Significant changes to the tax regulations in the Republic of Srpska ("RS") are expected in the coming months. On March 6, the National Assembly of RS passed amendments to the Law on Fiscal Cash Registries. In addition, Parliament approved the Government's proposals on amendments to several important tax laws, including corporate income tax, personal income tax, social security contributions and property tax. Proposed changes to the laws governing accounting and financial audits have also been approved. These changes are intended to clarify and strengthen existing tax rules, widen the tax base and introduce more discipline in the payment of tax, but also to reduce the tax burden for businesses in order to stimulate economic growth.
Amendments to the Law on Fiscal Cash Registers
Changes to the Law on Fiscal Registries which came into force on 27 March 2015, provide that in the event that a taxpayer breaches his/her obligations regarding fiscal registries, the Tax Administration has the authority to prohibit the taxpayer from engaging in business activity for a minimum period of 15 days, or until the taxpayer remedies the irregularities uncovered by the Tax Administration. However, the Tax Administration is only allowed to impose performance prohibitions through administrative procedures and not through misdemeanor procedures as was previously the case.
Proposed Amendments to the Corporate Income Tax Law
The most important changes proposed in the area of corporate income tax include an increase in the withholding tax rate from 10% to 20%. It has also been proposed that a withholding tax on dividends be introduced.
The capital gains or losses arising from the sale of fixed assets or investment property (such as shares and other types of securities, gold, stamps, etc.) used for the business activities of a taxpayer are no longer included in the calculation of taxable profit according to the proposed law.
Under the proposed law, interest and expenses arising out of a loan are deductible for tax purposes only in the fiscal year when such interest and expenses accrued. Also, according to the proposed law, in the event that a parent company does not deduct interest and expense payments in respect of a loan, its subsidiaries may deduct such interest and expenses in an amount that is proportional to the amount of the used loan. It is also proposed that expenses incurred for the purpose of marketing and advertising are recognized for tax purposes up to 5% of total taxpayer's revenue.
Transfer pricing rules will be strengthened and clarified by the proposed changes which adopt transfer pricing methods and definitions of related parties established under OECD Transfer Pricing Guidelines and prescribe that all related party transactions must be in line with the "arm's length" principle. The threshold for related-party status is increased from the previous 10% to 25% participation in capital, management and voting rights.
Under the proposed law, all taxpayers are required to prepare a transfer pricing study and submit the study to the Tax Administration upon request. In addition, taxpayers whose transactions with related parties exceed the threshold prescribed by the Ministry are required to submit the "annual declaration of controlled transactions" which presumably includes some sort of list and description of transactions with related parties.
Detailed instructions on the transfer pricing methods, form and content of the transfer pricing study and annual declaration of controlled transactions are to be prescribed by the Ministry of Finance.
If adopted, the proposed law will enter into force on 1 January 2016.
Proposed Amendments to the Law on Personal Income Tax
The most important change in the area of personal income tax is the abolishment of tax on dividend income.
Another important change is the proposal to introduce an obligation on foreign nationals investing in RS to pay tax on income generated outside RS (i.e. "world-wide" income). Proposed amendments introduce new type of taxpayers "non-domiciled residents". A non-domiciled resident is a foreign national who has invested more than BAM 20 million (app. EUR 10.3 million) in RS, and who fulfils one of the following criteria: (i) he/she has spent more than 30 days in RS; (ii) he/she owns a residential property in the RS with a value of at least BAM 300,000 (app. EUR 150,000); or (iii) he/she has a share capital in a company registered in the RS of at least BAM 100,000 (app. EUR 50,000). The proposed amendments do not provide any explanation as to what qualifies as an "investment in the RS" for the purpose of applying the new rules.
Under the proposed amendments, foreign nationals who fulfil the criteria listed above will be required to pay tax not only on income that is generated in the RS, but also on income earned abroad. Tax will be paid in defined fixed amounts, depending on the amount of income generated abroad: from BAM 100,000 (EUR 50,000) for income up to BAM 2 million (app. EUR 1 million), to BAM 1.6 million (app. EUR 800,000) for income exceeding BAM 40 million (app. EUR 20 million).
The possibility of paying tax on foreign income in pre-defined fixed amounts is also provided to residents of the RS, if they invest at least BAM 20 million (app. EUR 10 million) in the RS, instead at the standard 10% tax rate applicable to the total amount of taxable income.
These proposed new rules requiring foreign nationals who are not residents of RS to pay tax in the RS on their foreign income are very unusual, and deviate from the residency principle (a fundamental principle of income tax) whereby only residents (or in some countries nationals) of a given state are required to pay tax on their world-wide income in that state. Non-residents are normally required to pay tax in a given state only if such income is generated from sources in that state. If this unusual system of taxation is ultimately adopted, it will be interesting to see how the tax authorities of the RS will proceed with implementation, given that they will have limited ability to force foreign nationals to actually declare foreign income in the RS.
Another important change is a significant expansion of the types of income subject to personal income tax. A relatively short list of taxable income under the Personal Income Tax Law currently in force would be expanded by introducing a residual category called "other income". Under the proposed amendments "other income" includes fees to members of management bodies (management, supervisory and other boards), income generated in show business, income of athletes, translators, independent journalists, service income, and even scholarships to students and athletes. All these types of income should be taxed at the standard 10% personal income tax rate.
The proposed amendments also try to capture undeclared personal income, again in a somewhat unusual manner which is not likely to be efficient in practice. In this respect, the proposed amendments prescribe that natural persons in the RS are required to pay tax on the difference between their declared income and the value of their assets. There are no rules to clarify what are to be considered as "assets" or "declared income" for purposes of the application of this new rule, nor why would taxpayers choose to declare this "income", if they had chosen not to declare its source in the first place.
The imposition of tax on the difference between the value of a taxpayer's major assets and his/her declared (and taxed) income is a standard anti-avoidance measure present in the tax laws of many countries. It is likely that the intention behind this provision is to provide tax authorities with some mechanism for pursuing the taxation of undeclared income of citizens of the RS. However, for these new provisions to work in practice, the proposed language of the provisions will have to be significantly improved.
Proposed Amendments to the Law on Contributions
If adopted, the proposed amendments to the Law on Contributions will lead to an overall reduction of social security contributions from the current 33% to 31.6%. The proposal is to reduce rate of social security contributions for health insurance from the current 12% to 11%. The rate of social security contributions for insurance from unemployment would be reduced from the current 1% to 0.7% and for child protection from 1.5% to 1.4%. Contributions for pension and disability insurance would remain the same at 18.5%.
Proposed New Real Estate Tax Law
The proposed Real Estate Tax Law will introduce fixed rates of tax on immoveable property: 0.20% for property which is used for commercial production, and 0.25% for all other real property. The tax will be levied on the market value of the real estate in question. Currently, the rates of real estate tax in the RS depend on the location of the property and range from 0.05% - 0.50 %.
The proposed law prohibits a taxpayer from selling real property if it did not settle in total its real estate tax liability. The public notary in RS will be obliged to check whether the taxpayer fulfilled all its real estate tax obligations before allowing the execution of the agreement on sale of real property or any other notarial instrument for purpose of transfer of real property from taxpayer to a third party.
Proposed New Law on Payment of the Tax Debts
The proposed new Law on Payment of Tax Debts has been introduced in response to a ruling by the Constitutional Court of RS declaring certain provisions governing the settlement of tax debts to be unconstitutional. These provisions allowed corporate debtors to settle their outstanding tax liabilities by converting their tax debts into equity, and writing-off interest for the late payment of tax after paying the entire amount of the principal tax debt.
The proposed amendments allow debtors to postpone the payment of their tax debts only once. The postponement may be allowed for a period of up to one year, or payment in 60 monthly instalments. In addition, the postponement may be allowed only if certain conditions have been fulfilled, the most important being that the outstanding tax debt is secured (by a mortgage, pledge or other type of security). The postponement is not allowed for real estate tax.
Proposed New Law on Accounting and Audits
The proposed new Law on Accounting and Audits eliminates the requirement of companies in the RS to prepare semi-annual financial statements. Corresponding amendments to the Law on Financial Statements will also be required to bring this amendment into effect.
In addition to the categories of small, medium and large companies, the proposed amendments introduce the new category of micro entities. A micro entity is a company which has less than five employees, assets of less than BAM 250.000 (app. EUR 127,000) and annual profits of less than BAM 500.000 (app. EUR 255,000). Companies falling into this new category will not be required to submit annual financial statements. Proposed amendments introduce mandatory audit of financial statements for large- and medium-sized companies.
The public will have a chance to discuss and comment on the proposed changes to the tax laws of the RS in a public discussion that will be held in the following two months. After the public discussion, the Government and the competent Ministries of RS will prepare their final proposals which will be presented to the Parliament for a final vote within the next six months.
Karanović & Nikolić Law Firm will organize a business luncheon in relation to the proposed amendments to the tax laws in Republic of Srpska which will be held in Banja Luka on 28 April 2015.