The combination of services - infrastructure - taxes is a struggle for
foreign investments
The effect of the Balkan free trade zone depends on the harmonization of
the legislation in the countries
One of the main aims of the
Stability Pact is the creation of vibrant
market-oriented economies in Southeast Europe on the basis of sound
macroeconomic reforms. In order to
achieve this ambitious goal, the markets in the region must become open to
foreign direct investment the trade should be based on efficient and
transparent customs and trade legislation.
At a meeting held at the end of June
in Brussels under the Stability Pact initiative seven countries in the region -
Albania, Bosnia & Herzegovina, Bulgaria, Macedonia, Romania, Croatia and
Yugoslavia, signed a Memorandum of Understanding for the establishment of a
Free Trade Zone. According to the
memorandum the Free Trade Zone should be created by way of a network of double
agreements for free trade by the end of 2002.
In the Memorandum, the countries
express their willingness to harmonize their internal with the one of the
European Union in different spheres, among which are the tax and customs
legislation.
The harmonization in the region
The harmonization of the tax and
customs legislation is of specific importance for the establishment of the Free
Trade Zone. Undoubtedly the creation of
clear rules, in line with the European requirements in this field is of
substantial importance for securing long-term fiscal stability in the
region. On the other hand, there are
significant risks for the countries in the Free Trade Zone if a compatible tax
and customs legislation is not present.
With the removal of the trade barriers, the differences between the tax
legislation will become apparent - especially with regard to the VAT and the
excise duties. In this way, if there
are significant discrepancies in the applicable VAT and excise duty rates, upon
the establishment of the Free Trade Zone, we could witness an unexpected growth
of the cross-border trade, which under equal conditions will lead to a decrease
of the budget revenues in the countries, which apply higher rates of indirect
taxes. At the same time the differences
in the corporate rates might have a substantial impact on the decision of the
potential investors to prefer a specific country for investment among all other
countries in the region.
Therefore, an analysis carried in
advance with regard to the level of harmonization of the internal tax and
customs legislation of each of the countries in the region in Southeast Europe
with the European requirements is of primary importance for the effect of the
establishment of the Zone.
The level of harmonization in Southeast Europe
According to an analysis of the
level of harmonization of seven of the countries in the region the following
results were accomplished with regard to four indicators with equal importance
each carrying a maximum of 25 points:
n
harmonization
of legislation with regard to VAT;
n
harmonization
of legislation with regard to excise duties;
n
harmonization
of customs legislation;
n
harmonization
of legislation with regard to direct taxes and effectiveness of the tax reforms.
Table 1
|
Country |
VAT |
Excise duties |
Customs
duties |
Direct
taxes and tax reform |
Total |
|
Albania |
20 |
12 |
23 |
18 |
73 |
|
B & H |
0 |
0 |
19 |
8 |
27 |
|
Bulgaria |
23 |
24 |
24 |
23 |
94 |
|
Macedonia |
23 |
22 |
18 |
12 |
75 |
|
Romania |
23 |
23 |
25 |
12 |
83 |
|
Croatia |
20 |
18 |
20 |
10 |
68 |
|
Yugoslavia |
0 |
5 |
5 |
5 |
15 |
Source:
Author’s analysis
As long
as the tax legislation in the region is still in the process of constant
changes, the results of the comparative analysis are conditional and valid as
at the end of the year 2000. Based on
the results of the analysis with regard to the rate of harmonization, the
countries in the region can be divided in the following three groups /Table 2/:
Table 2
|
Group |
Country |
Total points |
Rank |
|
1.Harmonized |
Bulgaria |
94 |
1 |
|
|
Romania |
83 |
2 |
|
2.Advanced |
Macedonia |
75 |
3 |
|
|
Albania |
73 |
4 |
|
|
Croatia |
68 |
5 |
|
3.Beginners |
B & H |
27 |
6 |
|
|
Yugoslavia |
15 |
7 |
Source:
Author’s analysis
It is obvious from the results that in five of
the seven countries analyzed there is a considerable rate of harmonization of
the tax and customs legislation with the EU requirements. For these countries, already advanced in the
harmonization process, we cannot anticipate considerable problems relevant to the
participation in the Free Trade Zone.
At the same time, the prospective membership of Bosnia and Herzegovina
and Yugoslavia in the Zone, should take effect only after a substantial reform
in the tax and customs legislation in compliance with the EU rules is carried
out.
Comparative analysis of the tax systems in the region
In the countries in Southeast
Europe, as well as on world scale, there is a common tendency of the decrease
of the corporate tax rates. In 2001
Bulgaria, Albania and Croatia reduced substantially their corporate tax rates
in response to the lower rates of the corporate tax burden in the region as for
Bulgaria they reached 23.5% - 28%, for Albania 25% and for Croatia 20%. The corporate tax and VAT rates, the number
of double tax treaties (DTT) and the availability of tax holidays have a direct
impact to the analysis of the tax systems in the region /Table 3/.
|
Country |
Corporate
Rate |
VAT |
DTT |
Tax
Holidays |
|
Albania |
30 |
20 |
14 |
no |
|
Bosnia&Herzegovina |
30 |
no |
no |
yes |
|
Bulgaria |
28/32,5 |
20 |
46 |
no |
|
Macedonia |
15 |
19/5 |
17 |
yes |
|
Romania |
25 |
19 |
66 |
yes |
|
Croatia |
35 |
20 |
27 |
yes |
|
Yugoslavia |
25 |
no |
20 |
yes |
Source: SEEurope.Net
As it can seen from the table, the levels of the corporate
tax rates are comparatively low. This
tendency can be explained partly with the growing globalization of the business
and implementation of new technologies, the increased exposures, relevant to
the investments in the countries of Southeast Europe. As far as the business and the capital are becoming more mobile
and the political and economic risk is substantial, the countries in the region
are facing a significant pressure to provide competitive corporate tax rates.
For these purposes, a comparative analysis of the tax
basis and the available tax preferences should be carried out. Except for Bulgaria and Albania, in almost
all the countries in the region, specific tax preferences are available from
which local and foreign investors can take advantage.
Harmonization and foreign investment in the region
According to Charles Tiebout, famous
American economist, the governments of each country
compete by providing different combinations of public services and taxes. Therefore for the potential taxpayers and
investors, prior to their establishment in a distinct country, it will be of
decisive importance the combination
of public services, infrastructure and the existing tax system, including the
presence or the lack of specific tax preferences.
The problems,
related to the re-distribution of the investment flows, from the so-called tax
competition perspective, are a painful topic from a long time even for the
countries within the European Union.
According to a report, presented to the EU Member States at the meeting
in Helsinki in December 1999, 66 deviations within the tax systems of the
Member States were discovered, which could be qualified as harmful or unfair tax competition under the Code of Conduct. Based on a recently published communication
of the European Commission, the EU candidate countries should obey the
provisions of the Code of Conduct and should abolish in the near future the
existing harmful tax preferences, as
well as to refrain themselves from the introduction of any new legislation in
this respect.
In practice the
amount of potential foreign investments from an international perspective and
particularly in the regions is a rather scarce resource, for the attraction and
taxation of which a fierce struggle between the governments of the countries in
Southeast Europe is in place.
Some of the most remarkable examples
of tax preferences in the region is the lack of withholding taxation and
possibility of a decrease of up to 100% of the corporate tax due in
Macedonia. In a similar way Croatia
reduces or exempts from taxation with profit tax the investments exceeding
certain limits and number of new employees in certain industries - i.e. high
tech industries. As of 2001 in Romania
in addition to all other tax preferences, specific tax holidays for small and
medium sized enterprises, which include exemption from customs duties upon the
import and reduction of the corporate tax by 20% relevant to an increase of the
new employees by 10%. In Bosnia and
Herzegovina the newly established companies are exempt from taxes in the first
year and substantial reductions are provided in the following two, while in the
Republic Srpska there is full exemption from profit tax for the foreign
investors for the first 5 years.
Can Bulgaria gain from participation in the Zone
The economies of the countries in the region are relatively small and
isolated. Undoubtedly the establishment
of a Free Trade Zone with a common market of 55 million customers will help
this isolation to be overcome. New
opportunities for realization will the weak competitive production in the
region will be created which will assist in the economic stabilization on the
Balkans.
If we try to summarize the disadvantages (risks) and the advantages for
the economy of Bulgaria, such a comparison will look in the following way
/Table 4/:
Table 4
|
Advantages |
Disadvantages |
|
1.Reduction of the trade costs |
1.Losses of customs revenues |
|
2.Reduction of corruption and bureaucracy |
2.Will the customs control be more effective? |
|
3.The trade balance will be improved |
3.The structure of the economies is identical |
|
4.The developed industries will gain |
4.The less developed industries will lose |
|
5.New markets |
5.The consumption in the region is low |
|
6.External financing can be secured |
6.The process requires additional funds |
|
7.Foreign investments can increase |
7.Tax competition will increase |
Based on data of the Foreign Investment
Agency for 1999 the share of the export of Bulgaria to the countries in the
region, excluding Romania is 8%, while the share of the import from these
countries is just 0.7%. In monetary
terms the trade balance is positive - approximately USD 272 million. Based on the analysis of the data with
regard to the trade balance for 1999 it is obvious, that the balance is
positive (the export exceeds the import) in respect to Albania, Bosnia &
Herzegovina, Macedonia, Yugoslavia and Croatia. Our trade balance is negative from the countries in the region
only with Romania, but this fact is not of considerable importance as far as
Bulgaria and Romania are members of CEFTA.
It is apparent from this data that
the removal of the trade barriers and our participation in the Free Trade Zone
could have a substantial positive effect in the revival of the economy of
Bulgaria. Will, however, the reforms in
the tax and customs legislation be finalized successfully by the start of the
Zone, is a question, the answer to which the success or the failure of this
ambitious project will partly depend.
Published on 21 August 2001 in PARI Daily, Bulgaria.