No tax cuts in Croatia amid the crisis. This is how smarter countries do it

No tax cuts in Croatia amid the crisis. This is how smarter countries do it
Photo: Index/Pixsell/Patrik Macek

MANY European countries used the coronavirus crisis to cut the tax burden and increase consumption, help businesses, and speed up the recovery of the economy. Croatia isn't among those countries.

A drastic VAT cut in Germany 

Germany made perhaps the most significant intervention in the tax system and decided to cut the standard rate of VAT from 19 to 16 percent. Angela Merkel's government even cut the reduced VAT rate from seven to five percent. The new tax measures are in force from July 1 until the end of the year, as announced by the global media. We'll see what will happen after that.

Boris Johnson reduced VAT in the hospitality sector 

Many other European countries implemented the changes in the tax system. The UK decided to reduce the VAT rate in the hospitality sector from 20 to five percent and scraped VAT on e-books and electronic newspapers. Boris Jonhson's government hopes that the reduced tax burden in certain sectors will not only help their business in the coronavirus crisis but also encourage consumption, especially in popular pubs.

Amid the coronavirus crisis, Austria has also decided to change the tax system; in Vienna, in the second half of the year, they decided to reduce the VAT rate on non-alcoholic drinks from 20 to 10 percent, while the VAT rate on accommodation services, culture, and printed publication is reduced from 10 to five percent.

Belgium did a slightly smaller intervention in the tax system. According to world media's data, the VAT rate on accommodation services, restaurants, and publishing is cut from 12 to six percent. Bulgaria, the poorest EU member state, has chosen a similar tactic, and the VAT rate on accommodation, restaurant, and books is reduced from 21 to nine percent.

Greece cuts VAT on tourism and taxis

Greece and Cyprus, countries that greatly depend on tourism just like Croatia decided to help that sector by reducing the VAT rate on accommodation services and restaurants. Cyprus reduced the VAT from nine to only five percent, and Greece made a similar reduction. Besides, Cyprus will introduce the VAT rate of only five percent for public transport services.

The reduction of the tax burden on transport, including taxis, is also implemented in Greece, as the global media broadcasted, from 24 to 13 percent, and those tax changes cover non-alcoholic beverages as well.

The Czech Republic also decided to reduce the tax burden due to the coronavirus crisis for accommodation services, sports, and cultural events. The government in Prague decided to tax those services with the VAT rate of 10 percent instead of 15 percent.

Lithuania is also among the countries that decided to change the tax system, where accommodation services and restaurants should be taxed with the VAT rate of nine percent, instead of 21 percent, as it was before.

Let's add that some other European countries consider reducing the tax burden. One of them is Ireland, in which, according to the portal Avalar that deals with tax issues, they consider dropping the VAT rate on hospitality sectors from 13.5 to nine percent.

Countries outside Europe are also reducing taxes

Tax cuts in Europe are only temporary for now: the plan is to adopt the majority of the measures in the second half of the year only. But, at this moment, no one can predict how long the coronavirus crisis will last or in what intensity, so the possibility for these measures to continue longer isn't' excluded. It's worth pointing out that not only European countries decided to cut taxes amid the pandemic, but many other countries in the world as well. Countries that didn't make tax cuts still helped the businesses by extending the deadlines for tax payments and other measures.

Croatian new government bashfully announces the first interventions in the tax system

The Croatian government still hasn't decided to reduce taxes. The new government, which is currently being formed, bashfully announced the first interventions in the tax system, firstly in the segment of profit tax and extending the implementation of the reduced VAT rates on food. In other words, we won't experience tax cuts like Germany.

Besides, the announced changes in the Croatian tax system are, above all else, designed to somewhat maintain the standard of living, and they are less aimed at stimulating economic activities. The economists explain that with VAT being too important for the Croatian treasury since around 54.9 billion kunas was collected in 2019, according to the Ministry of Finance's data.

VAT represents a golden goose for the Croatian government

"So far, no government dared to significantly meddle with VAT because it represents a golden goose. The VAT reduction by only one percent means around two billion kunas of income less," consultant Andrej Grubisic revealed to Index.

Grubisic believes that the government should reduce the tax burden more significantly in the coronavirus crisis and thus help the economy. He also believes that greater benefits would be gained from reducing the tax burden than direct financial transfers. Of course, our interlocutor adds that the government still has a chance to relieve the tax burden, thus enabling the improvement of the standard.

According to him, the government should first reduce the profit tax rate for everyone, and not only, as they announced, for small businesses. Besides, Grubisic said that the profit tax rate should be reduced retroactively, i.e., for 2019 as well.

Andrej Grubisic: The general VAT rate should be reduced gradually

When it comes to VAT, Grubisic thinks that the general VAT rate should be reduced gradually, from year to year. However, he's aware that the sudden reduction in the general VAT rate, which amounts to 25 percent in Croatia and is one of the highest in Europe, would be a huge impact for the treasury, so he suggests to be reduced gradually.

Andrej Grubisic

For example, by one point every year, until it reaches a certain optimal rate for Croatia. Besides the reduction of VAT and profit tax, Grubisic advocates cuts in income tax and excise duties. The tax disburdening would result in a hole in the treasury, which could be covered with government debts, since, in any event, we have to go into debt, due to the consequences of the coronavirus crisis.

But it's clear that no tax cuts could be implemented without an overall reduction in the budget expenditure, i.e., a reform plan. 

"State expenditure should be cut at the same time as the tax cuts, and that means reforms," Grubisic concluded.

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