Tax reform or just redistribution of taxes?
Lowering the corporate income tax and personal income tax while distributing the lost revenues to the value added tax is a major change launched by a new tax policy proposal of the Kosovar government.
Since 2000 a system of taxation has been constructed and implemented continuously in Kosovo. Today the most important taxes collected to fill the national coffers are: corporate income tax, personal income tax, value added tax (VAT), rent withholding tax, custom duties, excise tax, municipal property tax and the quarrying and mining tax.
However, until now there has been no integrated fiscal code governing all taxation programs. Several UNMIK regulations and laws which have been promulgated by the Kosovar parliament were issued to cover the main taxes applicable in Kosovo.
The Kosovar government has now proposed to lower corporate income tax from 20% to 10% and reform personal income tax by instating a lower progressive rate. As a consequence the government also proposes to increase the VAT from 15% to 16%. Government’s challenge is to build a stable and sustainable economy that will attract foreign investment, utilize natural resources efficiently and maintain a fiscal budget that can afford to provide public services. Currently, the Kosovo tax base is not broad enough to achieve this purpose because over 70% of tax revenues are generated from customs, excise and VAT on imports. This is a tax base that will erode as more free trade agreements, such as Central European Free Trade Agreement (CEFTA), are implemented.
Tax policy without analytical data produced by precise statistics is sterile and academic. Employing such methodology, if it can be called that, was a necessity after the war in 1999 but now we have more time to discuss proper taxation policy and increase the level of transparency in the system, as well as deliberating the contributions of the various stakeholders. The same is true for other fiscal processes. The government’s annual budget and ‘medium term expenditure frameworks’ - used by the government to request funding for specific projects and address the future financial needs of Kosovo to the donor community – must also be revisited and reformed after thorough analysis and debate.
Usually, plans for implementing tax reform starts by carefully defining taxation procedures and tax planning. Did the Kosovar government follow this universally accepted reform methodology when drafting its tax reform proposals? No. However, it may be that the government lacked the information resources needed to do a thorough analysis of the situation.
In order to draft sound taxation policy and legislation we need better statistical data and coming up with that data should be a priority for the government. The government must also upgrade its technical knowledge and improve organization within the tax department and provide better political leadership.
Recently proposed changes in Tax policy are still subject to the discussion and possible improvement until the Parliament will adopt the Law which will finally endorse them.
The government of Kosovo must plan its activities with an orientation toward not only current needs but future development goals. They must also be accountable to their citizens who have been paying taxes and to the international community which has been providing them with considerable technical and financial assistance.
Lower corporate income tax rates should result in an increase in foreign-direct investment inflows into Kosovo. But investments are linked with necessary imports such as new technology, equipment and know-how. Collection of VAT during the import at the border is business-unfriendly policy.
What about collecting VAT inside Kosovo? Companies are currently crediting the VAT at the border and this is a big barrier for business start ups. The shift from collecting tax revenues at Kosovar borders to domestic collections would be an indication that the central government is able to levy taxes domestically. This is crucial for Kosovo’s future fiscal vitality and wise use of tax policy as a tool to build Kosovo's financial future.
Attention should also focus on reducing privileges of well established importers while allowing newcomer's to start their import-export business, thereby easing compliance and tax administration burdens, while preserving revenues and improving the business environment.
Since 2000 a system of taxation has been constructed and implemented continuously in Kosovo. Today the most important taxes collected to fill the national coffers are: corporate income tax, personal income tax, value added tax (VAT), rent withholding tax, custom duties, excise tax, municipal property tax and the quarrying and mining tax.
However, until now there has been no integrated fiscal code governing all taxation programs. Several UNMIK regulations and laws which have been promulgated by the Kosovar parliament were issued to cover the main taxes applicable in Kosovo.
The Kosovar government has now proposed to lower corporate income tax from 20% to 10% and reform personal income tax by instating a lower progressive rate. As a consequence the government also proposes to increase the VAT from 15% to 16%. Government’s challenge is to build a stable and sustainable economy that will attract foreign investment, utilize natural resources efficiently and maintain a fiscal budget that can afford to provide public services. Currently, the Kosovo tax base is not broad enough to achieve this purpose because over 70% of tax revenues are generated from customs, excise and VAT on imports. This is a tax base that will erode as more free trade agreements, such as Central European Free Trade Agreement (CEFTA), are implemented.
Tax policy without analytical data produced by precise statistics is sterile and academic. Employing such methodology, if it can be called that, was a necessity after the war in 1999 but now we have more time to discuss proper taxation policy and increase the level of transparency in the system, as well as deliberating the contributions of the various stakeholders. The same is true for other fiscal processes. The government’s annual budget and ‘medium term expenditure frameworks’ - used by the government to request funding for specific projects and address the future financial needs of Kosovo to the donor community – must also be revisited and reformed after thorough analysis and debate.
Usually, plans for implementing tax reform starts by carefully defining taxation procedures and tax planning. Did the Kosovar government follow this universally accepted reform methodology when drafting its tax reform proposals? No. However, it may be that the government lacked the information resources needed to do a thorough analysis of the situation.
In order to draft sound taxation policy and legislation we need better statistical data and coming up with that data should be a priority for the government. The government must also upgrade its technical knowledge and improve organization within the tax department and provide better political leadership.
Recently proposed changes in Tax policy are still subject to the discussion and possible improvement until the Parliament will adopt the Law which will finally endorse them.
The government of Kosovo must plan its activities with an orientation toward not only current needs but future development goals. They must also be accountable to their citizens who have been paying taxes and to the international community which has been providing them with considerable technical and financial assistance.
Lower corporate income tax rates should result in an increase in foreign-direct investment inflows into Kosovo. But investments are linked with necessary imports such as new technology, equipment and know-how. Collection of VAT during the import at the border is business-unfriendly policy.
What about collecting VAT inside Kosovo? Companies are currently crediting the VAT at the border and this is a big barrier for business start ups. The shift from collecting tax revenues at Kosovar borders to domestic collections would be an indication that the central government is able to levy taxes domestically. This is crucial for Kosovo’s future fiscal vitality and wise use of tax policy as a tool to build Kosovo's financial future.
Attention should also focus on reducing privileges of well established importers while allowing newcomer's to start their import-export business, thereby easing compliance and tax administration burdens, while preserving revenues and improving the business environment.
Comments