Differences in taxation in the CEE region
Mazars published the 2022 version of its annual CEE Tax Guide that offers up-to-date information on taxation in 22 European countries, including labor costs, corporate profit taxation, and transfer pricing. The publication shows that taxes and contributions on income and employment have typically decreased in 2022, but that their current levels differ markedly across the countries studied.
Mazars’ analysis found that labor costs are decreasing in almost all observed countries, but the actual drop size shows significant differences. The basic approach to income taxation also varies in the region: some countries continue to enforce flat-rate income tax rates (such as Bulgaria, Hungary, and Romania), while others maintain significantly progressive tax rates (e.g., Austria, Germany, and Slovakia).
In the listed countries, average labor costs burdening the employers amount to 15% of gross wages. Still, there are significant differences - over 30 percentage points - between the lowest, less than 5% in Romania, and the highest of over 30% (e.g., in the Czech Republic, Poland, and Slovakia). This highlights that tax systems are hard to compare but also indicates whether governments prefer to shift the burden of labor costs to employees or employers.
A more practical way of comparing systems is the so-called tax wedge, which shows what percentage of total income the state takes away in the form of taxes and contributions. It shows the extent to which a tax on labor income discourages employment, i.e. what percentage of labor costs is paid into the public budget in some form. The indicator varies between 15% and 51% depending on the wage level and family status of workers in the region.
"In Hungary, the government has reduced the weight of taxes on labor income to improve economic performance. It also further reduced the social contribution tax from January 1 to 13%, which, together with the abolition of the 1.5% vocational training contribution, will further improve the competitiveness of our country. This is a very positive step, as it not only means a reduction in tax, but also a reduction in the number of tax items, i.e. less administration for businesses," said Dániel H. Nagy, tax director of Mazars Hungary.
However, the value of salaries depends not only on the wage level of the employee but also, as in Hungary, on the family status of the employee: net salaries are significantly higher for those with several children, but for single parents, Hungary is still the leader in terms of net salary and the employer's payroll cost ratio. This is particularly striking for low incomes, while for higher incomes most countries operate with tax rates higher than the Hungarian 15%. The publication also mentions benefits, such as tax exemptions for mothers (raising) four or more children and for workers under 25.
The countries in the region show the greatest variation in wage levels. Minimum wages in the V4 range between EUR 500 and EUR 650; they are significantly lower in the Balkans and Moldova and are not comparable with those in Germany for example, where they are above EUR 1,700. While the minimum wage in euro has risen significantly in several countries, Hungary slipped to the bottom of the Visegrád Group last year, a trend that has continued to this day due to the steady depreciation of the forint.
The average private sector wage level in euro terms has increased significantly, by more than 12% on average, reaching 14% and 19% in Serbia and Hungary respectively. Average gross wages are highest in the Czech Republic among the V4, followed by the Czech Republic at around EUR 1,300.
VAT rate highest in Hungary, Croatia
Sales taxes have become a major source of revenue for public budgets in recent years, but this could change in the future due to the pandemic economic recession, the war in Ukraine and difficulties affecting global supply chains. EU rules are largely harmonized, and many non-EU countries are trying to align with the EU system. However, the applicable tax rates vary widely.
Sales tax rates in the region have remained stable over the past year, with standard VAT rates averaging around 21%. The standard VAT rates of 27% and 25% in Hungary and Croatia respectively remain particularly high.
"It can be seen that the focus of tax policy is on strengthening the role of consumption taxes. This is because they are less of a disincentive to investment and thus more conducive to growth. Domestic VAT collection has been declining steadily since 2010, which shows that the tax administration is able to collect VAT much more efficiently than before. There is no doubt that this is due to the use of digital data technologies, where Hungary has been a pioneer in recent years," said Nagy.
States are increasingly focusing on improving the efficiency of tax collection, using digital technology to combat abuse, as this is the area where the risk of tax evasion is greatest. The aim is to monitor the end-to-end sales process, detect non-taxable transactions and reduce tax evasion. The introduction of online cash registers has also proved to be an effective tool to whiten the economy, followed by online invoice services. Similar solutions can be found elsewhere in the region: in Romania, for example, the use of online cash registers has also been made compulsory in recent years.
Differences in corporate tax rates
Countries place very different emphasis on the taxation of corporate profits, with a 22 percentage point difference between the lowest and highest tax rates. Germany has the highest corporate income tax rate (31%) and Hungary the lowest (9%). The limits of tax competition are shown by the fact that only one country has reduced its corporate tax rate (from 24% to 22% in Greece), although it should be added that Austria also plans to gradually reduce its corporate tax rate from next year. The average tax rate in the countries of the region remains around 17%.
The European Union is also consciously seeking to limit tax competition, with the aim of establishing a common framework for corporate taxation or at least preventing the most harmful tax avoidance techniques. An important tool in this effort is the Anti Tax Avoidance Directive (ATAD, Directive 2016/1164/EC), which has been mandatory for member states since January 1, 2019, so the biggest challenge in recent years has been transposing EU rules, including restrictions on interest deductions. Also, the ATAD has been responsible for the harmonization of offshore (controlled foreign company, CFC) rules.
Central and Eastern European countries that apply traditional corporate taxation invariably allow losses incurred in earlier years to be carried forward and offset against a positive tax base in later years. This option is only available for a predetermined period, usually 5-7 years, sometimes only 3-4 years. Only five countries allow unlimited carry forward of losses. On corporate income tax, it is worth pointing out that Hungary and Latvia still do not apply withholding tax on capital gains. Group corporate taxation is now available in Germany and Austria, which was previously only possible in Austria, Poland, and Bosnia and Herzegovina.
Pandemic impact the largest challenge in transfer pricing
The OECD’s BEPS (“Base Erosion and Profit Shifting”) initiative drew attention to the fact that tax authorities need to concentrate more on possible cross-border transactions within corporate groups. By 2022, following the introduction of documentation obligations for large taxpayers in Montenegro, transfer pricing regulations have been in effect in all CEE countries but Moldova. In addition, taxpayers operating in the CEE region also had to participate actively in the CBC reporting system. The OECD’s “country-by-country reporting” (CbCR) aims to improve transparency by making the information needed to assess tax risks available to local tax authorities.
Mazars finds that the biggest challenge regarding transfer pricing in the past year was reacting to the impact of the pandemic. The emerging new crisis upset the reasonably expected profit levels, and multinational corporations had to intervene in their pricing structures. It is still a question how much the tax authorities will scrutinize the COVID hit tax base levels that will fall significantly below those of the pre-pandemic years.
In corporate taxation, the decision by the OECD and the G20 to introduce a global minimum tax forecasts significant changes. The proposal aspires to impose a 15% minimum tax rate on large multinational companies from 2023. Though there may be twists and turns, it is clear that there will be less and less opportunity for multinational companies to lower taxes by shifting profits and eroding their tax base.
The complete guide is available here.
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