- Wage levels and labor costs vary significantly in the countries of the region
- The pandemic may change the role of direct taxes
- Tax authorities increasingly scrutinize intra-group transactions in most markets
- By 2020 several countries in the region have introduced exit taxation rules
International audit and consulting firm Mazars has released the 8th edition of the regional survey on Central and Eastern European tax regimes. In a bid to best serve investors eying the region, Mazars’ CEE Tax Guide analyzes and summarizes tax changes in 21 countries and points at prevalent trends and underlying strategies in taxation. In addition to the Visegrád Four , this year’s publication also includes the countries of South-East Europe, Russia, Ukraine, and the Baltic states. The 2020 survey puts the spotlight on labor costs, indirect taxes, corporate income tax, and transfer pricing across the researched markets.
Taxes and contributions on incomes and employment taxes in the examined markets will further decrease in 2020, but their volume varies significantly from country to country. The countries in the region do not maintain a uniform approach to income taxing: some use flat-rate income tax, while others operate with progressive income tax rates.
The regional average of employer labor cost totals around 160% of net wages. The employer’s share of taxes and contributions compared to gross wages is only 16% on average, but the actual difference between the lowest and highest figure exceeds 30 percentage points. This also highlights the limitations of the comparability of individual tax systems.
Examining employment taxes also shows that the countries of the region significantly vary in their wage levels. By 2020 there has been a considerable increase in EUR calculated minimum wages, with the most important increase in Ukraine; it was also Ukraine, as well as in Romania and Bulgaria where the increase in the average wage level in the private sector has been the highest, exceeding 30%, however, to have a complete picture it has to be considered that exchange rate fluctuations of national currencies could also contribute to the growth.
In the case of value-added taxes, the average of standard rates was around 20% in 2020 in the region. The regular VAT rate of 25% and 27% effective in Croatia and Hungary, respectively, still count as especially high; and the 1 percentage point drop planned earlier in Croatia has not been implemented in 2020.
“Governments attempt to use digital technology to take steps against tax evasion. In Hungary, the recently introduced mandatory online invoice data reporting had a visibly positive fiscal impact; therefore, we may expect the spread of similar solutions in the region.”, pointed out Heléna Csizmadia, Tax Director at Mazars.
Prior to the pandemic, governments primarily built on the increase of private consumption when planning their fiscal revenues therefore increased attention was paid to indirect taxes. “Value-added tax has perhaps become the most significant revenue source for state budgets in recent years, this may change due to the economic recession caused by the pandemic.”, added Heléna Csizmadia, Tax Director at Mazars Ungaria.
The average corporate income tax rate is 16% in the examined markets. However, there is a difference of over 20 percentage points between the lowest and highest corporate tax rate of the region. The European Union consciously strives to limit tax competition and create a common framework of corporate taxation in member states. An important tool in this effort is the legal act called the Anti-Tax Avoidance Directive (ATAD), officially known as Directive (EU) 2016/1164. Most of its provisions must be applied by member states since January 1, 2019.
However, it is interesting to see, how differently various member states interpret the frameworks provided by the Directive. In some places – for example in Hungary – the lightest limitations apply, while elsewhere the local regulation goes beyond the limitation stipulated as the minimum standard within the ATAD – that is the way chosen by Poland for instance. The standardization of offshore (controlled foreign corporation, CFC) rules can also be traced back to the ATAD.
Regarding corporate income tax, Lithuania and Hungary still do not charge a withholding tax on capital income, and Albania significantly decreased the rate of withholding tax on dividends starting 2019. As of 2019, corporate group taxation is available in Hungary, which was only previously available in Austria, Poland, and Bosnia & Herzegovina.
Transfer pricing regulations have previously appeared in the tax systems of practically all countries, except Montenegro and North Macedonia, the most recent country to introduce documentation obligation was Bulgaria. This documentation obligation has changed recently. The fundamental objective of the OECD’s “country-by-country reporting” (CbCR) requirement is to promote transparency by providing the information necessary for evaluating tax risks to local tax authorities.
The majority of local Mazars offices presenting the tax systems of the countries reported that the tax authorities are paying more and more attention to examining the issues related to transfer pricing. “However, the question remains how the emerging new crisis will transform reasonably expected profit levels, and/ or to what extent multinational corporations will have to intervene in their pricing structure and how strongly the tax authorities will challenge the tax base levels that will fall significantly below those of previous years.”, says Heléna Csizmadia, Tax Director at Mazars Hungary.
Another important new element is that by 2020 the so-called exit taxation regulation appeared in many countries – including Hungary –, which applies when business activity is leaving the country if it is not otherwise covered by transfer pricing regulations. In practice, it means that a transaction may be taxable if a company sells one of its entire business lines abroad or relocates its assets and management abroad.
In Romania, budget constraints and the limits in the functioning of public institutions generated by the COVID-19 pandemic have put a significant strain on the current tax system, especially due to the implementation of a temporary tax payment deferral system. However, this situation has already created the premises for the development of the whole tax system in the sense of transparency, reduction in bureaucracy and increase of digitalization, collection and voluntary disclosure.
„A first step has been the recent implementation of the legislative framework with respect to connecting cash registers to a central system managed by the Romanian tax authorities and advances in discussion for the use of the SAF-T standard. The latter is expected to be tested in a pilot program for large taxpayers at the beginning of next year. Another measure taken in this difficult context is represented by a general tax amnesty from which all taxpayers can benefit, while at the same time, this can lead to an expected increase in tax audits during the remained of 2020”, mentioned Lucian Dumitru (photo), Senior Manager, Tax Advisory, Mazars Romania.