Corporate Income Tax and other Corporate Taxes1
Serbian corporate income tax collection of only 1.2 percent of GDP is far below the EU unweighted average of 2.7 percent of GDP (2010). Two main reasons behind the low collection are the low statutory rate and a vast range of costly tax expenditures—both have been seen as key to attracting foreign direct investments. As part of a tax reform introduced in late 2012, the CIT rate was increased, and a number of CIT-like charges that posed a significant and unpredictable burden to the business sector were eliminated or reduced. Tax incentives were also revisited; however their share in tax collection remains high. As part of further consolidation efforts, Serbia should consider eliminating all business tax incentives.
CIT rates, 2013
Sources: PriceWaterhouseCoopers; OECD
CIT collection in percent of GDP, 2011
A. CIT Rate and Exceptions
1. As a part of broader tax reform introduced in late 2012, the CIT rate was increased from 10 to 15 percent. The rate is significantly lower than the EU average of 23.5 percent, but higher than the very low rates of regional peers (Macedonia, Bosnia and Herzegovina, Bulgaria, and Albania have 10 percent rate, while Montenegro has 9 percent rate). Capital gains are also taxed at 15 percent separately from company’s operating results.
2. A number of tax expenditures have eroded the revenue base. A wide spectrum of incentives,2 including accelerated capital allowances, tax credits and tax holidays, aims at supporting a number of goals—creating employment; increasing investments in fixed assets, fostering small enterprises; stimulating growth in underdeveloped regions. The total fiscal cost of the incentives in 2011 amounted to 0.8 percent of GDP, or 68 percent of the total CIT collection. The total revenue loss related to incentives fell somewhat in 2010 (from 0.8 to 0.7 percent of GDP), following the abolishment of the incentive for employment of new permanent employees. However, the total cost of incentives rebounded to 0.8 percent of GDP in 2011 due to a sharp increase (37 percent) in the most costly incentive, for investments in fixed assets.
3. As a part of the recent reform, tax incentives were also revisited. Some were abolished (the least expensive ones), while some were made less generous. The changes will likely result in a reduction of CIT tax expenditure by about one third (0.2–0.3 percent of GDP). However, the full effect will take time to materialize as the credits for investments can be carried forward by 10 years. Despite these changes, the share of incentives in CIT tax collection will remain high, at about 45 percent. Eliminating all tax expenditures would bring additional revenue of about 0.5–0.6 percent of GDP to the budget.
4. In addition to reducing the revenue base, incentives are also distortionary. They tend to distort investment decisions and often represent a deadweight loss as investments may have been realized due to other favorable conditions. Lost revenues may have been used more productively elsewhere. In practice, tax incentives are often poorly implemented and monitored, cost-ineffective and can lead to abuse and corruption. Tax holidays are not well targeted and may be beneficial for short-term ventures generating quick profits.
B. Non-Tax Levies
5. Non-tax levies undermined the predictability and stability Serbia’s tax system. The most important considerations for business investment decisions are not necessarily relative tax burdens, but stability and predictability of the tax system that should be less discretionary and more transparent. The corporate sector in Serbia had been under a heavy burden of continuously proliferating tax-like levies. An analysis by NALED3 identified a list of 370 non tax levies paid by Serbian companies in 2012. Of that number at least 179 charges were paid without getting any rights, goods or services in return, or their value is by far less than the amount paid for them. The base for calculating 25 levies was operating revenue of companies. In addition to creating unstable and unpredictable business environment, non tax levies also undermine the corporate income tax base, as their payment is an allowable deduction in the production of income.
6. The legislative framework that was in place until 2012 created a favorable environment for uncontrolled use of various tax-like levies. These levies were outside of the Ministry of Finance control, and many of them were dedicated to special purposes and the entities that collected them had a full discretion over their spending (own resource revenue). A typical example of such a levy was fee for the Budget Fund for Woods paid by all Serbian companies in the amount of 0.025 percent of total operating revenue. About three quarters of the levies were imposed by the central government; the remaining quarter was in charge of the local governments.
7. A comprehensive reform of the system of the tax like levies was carried out in 2012 aimed at reinforcing and stimulating a favorable investment climate. Charges can now only be introduced through new legislation; their level must correspond to the cost of their providing, and unless specified in the law must be approved by the finance minister. Own resource revenue accounts were abolished, all revenues are now collected through the single treasury account, and decisions on their spending are made through the regular budget procedures. Overall, comprehensive legislative changes (28 laws) led to abolition of 138 charges (28 at the local level). The loss of revenues from eliminated levies was replaced with increased collection from a higher CIT rate, although reliable estimates of the net effect are not available.
|Description of CIT incentive||2009||2010||2011||2009||2010||2011||Projected savings cutting tax incentives|
|In RSD bn||In percent of total tax expenditures||In the first year||In the tenth year|
|Tax allowance for a new concession company||0.0||0.0||0.0||0.0||0.0||0.0||0||0|
|Employment of persons with disability||0.0||0.0||0.0||0.0||0.0||0.0||no changes in tax policy|
|Deduction on account of profits made in a newly established business unit in an underdeveloped region||0.0||0.0||0.0||0.0||0.0||0.0||no changes in tax policy|
|Deduction on account of permanent employment of new workers (abolished in 2010)||2.6||0.0||0.0||12.5||0.0||0.0||no changes in tax policy|
|Tax credit of 20% (40% for SMEs) for investment in fixed assets, up to 50% (70% for SMEs) of tax liability with 10-year carry forward of unused credits||13.7||15.2||20.8||65.7||76.8||81.5||0.5||5|
|Tax credit in the amount of 80% of investments in special sectors||2.9||3.1||3.1||14.1||15.6||11.9||0.2||2.5|
|Deduction on account of CIT paid on income earned on operations in another country||0.1||0.0||0.0||0.3||0.1||0.0||no changes in tax policy|
|Deduction for accrued corporate income tax and withholding tax||0.9||0.6||0.6||4.5||2.8||2.2||no changes in tax policy|
|Resident parent company’s right to decrease its tax liability by taking a credit for calculated withholding income tax for intercompany dividends||0.0||0.0||0.0||0.0||0.1||0.2||no changes in tax policy|
|Ten-year tax holiday for investing at least at least RSD 800 million and employing at least 100 workers, in proportion to that investment||0.6||0.9||1.1||2.7||4.5||4.2||0.1||1|
|For a newly established legal entity||0.0||0.0||0.0||0.0||0.0||0.0||no changes in tax policy|
|For newly established legal entities with headquarters in underdeveloped areas and in free trade zones||0.0||0.0||0.0||0.0||0.0||0.0||0.0||0.0|
|For taxpayers with stakes owned by foreign entities||0.0||0.0||0.0||0.0||0.0||0.0||no changes in tax policy|
|For new permanently employed workers||0.0||0.0||0.0||0.2||0.0||0.0||no changes in tax policy|
|Total incentives in percent of CIT collected||66.8||60.8||67.7|
Prepared by Desanka Nestorovic (Belgrade Office).
The key tax expenditures include: (1) a 10-year long CIT tax holidays for investments above EUR 9 million (RSD 1 bn; recently increased from RSD 0.8 bn) in fixed assets and employing at least 200 employees (instead of 100 employees before the changes to the law); (2) exempting corporate taxpayers from CIT for investing in training and employment of disabled people; (3) tax credit of 20 percent for investments in fixed assets up to 33 percent of the CIT liability (down from 50 percent of CIT liability) with unused tax credit being carried forward up to 10 years; and (4) for small firms a tax credit of 40 percent for investment in fixed assets up to 70 percent of the CIT liability with unused tax credits being carried forward up to 10 years.
A business association comprising companies, municipalities, and NGOs working to improve conditions for doing business in Serbia.