Tax Reform Details Postponed until Tomorrow

By 1 August 2018

ZAGREB, August 1, 2018 - Finance Minister Zdravko Marić said on Wednesday that proposed changes to the tax system would be presented to the public on Thursday and would take effect at the beginning of next year.

Speaking to the press after a meeting with the coalition partners, Marić said that economic and fiscal policies for 2019, with projections for 2020 and 2021, would be unveiled at a cabinet meeting on Thursday, while changes to the tax system would be presented after the meeting.

"There will be a presentation for the public tomorrow, hopefully after the Cabinet meeting. At that meeting, we will, among other things, present economic and fiscal policy guidelines for the next three years, which is a regular step in the budgeting process, and outline the package we have discussed today," Marić said.

He said that today's meeting with the coalition partners had passed in a very constructive atmosphere. He, however, noted that some of the coalition partners looked at this issue either from the point of view of businesses or as private citizens, but that all were aware that the problem should be addressed from all angles.

"From the very start our idea has been to translate all the positive effects of public finance consolidation, which we have been doing over the past two to three years, into relieving the tax burden so that it is felt the most by citizens and businesses," the minister said.

Asked if the tax burden would be cut by 2.7 billion kuna, Marić declined to comment.

Responding to the question of whether he would take into consideration some of the proposals put forward at the meeting, Marić said: "Of course we will take comments by our coalition partners into consideration. There were a lot of good and concrete proposals and comments."

Asked what he thought of criticisms from some of the coalition partners that nothing was being done for low-income people who were leaving the country in large numbers, Marić said it was not always easy to look at the direct impact of tax changes on wages. He said that any kind of change to the income tax system did not necessary mean a net wage increase.

He said that the proposal to increase the non-taxable portion of income from the present 3,800 kuna to 5,000 kuna had its positive sides, but also challenges which he would consider.

Asked to comment on the proposal to reduce the VAT rate on fresh fruit, vegetables, meat and fish from the present 25 to 13 percent, Marić said that VAT is a regressive tax which is paid by all taxpayers regardless of their wages. He said that the aim of the proposal is to reduce the so-called regressive effect because that is the only way for low-income people, who spend most of their income on food and housing, to feel the effects of the tax reform.

According to media reports, as part of the third phase of the tax reform the government will propose raising the threshold for income taxation at the highest rate of 36 percent from the present 17,500 kuna to 30,000 kuna as of next year. It will also recommend increasing the healthcare contribution from 15 percent to 16.5 percent, and abolishing the employment contribution of 1.7 percent and the occupational safety contribution of 0.5 percent, which would reduce the tax burden on businesses by about 700 million kuna.

A reduction of the general VAT rate by one percentage point, from 25 percent to 24 percent, which is part of the ruling HDZ party's election agenda, has been abandoned and instead a reduction of the VAT rate from 25 percent to 13 percent is being proposed for specific products, such as fresh fruit, vegetables, meat and fish.

The aim of the proposed tax changes is to reduce the tax burden on businesses and households by 2.7 billion kuna. The tax burden was reduced by 2.5 billion kuna in the first round of the tax reform in 2017 and by a further 1.2 billion kuna in the second round in 2018.