The Discussion on Tax Reform Is Also a Discussion on a Competitive and Predictable Business Environment

Ljubljana, 10 January 2024 - "The double amendment of the Income Tax Act in the same year is certainly not an example of a stable and predictable business environment, to which the government added new burdens last year," said Vesna Nahtigal, General Manager of the Chamber of Commerce and Industry of Slovenia (GZS), at the beginning of the event on behalf of the organisers of the public consultation on the tax reform, the 15 economic and agricultural associations and organisations that together represent "Gospodarski krog", adding that the government has not reduced the burden on the economy by any measure, except for the mitigation of the energy crisis. Ms Nahtigal said that the government has not taken any measures to reduce the burden on the economy. The tax system should be transparent, simple, understandable and predictable for people and businesses. The aim of tax reform should be to relieve the burden on the Slovenian economy and create the conditions for it to be more competitive on world markets. A favourable tax policy encourages foreign investment and economic growth. At the same time, tax reform should address demographic challenges and focus on preventing the outflow of educated staff abroad and attracting foreign skilled staff, said Marko Lotrič, President of (Association of Employers in Craft and Small Business of Slovenia) ZDOPS, in his closing remarks.

The economy in Slovenia is already more heavily burdened by corporate income tax than in four comparable Central European countries in terms of effective tax rates. Raising it by an additional 3 percentage points will make it even less competitive. As a share of GDP, we rank 3rd among the EU-27 in terms of social contributions collected. A key reason for the divergence is the high effective taxation of labour through pension contributions and the absence of a development cap. A comparison of net wages for the Slovenian average gross wage of €2,200 shows that in the seven Central European countries, the average employee's monthly remuneration is €145 higher, and if we raise the wage level to €4,000 gross, it is as much as €290 higher. In terms of competitiveness of countries, Slovenia is ranked 42nd out of around 60 countries, falling behind both the larger European countries as well as the smaller Scandinavian and Baltic countries. These data prove that Slovenia is not attractive for greenfield FDI, said Vesna Nahtigal, General Manager of the Chamber of Commerce and Industry of Slovenia. She added that the aim of the tax reform should be to relieve the burden on the Slovenian economy and to create conditions for it to become more competitive on global markets, because a favourable tax policy encourages foreign investment and economic growth. And this is the best way to ensure sustainable public finances in the long term.

Slovenia continues to be in a good position to accelerate its development, both in terms of financial position and some structural indicators of competitiveness and resilience, including a high degree of social cohesion, said Dr Peter Wostner, UMAR, who points out that progress is too slow and lacks determination, especially in the face of negative demographic trends. In fact, much more will need to be done in the future with the available resources, and Slovenia should pursue the goal of raising productivity to the level of leading innovators. To achieve this goal, national strategic priorities should be more clearly defined and should more clearly pursue an accelerated and comprehensive smart transformation, both in the segment of transforming Slovenia's traditional flagships and in more ambitiously addressing missed opportunities (e.g. in the field of information and communication technology). This requires a comprehensive set of measures, which are structured in the Productivity Report as a predictable, efficient and responsive business environment, a strategic approach to human resource development and measures to accelerate the transition to a smart and green economy. This will require, also from the perspective of fiscal restructuring, a more favourable environment for the implementation of highly productive activities and employees, in view of the mobility not only of capital but also of people.

Dr Tjaša Redek and Dr Mojmir Mrak from the Faculty of Economics, University of Ljubljana, Dr Matej Avbelj from the European Faculty of Law, Dr Davorin Kračun, President of the Fiscal Council, and Ivan Simič from Simič & Partners and the Tax Advisory Chamber of Slovenia presented their views at the roundtable.

Wages in Slovenia are low, but they are a reflection of what we generate in real terms in society. If we do not focus on how to create more, they will stay that way, pointed out Dr Tjaša Redek. Policy needs to focus on linking different strategies that will lead to higher prosperity. With the current wage burden, it is difficult for companies to afford the best educated employees. The distribution of wages has gone against those with higher education in recent years, and the wage gap is shrinking. 

Dr Mojmir Mrak described the government's approach to tax reform as "hand-wringing". The government is basically redistributive. He believes that it will not be possible to solve serious development problems without mastering the logic of "increasing the cake in the form of more added value". In any case, tax reform should be pursued together with pension reform, and it should first be clarified what pensions are and what social transfers are. He does not believe that there is the will for such a reform and that only certain changes or adjustments are more likely. Therefore, in the current situation, he would prefer not to see a tax reform, because if there is one, it could do more harm than good.

"A right deferred is a right denied", commented Dr Matej Avbelj on the still pending constitutional review of the Income Tax Act. He described the State's failure to ensure effective and fair dispute resolution in society as a hidden tax. In his view, the issue needs to be looked at systemically. He explained that the average time to reach a decision at the Constitutional Court is over 500 days, while only 13% of cases similar to the constitutional review of the Income Tax Act are decided on their merits. The remaining cases are dismissed, which means that the dispute is not resolved. The slow pace of action does not mean that the Court does not decide, but that it leaves the decision-making to the other two branches of government, which too often pass laws in a fast-track procedure.

Dr Davorin Kračun agreed with Dr Mrak on fiscal rules, which he sees as an instrument that benefits mainly smaller, peripheral countries in the EU. We have gone through 3 crises in the last 4 years. The total deficit during this period was EUR 10.2 billion. A quarter of this was contributed by the structural deficit. He advocates predictable and stable public finances, also in the medium and long term, and a competitive and properly distributed fiscal squeeze.

Of the 200,000 companies in Slovenia, most companies pay VAT at the statutory rate, said Mr Ivan Simič. "In Slovenia, we don't even need so much a reorganisation of taxes, but more taxpayers. I myself proposed a few years ago a 6th income tax bracket for those who will have an annual income of more than one million euros. We want to attract rich people to Slovenia to pay taxes here."

In his closing remarks, Marko Lotrič, President of the ZDOPS and the National Council, summarised the conclusions of today's consultation.

CONCLUSIONS OF THE CONSULTATION

  1. Economic and agricultural associations and organisations are such an important partner and stakeholder in the social dialogue that decisions affecting our activities, which the tax reform certainly is, should not be made without us. When it comes to reforms that affect society as a whole, all the cards must be laid on the table, the talks must be frank and the agreements binding. 
  2. The tax system must be transparent, simple, understandable and predictable for people and businesses. 
  3. Tax policy is a system that affects people's lives and the way businesses operate. Therefore, tax reforms should be made infrequently and deliberately so that arrangements last over time, ensuring a predictable and stable business environment. Otherwise, individuals and businesses are systematically discouraged from becoming more active.
  4. The aim of tax reform should be to relieve the burden on the Slovenian economy and create the conditions for it to be more competitive on global markets. A favourable tax policy encourages foreign investment and economic growth.
  5. At the same time, tax reform should address demographic challenges and focus on preventing the outflow of educated people abroad and attracting foreign skilled workers.
  6. Continued excessive tax and contribution increases are bound to increase the grey economy, thus reducing inflows to the budget and social security systems. 
  7. The volatile fiscal environment is also reflected in a higher cost of capital and liquidity, which is also reflected in the financing conditions of the economy and the population.
  8. While the tax burden will be high, especially in 2025, changes to the Income Tax Act have already resulted in lower net wages, despite the higher burden on businesses, for example no increase in the personal allowance, and changes to the tax treatment of performance bonuses. The business community believes that many of the changes to the Income Tax Act, which was amended last year, were unconstitutional. We are still awaiting the Constitutional Court's ruling.
  9. Given the experience of this year and the adoption of laws that have burdened the economy and have not increased people's wages as a result, we believe that it is best that the government does not proceed with further changes to the tax legislation at all. If it does, it should follow the example of Germany or Croatia, where tax reform has relieved the burden on the economy and given people higher net wages.

The expert consultation was organised by the economic and agricultural associations and organisations that form "Gospodarski krog".