the application of OECD standards for exchanging information in individual cases of tax evasion concerning nonresident clients of Swiss banks. Internally, Swiss voters rejected a proposal to impose minimal tax rates across cantons for high income or wealth. The Swiss government also improved rules for financing companies. Ongoing differences with the European Union Cantonal corporate tax regimes In December 2010 Council of the European Union adopted a report on EU relations with European Free Trade Association countries, where it reiterates its concerns regarding certain Swiss cantonal corporate tax
regimes, which in its view create "an unacceptable distortion of competition" on the basis of the 1972 Swiss-EU Free Trade Agreement. Although Swiss and EU officials have been engaged in a "dialogue" for some time, the positions have not evolved. The EU considers that Switzerland has been procrastinating over the issue for the last four years in a "wait and see" approach. The latest EU report is unlikely to impress the Swiss government, however. Besides the EU's numerous internal problems, the Swiss government has repeatedly found the EU complaint baseless, as the special tax regimes apply according to specific criteria to holding and auxiliary corporate structures with practically no operations in Switzerland. These structures carry out financing, research and development and other headquarters services for their groups abroad. There is no discrimination between Swiss and non-Swiss companies. The difference arises from the different rates applicable on revenues from Swiss and non-Swiss sources. As the latter are taxed at very low rates which may reach 2% depending on the extent of operations in Switzerland, many corporations have relocated their headquarters in recent years. The Swiss central government has no authority over cantonal tax systems. With regard to what the EU
calls "harmful business tax practices", the European Council hopes to pressurize Switzerland into applying the principles and criteria of the EU Code of Conduct on business taxation adopted in 1997. The Swiss economy strongly opposes such a move. Observers expect that Switzerland might give in eventually with a solution that would decrease corporate taxation for all types of companies. Some cantons have signalled that they might adapt their tax systems in that they would lower tax rates for revenues from Swiss sources and apply the same rates to all types of corporations. Savings taxation Concerning the taxation of savings of EU residents' deposits in Switzerland, the European Council has welcomed the readiness of Switzerland to consider an extension of the scope of the savings taxation agreement, once the EU has finalized its work on the revision of the savings taxation directive. The withholding tax agreement for savings income between Switzerland and the EU has been operational since 2005 with tax revenues in excess of CHF 535 million in 2009, to the benefit mostly of the Italian, German and French governments. Switzerland adamantly refuses to adopt an automatic exchange of
information, the EU's official policy, in order to preserve the financial privacy of banking clients. Brussels is expected to take up the automatic exchange of information issue, which also concerns Austria and Luxemburg, in 2017. The Swiss government has put forward as a lasting alternative the implementation of a tax at source for all revenues of non-resident clients of Swiss banks. This proposal, which emerged from the banking sector itself as a way to preserve banking secrecy, is controversial, as it would extend the Swiss banks' role as tax-collecting entities. However, its appeal for heavily indebted governments has led to progress for this plan in 2010, although the EU remains sceptical towards a solution that goes against its efforts to centralize and standardize policy across the continent. Two member states, Germany and Britain, bypassed Brussels and signed bilateral agreements with Switzerland on this issue after exploratory talks conducted by a joint working group. According to the agreements, negotiations will take place between these two states and the Swiss government to "further intensify cooperation in financial and tax matters" and to "strengthen longterm legal security for market participants". Eventually this should lead to improved market access for Swiss banks directly from Switzerland in European domestic markets.
The agreements seek a "fair and lasting" solution in the interests of both sides. German and British taxpayers should not be deterred from holding a bank account in Switzerland. In future, however, the possible risk of tax evasion should not impact on the investment decisions of taxpayers from those countries. During the exploratory talks, the parties also agreed on a solution which respects the protection of bank client privacy. Consequently, the automatic exchange of information will no longer be an issue in relations between the two contracting states and Switzerland. Further, the solution will apply after the entry into force of the agreement to be negotiated (no retroactive effect). The solution, the details of which are to be clarified during the negotiations, covers the following points in particular: the regularization of past untaxed existing assets; the introduction of a final withholding tax for the future on investment income (at a rate to be negotiated). After the tax has been paid the tax obligation towards the country of domicile will have been fulfilled. Extended administrative assistance has been agreed in order to prevent any possibility of circumventing the withholding tax. This envisages that the German and British authorities can submit a request for administrative assistance which states the name of the client, but not necessarily the name of the
bank. Nevertheless, the number of requests that can be submitted is limited and must be well founded. "Fishing expeditions" are not possible. Finally, the package includes measures to decriminalize banks and their staff. Exchange of information according to OECD standards In 2010, the Federal Council adopted an administrative ordinance that governs the implementation of administrative assistance provisions in new or revised double taxation agreements (DTAs) in accordance with the OECD standards. The Ordinance on the Provision of Administrative Assistance in Accordance with DTAs rules the requirements for providing and implementing administrative assistance to third countries. If state authorities submit a request on the basis of a DTA concluded with Switzerland, the Federal Tax Administration will conduct a preliminary examination. The prerequisite for the request is that it is in line with the principle of good faith. Requests for administrative assistance will be rejected if they are based on information which was obtained or forwarded due to actions which are punishable under Swiss law. In clear language, this means that the Swiss authorities will not
cooperate on the basis of stolen data from banks. Other core requirements mentioned in the ordinance are detailed information to clearly identify the person concerned and the holder of the information, in general the bank. Switzerland will not provide administrative assistance in the case of fishing expeditions, either. The procedural rights of those concerned will also remain fully safeguarded. Those concerned may file an appeal with the Federal Administrative Court. A law is under preparation to replace the ordinance. In March 2009, the Federal Council had taken the decision to adopt the standards set out in Article 26 of the OECD Model Convention with respect to international administrative assistance in tax matters. Switzerland has since negotiated new DTAs or correspondingly revised DTAs with over two dozen states. According to the new rules Switzerland's principle of double criminality no longer applies to non-residents as regards tax subtraction (or tax evasion, not a penal, but an administrative offence in Switzerland, as opposed to tax fraud, which involves the forging of documents). Rejection of minimal tax rates by 58.5% of voters
In November 2010 a majority of voters turned down a proposal by the Social Democratic party to impose minimal tax rates across cantons for residents with income over 250,000 Swiss francs or wealth over 2 million francs. Nationally 58.5% of voters rejected the plan, with a record majority of opponents of 79.9% in the canton of Nidwalden, one of the country's most competitive and wealthiest cantons. Only four cantons out of 26 approved the proposal, which would have needed a double majority of voters and cantons to pass. The federal system of Switzerland is viewed as the secret to the country's ongoing economic success and worldwide competitiveness. Contrary to many countries where taxes are collected centrally and distributed to regional or local jurisdictions adding layers of bureaucracy and inefficiency, Swiss taxes are levied at three levels: the approximately 2500 communes, the 26 cantons and the Confederation. Although the Confederation has gained weight since its creation in 1848, two thirds of taxes are still levied at cantonal and local levels. The diversity between cantons is substantial: taxes can vary by a multiple of three within the country depending on the location. Only federal taxes are the same for the entire country. Rules, rates, and systems vary enormously among cantons despite formal harmonization
to facilitate comparison. The tax burden not only varies for income or wealth, but also on levies such as the car tax or the dog tax, which depend on the canton or the municipality. Most cantons have also abolished inheritance tax for direct heirs. The canton of Schwyz does not have inheritance tax at all.
Taxes within a canton can also vary substantially depending on the commune of residence. Voters play a central role in the tax system. The introduction of a new tax necessarily requires the approval of voters. In order to limit the diversity and competition in the Swiss tax system the Social Democratic Party wanted to impose a minimal rate of 22% for income over CHF 250,000 and a rate of 5 per mil for wealth over CHF 2 million. Some cantons apply rates that are as much as twice lower those thresholds. The government combated the measure as "dangerous" and "pointless". First, the proposal would have made some cantons less competitive as a business or residential location; second it would have reduced public sector efficiency and encouraged the dilapidation of tax funds. The government also viewed the existing mechanisms as sufficient to prevent any perceived abuse. Amendments to Withholding Tax and Stamp Duty Directives The Swiss Federal Council passed a change in the Swiss withholding tax and stamp duty directives. The reform implies a liberalization of the current practice, as inter-company loans are basically no longer considered as bonds or bond-like instruments in the sense of the withholding tax and stamp duty law. The amendment is beneficial in particular for domestic and nondomestic groups centralizing their cash management activities in Switzerland and seeking to take advantage of the favourable tax environment. Based on the new wording of the directives, loans between group companies no longer
qualify as bonds or bond-like instruments regardless of the loan conditions. Group companies in the context of the law are companies whose financial statements are fully consolidated in the group accounts according to recognized accounting standards.
United Kingdom Tony Curzon Price 279
United Kingdom Tony Curzon Price Editor-inChief, openDemocracy May 2010: the scene for fiscal panic In April 2010, one month before a general election in the UK, Moody's, the credit rating agency, cut Greece's sovereign debt rating; 10 year government bonds reached 12.5% and two-year bonds reached 10.1%. The UK electorate delivered no overall majority in the May 6th election, and, during the coalition negotiations, the pound Sterling fell even against the weakened Euro. More than enough to worry whoever would be the incoming finance minister (chancellor): ratings agency ready to downgrade sovereigns whom they did not think would be able to exercise fiscal prudence; a risk of a currency crisis, dangerous when at least 20% of government borrowing the year before had relied on savings from other countries. Here was the nightmare for an incoming government: lenders doubt its willingness to maintain the value of the currency, to avoid inflating the debt away, or worry that exposure to domestic financial institutions whose liabilities were a staggering 389% of GDP, with UK
banks highly exposed to Irish banks would lead other lenders to reconsider their investments in UK sovereign debt. The risk was that the story would play out with borrowing costs rising; if monetary policy remained lax, inflation through devaluation would be the result. Interest costs to the private sector would rise, GDP shrink and the budget deficit and borrowing requirements rise even further. This is the debt death-spiral which Ireland still finds itself in and which the (politically independent) governor of the Bank of England warned the main party leaders was the immediate risk that Britain faced. One of the first acts of the incoming Conservative/Liberal coalition was to announce an emergency budget for June and a goal to balance the budget over the course of the Parliament. The immediate crisis of loss of faith in Sterling was averted. The program of tax rises and spending cuts implied has dominated fiscal discussions for 2010 in the UK. The over-arching impression has been of a singleminded focus on raising revenue and cutting spending where it was politically possible. The small-scale details of fiscal policy, usually so important in non-critical times, have been subsumed in the larger and more immediate problem of maintaining a reputation as a trustworthy debtor. When I wrote last year's round-up of UK fiscal news for this publication, I
offered the hope that whoever would win the election would be better placed than anyone has been for a long time to overhaul the system. The electorate would know that change and difficulty were needed, and there was the possibility of proposing a deal: "We need to increase taxes overall, but let us lower taxes on what we consider good and raise them on bads..." Unfortunately, that opportunity was sacrificed in the heat of managing a crisis. Why the hole? The Office of Budget Responsibility (OBR, a new institution set up to offer impartial forecasts of the economy and of impacts of fiscal policy) estimates that budget balance will require a combination of permanent tax rises and spending cuts equal to 6% of GDP, of 86 billion ( 101.3 billion). This permanent tightening is needed despite the fact that GDP is forecast to return to pre-crisis levels by 2012. The reason for two thirds of the required tightening is that the Treasury has revised downwards its estimate of the growth potential for the economy. The previous government had assumed and adjusted to a much higher average growth rate than now seems reasonable. Therefore, a "structural" deficit of about 4% of GDP has
opened up. The additional 2% of GDP come from having to reduce the cyclical spending increases of the past 3 years and to accommodate for the much reduced revenue from the once lucrative financial sector. The UK government intends to restore balance by 2014 and it has announced that it will continue to reduce government spending into 2015 (the year an election is expected) in order to deliver tax cuts. The tightening will be gradual and will be composed of 26% tax rises and 74% spending cuts. Table 1 below summarises the balance of measures planned to return to budget balance. Table 1: Measures to reduce deficit (bn) 201 201 201 201 201 2 0 1 2 3 4 0 1 5 Invest -1.8 -2 -2.1 -2.1 -2.2 ment 2. 5 Curren -3.5 -7.7 - t 14.2 19.9 29. 4 spendi 8 2 ng
Benefi -0.4 -2 -4.7 -8.2 -11 ts 2 0. 5 Debt 0 0.8 -1 -1.8 -3 interes 4. t 5 Other -3.1 -5.6 -9.5 11.7 15. 2 7 4 Net tax -2.8 -6.2 -6.9 -8.5 -8.2 8 Tax -3 - increas 14.6 17.2 20.2 20. 2 es 8 2 Tax 0.2 8.4 10.3 11.7 12. 1 reducti 6 4 ons Total -8.1 - - 15.9 23.2 30.5 40. 5 2 2. 5 Fiscal Philosophies There has been a fashion for finance ministers offering stability and
predictability of fiscal policy. The thought is clear: whatever the content of policy, it is only made worse by being unexpected and by not being able to figure as an input into other economic agents' plans. Gordon Brown, as Chancellor in the previous Labour administration, had instituted a rule that current spending should balance the budget over the economic cycle. Sensible-sounding, this rule turned out to be highly manipulable: first, capital spending was excluded; second, "the economic cycle" ended up being a highly subjective concept. In many ways, it appears that the period 1997-2007 was one long period of boom, of growth beyond the growth rate of the economic potential of the economy. But the administration
never saw it that way and therefore never built up reserves for the bad times. The new Chancellor, George Osborne, has therefore announced a new set of rules that he will stick to: Rule 1: balanced structural current budget by end of forecast horizon (currently 5 years) Rule 2: debt as a share of GDP falling by end of forecast horizon The advantage of the first rule is that it does not depend on the subjective identification of the economic cycle. The trouble with it is that it encourages the Chancellor to put pain into the future and to claim that he is honoring a prudent program. As the moment for pain arrives, the forecasting horizon is pushed out again and the balanced budget always comes manana. The second rule is unlikely to be a constraint if the first rule is met. And if rule 1 is met while rule 2 is not, the implication is a severe contraction in GDP one so severe that one does not expect rules like this to be adhered to. The two rules now make no distinction between current spending and capital spending. This reflects the current administration's desire to reduce the role of the state. As a strict matter of economic rationale, one would probably prefer to maintain a distinction between current and capital spend: a large and necessary public good investment, say in railway infrastructure, is properly speaking an investment and may have a pay-back over twenty or fifty years; it ought not to be a block on the investment that it would lead to a violation of the government's short term balanced budget constraint.
Tax changes The tax changes planned are mostly measures that have incentives. Table 2 mix of measures. announced and revenue raising little regard for summarises the
201020112012201320142015VAT2.912.112.51313.514 Bank Tax measures, bn (+ve in Table 2 :Levy01.22.32.52.52.5Reduction is capital s spending0011.91.82allowance revenue raised)
Reduction in tax free investment allowance000.11.211Capital gains tax00.70.80.90.91Corporation tax0-0.4-1.2-2.1-2.73.5Small companies' corporation tax Employers' national insurance0 0-0.1 -3.1-1 -3.2-1.3 -3.5-1.4 -3.7-1.5 -4contributions
The VAT tax rise is relatively simple, VAT had been reduced in an emergency, temporary measure from 17.5% to 15% in 2008 as a rapid way to inject demand into the economy. In June, the Chancellor announced an increase to 20% for January 2011. The UK VAT scheme has many exemptions for goods considered to be necessities and thus has some progressive characteristics in it. Many foodstuffs, children's clothes, equipment for disabled people, books, gas and electricity for the home are all 0% or 5% rated. As a simple tax with some unavoidable progressive elements, it seems like a good tax. Critics argue that its progressive elements are very inefficient: why should everyone be exempt from tax on these necessities? The Bank Levy is a new tax on banks' non-tier 1 capital. It hits larger banks more than smaller ones, and
Sources: http://wwwifs.org.uk/budgets/budgetjune2010/tetlowpdf Income tax increase in tax-free allowance0-3.5-3.7-3.83.9-4Net tax increase2.906.907.608.808.007.50
riskier banks more than less risky ones. The tax rate is of 0.04% from 1 January 2011 and 0.07% from 2012. The structure is very similar to that proposed by the IMF as a "Financial Stability Contribution" - an insurance scheme for lender of last resort services. It is obviously welcome as a revenue-raising opportunity. "Capital allowances" allow the cost of assets to be written off against tax. It is a complicated tax, with many special regimes. Cutting the rate at which capital costs can be offset against tax is thought to induce large behavioural changes, and investment will probably be affected. At a time when it is hoped that investment activity will replace the demand that government spending reductions are bringing about, this seems like an odd choice for revenue raising. From the point of view of revenue raising, however, it has the advantage that much of the activity it taxes investment - occurred before the tax was raised. That part induces no behavioural change. Capital gains tax has been increased from 20% to 28% for higher rate taxpayers. It has long been known that most very high-earners, especially in the financial services, know how to turn a bonus - taxed at 50% - into a capital gain, taxed at a much lower rate. The goal of bringing capital gains taxes and income taxes closer together to avoid this wasteful avoidance activity seems sensible. Entrepreneurs can now earn a capital gain on their own business of 5m (up
from 2m) that is free from capital gains tax. There is a blanket 10,100 per person annual exemption on capital gains. Corporation tax will be cut from 28% to 24% over 3 years, and small companies corporation tax rate will be cut from 21% to 20%. These measures will be offset to a degree by reductions in plant and machinery depreciation allowances and tax-free investment allowances. National Insurance Contributions (NICs) a payroll tax that purportedly reflects the "insurance" aspect of employment-related welfare provision, like pensions, parental leave, unemployment benefit etc has had a layer of complexity added to an already very complex tax. New companies outside the South East of England now pay no NICs on their first 10 hires for the next 3 years. It is a horribly complicated tax, expensive to administer and does not even contribute to a funded benefits system. It should be reformed and simplified. The personal income tax threshold has been raised from 9,000 to 10,000. This reduces the average tax rate of the low paid substantially and is intended to make low-pay work more attractive. It was a condition of the Liberal Democratic Party entering the government as junior coalition partner. However, the threshold at which the 40% income tax rate is paid has been reduced from 45,000 to 40,000. This will bring an additional
750,000 people into the higher tax band. The Institute of Fiscal Studies summarises the impact of income tax changes as follows: "On average, the incentive for the vast majority of workers to earn a little more will be slightly weakened as a result of these reforms. Some workers will see their marginal effective tax rates increase more substantially as a result of these changes the number of individuals paying the higher 40% rate of income tax will increase by 750,000." Spending cuts The tax increases described above account for only about one quarter of the fiscal tightening that is planned for the next 5 years. The rest comes from expenditure cuts, broadly divided into cuts in benefits and cuts in departmental expenditures. Cuts to welfare spending by the end of the planning horizon The government welfare budget of about 200 billion is to be cut by about 20 billion. This will be achieved through a broad program of cuts in entitlements, with some preference for increased use of means tested benefits (that is, it is tested whether an individual or family is eligible for the benefit). The
difficulty, as always, with means testing is that this raises effective incremental tax rates and worsens "poverty traps". It also tends to make benefit administration more complicated. The general fiscal position has been deemed more important than
incentive effects in many of the reforms. Index benefits against the Consumer Price Index, not Retail Price Index Saves 5.8bn Reduce benefits and tax credits for families with children Saves 5.7 bn Replace housing benefit with locally administered transfer Saves 1.8bn Reform of benefit for those too ill to work Saves 3.1bn Cut council tax benefit Saves 0.5bn Institute overall benefits cap Saves 0.3 bn Other measures: 3.3 bn TOTAL CUTS 20.5bn Cuts to departmental expenditures Non-welfare departmental spending on goods and services will be the largest contributor to the fiscal tightening.
Table 3. Departmental Spending, 2011-2014, % change
International development34.2Climate change16.2Work and pensions1.4Health service0.3Defence-7.3Education-10.8Transport14.6Culture, media, sport-21.1Home office25.2Justice-25.3CLG Local government26.8Business, innovation and skills28.5Environment, food and rural affairs30.9Communities and local government-67.6
Table 3 shows which departments have done well and which badly. There is substantial growth in the overseas development budget - a priority of the Prime Minister's. A political commitment was made to maintaining the budget of the very popular national health service. Energy and climate change, a very young department (it was once in Business, innovation and skills) that needs to accommodate Britain's aging nuclear power stations, commitments on climate change and decline in North Sea oil and gas production, sees its budget expanded. The remaining departments all see very substantial cuts, with broad policy priorities reflected in the relative magnitudes. These cuts, however, are motivated almost entirely by the fiscal constraint. The precise way in which they will be cut, with what impact on services and incentives, is yet to be determined. Conclusion
When the second-highest ranking finance minister occupied the offices vacated by his Labour predecessor after the May election, there was apparently a note on the empty desk saying "Sorry. There's no money left. We spent it all."
That about sums up the politically un-enviable position that the coalition finds itself in. Tax and spending policy has been utterly dominated by the fear of investors deserting UK sovereign debt. The program that the coalition has outlined is very tough: there has never in the peacetime history of the country been such a rapid or large reduction in government spending. Will the coalition actually implement these draconian plans? There are reasons to thinks they might not: if the downturn proves more resilient than expected, there will be great pressure to relent on spending cuts and revert to demand support policies if the economy recovers particularly vigorously, the government will be tempted to be less harsh on some of its natural political constituencies if the Liberal Democrats find that coalition government is not helping them to get re-elected, they will be tempted to end the coalition and vote on measures on a much more case-bycase basis Indeed, the cases under which the government does not follow through on its plans seems to cover almost all likely future scenarios. We should therefore consider that much of the value of these budgetary announcements may be the appearance of a willingness to be tough, rather than toughness itself. Time, of course, will tell.
Country Profiles Austria 2010
Public nnanc es
200 9 Public Debt Public Deficit Consol idated Tax 67.1 % 3.5% Not availab le 70% 4.8% Not availab le 2.9 GDP points 1.4 GDP points
201 0
Cha nge
revenues Per son al Inc om e Cap ital Gai ns inc om e Exc ise tax es We alth Belo w 10 000 0% and bases 10 000 25 000 36.5 % unchan ged 25 000 5 1 00 0 43.2 1% unch ange d Abo ve 5 1 00 0 50 % unc han ged
25% introduced in 2011, previously identical to marginal tax rate, capital gains were tax free after one year
Corpo rate
20% 10% reduced rate (food, books, newspapers) 12% reduced rate (vine purchased directly at a vinery) All Rates unchang ed 25% ________unchanged Tax on tobacco increased in 2011 Flight tax introduced in 2011 No wealth tax Macroeconomic data 1.6% (-3.9% en 2009) 18 333
GDP growth Average net annual income Unemplo yment
4.1% (4.8% in 2009)
Public
Belgium 2010
Yea r Publi c Debt Publi c Defic it Cons olidat ed Tax reven ues 20 09
321.3 9 billion 5.9% GDP 89.99 billion
201 0 341.9 3 billion 4.8% GDP 91.11 billion
Cha nge 6.3 9% 1.1 % +6 % Ab ove 343 30 50% un-
bases Per Bel ow 11240 son 7, 30 _ al 900 79 % chan Inc 0% unch ged om e 33% the property Tax un- or 16,5 % ifange falls within the terms 45% chan cha 00 - d unged chan Cap nge 40% ged ital d 11 unGai JI ns 240 21 %, 12 %, 6% VAT Unchanged (since 1 January 2010 the VAT rate in the catering sector is 12%) Co 90 r- Bell 25 000 - 90 000 - Above por 322 500 322 ate ow 31 Increase in excise duty on diesel CN codes, change of the tax system for manufactured tobacco, modification of the excise system for soft drinks and coffee
Tax rates and
inc om e Exc ise tax es We alt h tax es
25 000 24.2 5%
34.5 500 % No wealth 33% tax
GDP growth
Macroeconomic data 1.6% (-2.7% in 2009)
Average 31 365 income (GDP per capita) 8.7 Unemploy % (7.7% in ment 2009) The establishment of the conciliation service tax, operational Best change in since June 1st 2010, aims to assist the taxpayer find " 2010 arrangement possibilities rather than go to trial ", said Minister of Finances. Worst Article 307, 1 CIR/92 chang which provides an e in obligation to report 2010 payments to persons resident in one of the states appearing on the list of tax heavens (law of dec. 23th 2009) Bulgaria 2010 Public finances Year 2009 2010 BGN 10 Public 080 mil- BGN 11 349 lion 5 million 5 154 803 Debt million million 15.7% 15.3% of of GDP GDP Public Deficit 3.8% of 2.9% of GDP GDP Consol BGN 25 idated 022 mil- BGN 23 Tax lion revenu 12 793 932 es million 35.9% million 12 236 million 34.10% of GDP Persona l Income Tax Capital Gains
Change + 12.6%
+0.9% % -4.4% -1.8 GDP points
Tax rates and bases 10% (Unchanged) 10% (Unchanged)
VAT 20% (Unchanged) Corpor 10% (Unchanged) ate income Increased for kerosene, Excise electricity for industrial purposes, cigarettes, tobacco, fuels taxes Wealth No wealth tax taxes Macroeconomic data GDP 0% (-5% in 2009) 4 800 GDP per ( 4 650 in 2009) capita 8.3% Unemploy (6.8% in 2009) ment Best Despite the excessive deficit chang and the revision of the e in budget, the major taxes 2010 VAT, Corporate and Personal income tax were not touched. Thus, the 10% corporate tax and the 10% income tax are still the lowest in EU. Worst The partial nationalization of chan the private professional ge in pension funds the idea 2010 was to transfer the money from the early retirement accounts in private funds to a newly set-up state "early retirement" fund. At the end, the government transferred the money of those that will retire in the next 3 years into the National Social Security Institute thus, not establishing a new state "early retirement" fund and not shutting down the private professional funds. Croat ia Public finances Year 2009 2010 Change Public 35.4% of 38,2% of 2.8 Debt GDP GDP GDP points Public 2,9% of 4,2% of 1.3
Deficit
GDP
GDP
Consolid 34,% of 33,1% of ated Tax revenues GDP GDP

Tax rates and
Pers onal Inco 43,2 me Tax 00 1 (5 HR 825) K 15 % Capit al Gain s

BeloW
bases ,
HRK 43,201108,000
( 5 825 .3 14 566 ) 25 %
HRK 108,0 01302,4 00 (14 561.4 -40 778.6 ) 35 %
GDP points -0.9 GDP points Over HRK 302, 400 (40 778. 6)
45 %
VAT Corp orate inco me Exci se taxes Weal th taxes
20% for companies 15%-35% for individuals 23% standard rate 10% and 0% Reduced rates Unchanged 20% Certain small companies pay lower rate Unchanged No wealth tax Macroeconomic data -1.5% (-5.8% in 2009) HRK 52,267.65 (7 048) 9.5% (9.2% in 2009) Keeping of the promise to repeal the special crisis tax on incomes
GDP Average income (GDP per capita) Unemplo yment Best
change in 2010 Worst change in 2010 Czech Republic
Public finances Year 2009 onm Change 2010 35.5% of CZK 1 451 Public GDP billion (59 13.1 52 351 209 million) Debt million 39.3 % of % GDP 6.6% of Public GDP 8 CZK 195 -7.3 % billion 582mill (7 955 ion million) Deficit 5.3 % of GDP Consoli 41.153 CZK +4 % dated 1049.8 Tax billion revenue (42.8 s billion) 28.4 % of GDP Tax rates and bases Perso 15 % from "super-gross" nal wage = standard gross wage Inco + health and social insurance me contributions paid by the employer Unchanged Capi All earned income from capital tal Gain s is taxed the same as regular income 20 % (19% in VAT 2009) 10% reduced rate(9% in 2009) Corp 19% orate 20% inco in me 2009 increased: tax on fuels +1 Excis CZK/l (+0.04 ); tax on alcohol approx. +5 CZK on 0.5 l of 40% liquor; tax on beer e approx. +0.5 CZK on 0.5 l of beer; tax on cigarettes +0.04 CZK per piece; tax on tobacco +60 CZK/kg Wealt None, just a property tax (land h + real estate)
GDP Average income per month Unemploy 8.3% (Change from 6.7% ment in 2009) 58 bil. CZK. By this Best amount should be government expenditure in change in 2011 lower compared to the previous plan. 2010 4 %. By this amount rose Worst the consolidated tax revenues of the general government in 2010 change in compared to 2009. 2010 Denma rk Year Public Debt Public Deficit Public Finances 2009 2010 Chan ge DKK688 DKK75 .1bln 2.8bln +9.4 92.3bln 101.0 bin % DKK62 DKK .6bln +34.6 46.5bln 6.2bln 8.4bln %
Macroeconomic data 2% (-4.1% in 2009) 23 324 CZK (933 )
Consolidated
Co:rev H enu es Per son al Inc om e
DKK798.9 DKK836 +4.7 bln .3bln % 107.2 bln 112.2bl n

Tax rates and bases
Inc om e Fro m Cap
ital e
decreased 37.3 % decre Above DKK Dedu ased 40,000 and ctible 28% Inc agains unchan with income total om t local ged below DKK e 389,900 fro taxes m (33.6 52.2% Sha %) ..unch 37. res anged 3% decreased Above DKK 48,300 decr ___ (6,480) ease 42% decrea d sed por 25% ate (unchanged inc om ) e Exc ise tax We Some alth increases in tax 2010 No wealth tax but property is taxed
25 Rate unchanged, but the small number of exemptions has been further reduced
Belo DKK 46,630/ DKK 320,000/ w DKK 320,000 DKK 423,800 DKK (6,260/42,930) 46,63 (42,930/56,860) 40.9% 0 Above (6,26 Net DKK 423,800 0) 8% positiv ..unch e capi- 42. anged 3% tal Abo income dec ve below DK DKK Net K negati 40,000 40,0 (5,37 ve 00 0) capita and with Below DKK 48,300 l (56,860) 56.1% total incom
GDP Average income Unemploy 4.2% (3.6% in 2009) ment Best The lowering of the top change marginal income tax from 63% percent to 56.1% Worst tax reform plus other tax change changes despite the in existing "tax freeze" will 2010 in the long run increase the tax burden by some DKK 24 bn./year ( 3.2 bn.) Fran ce Public finances Year 2009 2010 Change +5.3 Public 1510.7 1 618 GDP points Debt billion billion Public 7.5% of 7.7% of +0.2 Deficit GDP GDP GDP points Consolida 786,4 802,6 +2% ted Tax revenues billion billion Pers onal Inco me Tax Bell ow 5 963 0% Tax rates and bases From From Abov From 5 26 e 70 963 to 420 to 830 11 896 to 70 11 896 830 26 420 5.5% | 30 41% (40% in 14% % 2009) 31.3% tax on dividends (increase 1.2%) 29.3% on real estate gains (increase 1.2%) 19.6% regular rate 5.5% and 2.1% reduced rates 33.1/3 % 15%
Macroeconomic data 2% (-4.7%) DKK 256,090 (34,360)
VA T
Exci se taxe s Wea lth taxes
reduced rate unchanged Yes
Macroeconomic
1.5% (2.6% m 2009) 29 167 9.8% (9.4% in 2009) Best Talks about abolishing the change in wealth tax 2010 Worst Creation of new taxes in an change in already overly complex fiscal 2010 system. Moving away from a flat tax approach. Germany 200 9 Public Debt Public Deficit Consol idated Tax Public finances 201 Cha 0 nge 73,4% avail 2.1 able 75,5 of % of GDP GDP points GDP 4% 3% of of GDP 1 GDP GDP Not Not avail point able
revenues <8 Tax rates 80 005 and bases 05 Between Between 14 8005 son 0% % al Un- and cha Income nge 52882 Unchan d concave increasi ng schedul e ged Uncha nged 25 % Capital Unc Gains hang ed
Per al
25 073 0<
52882 and 42% Unchanged
45 % Unc hang ed
VA T
Exc ise tax es We alt h tax es
Co rpor ate inc om e Slight increase in tobacco taxes in 2011; major increase in to increased subsidies for energy prices expected due "green" energy, an increased which are financed though use. No net fee tax, only energy wealthonhousing property taxes on and land Macroeconomic data 3.3% (4.7% in 2009) 30450 (Change from 2009:
19% regular rate 7% reduce d rate Uncha nged 29. 83% Unc hang ed
GDP growth Average income (GDP per capita)
+3.54% 7.1% Unemploym (7.5% in 2009) ent No major changes for the Best chang better in tax policy, but the finance minister's signals e in that he indeed intends to 2010 honor the debt brake are encouraging. Worst Increase in energy prices chang due to another round of e in increases in aggregate 2010 subsidies for "green" energy. Ital y Yea r Public 200 finance 9 s Il revenue s 1 763 559 million 116,0 % of GDP 5,3% of GDP 42.8% of GDP Ch an ge
Publi c Debt Publi c Defic it Cons olidat ed Tax Inco me Fro m Lab our
2010 1 842 +4.4 269 million 6% 118,5 % of +2.5 GDP GDP points -1.4GD P 3,9 % oin of GDP ts 43.3% of GDP
______pc . +0.5 GDP points
Tax rates and bases 15.001 - 28.001 Abov 55.001 0 - 15.000 e 28.000 75,0 75.000 |_55.000 00 23% I 27% I 43% 38% 1 41% UnUnchan- Unchanchang UnchanUned ged ged ged changed
Capi tal Gain s

VAT
Dividendes: 27% ; Interests: 12,5%/27% ; Royalties: 15% (forthcoming change) 20% regular rate 10% and 4% reduced rates Unchanged 27,5% Unchanged Unchanged
pora te inco me Exci se taxe s Wea lth taxe s GDP Average income (GDP per capita) Unemplo yment Lithuania
No wealth tax
Macroeconomic data 1.1 % -5.1% in 2009 Not available 8.4 % 7.8% in 2009
Public finances Year 2009 2010 Chan ge 34436 24632 Public million million + 7-8 Litas 29.5 Litas 36-
37% of Debt % GDP Public 7.2% 8.2% -1% Deficit Consoli LTL 27 Not dated 018 Tax million 7 revenue 831 disclosed s million 32.9% Tax rates and bases Per Inco son me 15% al Capita l Gains VAT Corpo rate incom e Excise taxes Wealt h taxes 15% Unch ange d
Uncha nged
21% regular rate 9% reduced rate Unchan ged 15% (from 20% in 2009) Introduction of a tax on electricity no
Macroeconomic data 1.3% GDP growth - 14.8% in 2009 Average 2081 Litas (603 salary Euros) (before taxes) 18%
Unemploym ent
13.7% in 2009
Corporate income tax decreased from 20 to 15% , . from .15 to 20% by the same (although 6it was increased in 2010 y v Best change . , r N government just a year before..). M new rules for taxing income-in-kind. Private use of company or otherWorst automobiles became taxed, but change in 2010 companies still cannot deduct VAT of purchased automobiles. ____________________ Luxembo urg Public financ es 2009 Public Debt Public Deficit Consol idate d Tax reven ues 5.6 billion 0.7% of GDP 10.47 billio n 201 0 7.6 billio n 2.2% of GDP 10.8 5 billio n Cha nge +35. 7% +1.5 GD P poin ts +3.5 %
Tax rates and bases Perso Bellow 11.265 Over nal Incom e Tax to 41.793 11,265 41.793 0% Progressi 39% Unchan ve tax ged rates from 8% to 38% Unchang ed 28.8 Capita % Incr ease l d Gains VAT tax rates amount VAT (normal VAT tax rate), 15% 12% (intermediary VAT rate), 6% (reduced rate) or 3% (super reduced rate). Corpo 28.8 rate %. incom Incr e ease d Excise Unchanged taxes been abolished Wealt Wealth tax has tax payers but for individual remains applicable to companies only at a rate of h 0.5%. taxes Macroeconomic data GDP growth 3% -4.1% in 2009 Average 74.644,07 income (GDP per capita) 5.8% Unemployme 6% in 2009 nt Best change in 2010 Worst The increase is provided of change the marginal tax rate for in 2010 personal income tax to 39% to which is added a "crisis contribution" at the rate of 0.8% in 2011. A special minimum income of 1.500 tax is introduced for financial participation companies (SOPARFI's) whose activities are excluding commercial transactions.
Netherlan
Public
Yea r Public Debt Public Deficit Consol idated Tax reven ues
201 0 million 342 ___ billion 38,1% 381 60% billion of GDP 66,2% 5,3 of GDP % 209 611
Tax rates and bases 18.629 33.436
200 9
Cha nge 214 006 million ___ 37,9% 11.4 % +6.2 GDP points +2.1 % -0.2 GDP points
52% uncha nged
Below 33,00% Decrease of 0.45%
Per 41,95% son 0.45% _ unchanged _ _ al Capital gains are taxed at Inc regular income tax om and corporate e income tax rates like Tax in previous years Cap ital Gai ns taxes VA T Cor por ate inco me Exc ise taxe s We alth 0.5 JP
42% uncha nged
19 20 entry to museums, zoos, % % theatres and sports) ) All 6% unc Rates unchanged red Profits Profits up to 200.000 uce exceeding 200.000 d rate (foo 25% d pro 0.5% decrease duct s, unchanged boo ks, Formally no med individuals have wealth tax to report their icin net wealth in Box III of the es, art, income tax on an annual basis. supposed anti The net wealth is a fictitiousto have generated que return of 4% which is taxed at s, an income tax rate of 30%. Macroeconomic data GDP (-3.9% in 2009) growth Averag 32.500 e income 4.2% Unempl (3.5% in oyment 2009) The best change was consideration to come to a fully new Best change in income tax regime in 2012 which might involve a flat tax in the 2010 income tax. Currently the Ministry of Finance is studying on this issue to a report early 2011. Worst change in 2010
Norway 28% Surtax on wage income 9% and Tax rates and bases income from self(brackets increas ed by 12% (brackets increased by 3.2%) 25%, 14%, 8%, 0% 28% Exc ise tax es We alth tax es
Corpo rate incom e
Increased for tobacco Above NOK 700,000 0.7% municipal tax + 0.4% state tax Macroeconomic data 1.7% Change from 2009 3.5%
GDP growth Average income (GDP per capita) Unemploy ment
Polan
Public
Yea r Public Debt Public Deficit Consol idated Tax revenu es 166 7 million 7.3%
200 9 99 millio n
201 0 207 7 millio n 7.3 % 119 9 millio n
Cha nge +24. 6% Unc hang ed +21. 1%
Tax rates and bases Above 85 Bel 528 PLN Pers (21.522,7 onal 6) low Inco me 14 839.02 PLN 85 528 Tax (3.734) plus 18% of the PLN amount above 85 (21. 528 PLN Capi 522, 76) 18% tal minu 19% s Unchanged 556.02 PLN (140) 23%, 8%, 5% (previousl y 22%, 7%, 3%) Cor 19 por % ate Unc inco hang me ed Wealth Exci taxes se taxes
Incre ased
for cigarettes no Macroeconomic data
3.4%
GDP
(1.7% in 2009) Average 9 300 income (GDP per capita) 9.8% Unemployme (8.2% in 2009) nt _ Increase in transparency of taxation system: Best reports on tax preferences administration costs change in and (including taxes) 2010 Worst Increase in VAT (from change in 22% to 23%) 2010
Portug al
Public financ es
200 9 Public Debt Public Deficit Consol idated Tax revenu es 76.1 %
201 0127 568 milli on -9.3 % 15 701 million 65 298mil lion 38.9 % of GDP
Cha nge 82.1 + 6 % GDP 140 459 points milli on +10. -7.3 1% % -20 .11 12 % 544 millio n 71 859mf +10. flion 05% 41.6 % of GDP
Macroeconomic data 1.1% (-2.6% in 2009)
GDP Average income (GDP per capita) Unemplo yment
15 738 10.7% (9.6% in 2009)
Best change in 2010More than 200 measures to control the deficitWorst change in 2010Several dozen millions spent on studies for various infratsructures when it was obvious the billions were not there to build those infrastructures nonresiden t
4 7 Bel 989 410 -7 42 410 259 ow 4 7 Tax 410 989 18 rate son (10. 375 5% 14 24. ai 5% (13 (23. % Inc om % 5% e 200 200 200 in in Tax 11, 9) 9) 9) 5%
Cap ital
Bond Income 21.5% (20 in Portug al Bond Price
s and base s
42 259 II" 38 % (36. 5% in 200 9)
61 244 1 6 244 43.5 % (42 % in 200 9)
66 045 6 6 045 153 300 43.5 % (42 % in 200 9)
Abo ve 153 300
46. 5% ( 42 % in 2009 )
Stock Dividends 21. 21.5 21. 5% % in 5% ffl% ffl % 23%, 13%,
Stock Price Gains Non-Residents:
Wealt h
(*) Madeira & Azores 16%, 9%, 4% (14%,
8%, 4% in 2009) 25% for residents taxable profit Companies with in(Unchanged) above2.5% onpay a"surplus" extra 2 mil that 2011 an Increase of circulation tax Yes, for real property
Romania Public finances 2009 29,99 GDP points 7,2 GDP 2010 points Yea 35,66 GDP points 5.23 r GDP points 29,4 GDP Public points Debt Public 31 GDP points Deficit Consol idated Tax revenu es Cha nge 18. 91 % 27. 36 % 5.1 6%
Pers onal Inco me Tax Capi tal Gain s
Wea lth taxes
Tax rates and bases 16 % Unch ange d 16% Unch ange d Normal rate 24%,(19% in 2009) Reduced rate 9%, unchanged Special rate 5%, unchanged 16% Unch ange d Increase for gasoline (3.32%) , diesel gas (3.17%) and cigarettes excises (5.49%). No Wealth tax but real estate taxes increased Macroeconomic data
GDP Average income (GDP per capita) Unemplo yment Best change in 2010 Worst change in 2010
1.9% (7.1% in 2009) 7.2 % (6.3% in 2009) Abolition of minimum corporate income tax VAT increase from 19% to 24% Slovakia 2010 Public finances 2009 2010 22, 6% 17, 7% 28, 9% 18, 1% Cha nge +27,9 GDP points +2,2 GDP points 0.4 GDP points
Public Debt Public Deficit Consoli dated Tax revenue s
VA T
19% (20% in 2011) 10% reduced rate (medicaments, books, medical devices for patients) 6% for home-made agroproducts cancelled in 2011 19% unchanged
income
Corporate
Exc Tax on tobacco increased in ise 2011 taxe Fuel Tax on diesel decreased s by 23,5% Special 80% on We proceedings and tax holding alth surplus emission quotas taxe applied in 2011 and s 2012 tax wealthNo Macroeconomic data 2010 65,9 bln. 4% Change from 2009 3,2 %Change from 2009 14,4% 19% Change from 2009 Fuel tax on diesel decreased by 23,5% 28% growth of public debt
Averag e monthl y salary 769 Unem ploym ent Best change in 2010 Worst change in 2010
Year Public Debt Public Deficit Consol idated Tax 200 9 560,6 82 million
Public financ es -11.1% 201 Cha of 0 nge GDP 22 684,3 332.8 09 % 82 million -1.9 million GDP 9.2 points % 4.3 % 347.2 25 million
Spa in
sonai InCapital
reve nues 1 7 7 0 7
come Tax Gains

707 007 33 - 53 007 407
Tax rates and
VAT Corporate Excise taxes 24%
in-
53 120 407000175 000 A b o v e 17 5 0 0 0 I n -
28% 37% c Bellow 6 000 21% r Increas ed e 18% regular rate and reduced rates a of 4% and 8% (Increased from s 16%, 4% and 7% in 2009) e 25% for d 30% (regular rate)35% for small enterprises companies related to 43% 44% 45% hydrocarbon (oil, gas...) activities
=
Increased for tobacco, gasoline No wealth tax (since 2008, 100% rebate)
GDP GDP per capita (current market prices) Unemploy ment
Macroeconomic data -0.3% (-3.7% in 2009) 22.810

20.7% (18% in 2009)
Above 6 000
19 %
The lack of substantial tax Best hikes, beyond the VAT and capital gains tax raise, to lead the fiscal change in consolidation process. Tax reductions for small 2010 and medium enterprises in the CIT New brackets in the PIT Worst for workers who earn more than change in 120,000 / year VAT rate and other taxes on consumption were 2010 increased to alleviate budgetary problems. Although this is not indeed a good measure, it may be less bad than other tax hikes, e.g. in CIT. Swed en
Public
1295 billions SEK 1288 billions SEK Public Debt (145 billons) (144 +12. billions) 19% 41,7% of GDP 39,1% of GDP 37 +0.1 GDP billions SEK ( points T~41 billions SEK ( If 4,6 Mlions) 4,1 Mlions Public Deficit ) (1,2% of GDP) (1,3% of GDP) Cons 1435 billions SEK 1488 olidat billions SEK ed (160 billions) Tax (166 billions) reven +3.75% ues (46,2% of GDP) (45,2% of GDP) -1 GDP point Tax rates and bases Bellow Above from Above SEK 29,0 SEK 12 500 SEK 8 to 12 500 (the local tax 395600 + ( 1 408) I ( 1 34.7 408) I (44 0% 000) 20% Local tax state 51,55% 0% tax)
fina nce
+0.69 % -2.6 GDP points
Per son al Inc om e Tax
A ( bov 63000) e SE 56,55%. (local tax+25 % state K 560 taxes) 904 Cap 30 (20 for some ital privately owned Gai companies) ns (Unchanged) 25, 12 or 6% (Unchanged) Corporate 26,3% (Unchanged) income ExciseTax on diesel fuel has been raised with SEK 0,50 ( 0,06) per liter. We no alt h tax es Macroeconomic data 4.4% (GDP 5.1% in 2009) Average SEK 316 000 income ( 35 600) (GDP SEK 302 000 per ( 34 000) in capita) 2009 8.2% Unemploy (8.3% in ment 2009) The proposal on Best reintroducing a wealth tax is not on the agenda any change in more. 2010 Sweden still has worlds' Worst highest top marginal tax rate, above 70%. change in 2010 Switzerland Year Public finances 2009 Change 2010
CHF 208 billion 160.8 billion 38.8% Public Deficit +0.4% Public Debt
CHF 211 +1.49% billion -0.6 163.2 GDP billion points 38.2% -0.9% -1.3 GDP points Consolidated Tax CHF 191 -3.1% CHF 197 billion billion revenues 147.7 152.4 billion billion Person al Incom e Tax Capita l Gains VAT Corpo rate incom e Excise taxes Wealt h taxes GDP Average income (GDP per capita) Unemploy ment Tax rates and bases 21.7% (average, depending on canton) Unchanged No tax 7.6% Unch ange d 18.8%(average, depending on canton) (21.2% in 2009) Unchanged 0.02% (average, depending on canton) Unchanged Macroeconomic data 2.7% (-1.6% in 2009) 49.450 48.150 in 2009 3.6% Unchanged
Best change in 2010 Worst change in 2010
no change in cantonal sovereignty over tax rates none this year
United Kingdom Public finances Year 2009 2010 Change Public 7081 863 21.89% Debt billion billion Public 105 104 -0.95% Deficit billion billion Consolid 548 5.38% ated Tax 520 revenues billion billion Tax rates and bases 37 Above Pers 0 - 2 440 401 - 150,0 150 00 000 onal 0 - 37 400 50% 40% tn 10% 20% (highe (starti (basic (Addi ng rate) r rate) tional me rate rate) for Increa saving sed s only)
S
Capit al Gain s VAT Corp orate inco me Exci se taxes Weal th
18%28%dependin g on income (18% in 2009) 20% (15% in 2009) 28% Unch ange d 2-10% increases on various items - alcohol, cigarettes, fuel no
taxes GDP Average income (GDP per capita) Unemploym ent Macroeconomic data 1.7 % (4.9 %) Not available 7.9% 7.5% in 2009
_ , Increase in VAT F & 17.5% to 20% while keeping from Best change in 2010 . . exemption structure intact The huge expenditure and national borrowing to save Worst change in 2010 the finance sector, allowing none of the debt holders to lose any money Published by IREF or in collaboration with IREF 2010, Taxation in Europe 2010, IREF 2009, Futur des retraites et retraites du futur: Ta transition, Jacques Garello et Georges Lane, vol. 3, Librairie de l'Universit, Aix-enProvence. 2009, Taxation in Europe 2009, IREF 2009, La flat tax : La rvolution fiscale, Robert E. Hall et Alvin Rabuschka, Editions du Cri 2009, Plante bleue en pril vert, Vclav Klaus, Librairie de l'Universit, Aix-en-Provence. 2008, Taxation in Europe 2008, IREF, www.irefeurope.org 2008, Futur des retraites et retraites du futur: La capitalisation, Jacques Garello, Georges Lane, vol. 2, Librairie de l'Universit, Aix-enProvence. 2008, Futur des retraites et retraites dufutur: Le futur de la rpartition, Jacques Garello and Georges Lane, vol. 1, Librairie de l'Universit, Aixen-Provencev.
2007, Taxing Wealth'What For?, IREF Monographs, www.irefeurope.org 2006, Taxation and Justice, IREF Monographs, www.irefeurope.org 2005, Public Debt, Public Spending and Economic Growth, IREF Monographs, www.irefeurope.org 2004, Taxation and Economic Growth, IREF's Monographs, www.irefeurope. org 2003, La dcentralisation fiscale , Numro spcial du Journal des Economistes et des Etudes Humaines, vol. XIII, n4.
IREF 10 Rue Pierre d'Aspelt, L-1142 Luxembourg RCS F 140 35, Avenue MacMahon 75017 Paris
http://www.irefeurop e.org

Taxation in Europe 2011

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Taxation in Europe 2011

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Taxation in Europe 2011 The yearly report on the evolution of European tax systems

CONC URRE NCE FISCA LE ET LIBER TE ECON OMIQ UE

Germany Italy Lithuania Luxembourg Netherlands Norway Poland Portugal

198 199 200 201 203 204 205 206

Main findings for 2010 Pierre Garello

Main findings for 2010 Pierre Garello

Main findings for 2010 Pierre Garello

Main findings for 2010 Pierre Garello

57.2 61.5 63.4 63.8 2 0 2 2

Main findings for 2010 Pierre Garello

Main findings for 2010 Pierre Garello

Main findings for 2010 Pierre Garello