The last decade of the previous millennium set the Republic of Macedonia on a new course, with EU & NATO integration a number one priority for the country in the Western Balkans. This new course meant that reforms in almost all areas of state management were inevitable.
A new system is reinforcing the principles of market economy, private property, and independence of economic subjects. The reforms have spread into the taxation policy of the country, starting in 1994 with the enactment of a series of new laws regulating income and property taxes and, in 2005, establishing a new government body: the Public Revenue Office.
The highlights of tax reform in Macedonia were the 2000 introduction of the Value Added Tax (which replaced the previous turnover tax) and the 2001 creation of a new excise taxation system. VAT promoted the goal of transferring the tax burden from direct to indirect taxes, which meant a reduction of the income tax and an increase in consumption taxes.
The new fiscal system introduced the principle of allocated neutrality of taxes and the state budget, based on which the instruments of the fiscal policy will no longer stimulate and support some (privileged) sectors.
The key elements of the new tax system include: a) income, consumption, and property are the subjects of taxation; b) taxpayers are companies and citizens; c) proportional tax rates are applied to taxes on revenues and consumption; and d) there is a developed system of electronic payment of taxes.
There are four types of taxes in Macedonia:
1. Income (direct) Taxes: A 10% Personal Income Tax is payable annually by individuals – both residents and non-residents –on income generated in the country and abroad. The Profit Tax is payable annually by: (a) resident legal entities of Macedonia generating income in the country and abroad, and (b) permanent establishment of non-residents on the profit realized by activity performed in Macedonia; the taxable profit increased for the unrecognized expenses is the tax base, and the tax rate is 10%. Withholding tax applies to revenues of foreign legal entities. A set of 48 international agreements for avoiding double taxation are available.
2. Consumption (indirect) Taxes: VAT is payable on the turnover of goods and services at all stages of production, trade, and services. The taxpayer is a person (either a legal entity or individual) which performs a commercial activity either permanently or temporarily. The tax period can be one or three months and the general tax rate is 18% (the beneficial rate is 5%). Excise Tax is charged on the consumption of mineral oils (at a specific rate), alcoholic beverages (at a specific rate), tobacco goods (at combined rates) and PMVs (at progressive rates). The purpose of Customs duties is to protect and support the financial interests and economic activity of the country, both protecting it from unfair competition and enhancing the competitiveness of the Macedonian economy. The import of products is the subject of taxation, the value of the imported products is the tax base, and all persons and/or legal entities that import products from abroad appear as taxpayers. The customs duties are regularly harmonized with the rules of WTO and the Combined Nomenclature of EU; foreign trade agreements with EU, EFTA, CEFTA countries, Turkey, and Ukraine, as well as the One Stop-Shop system for cross-border trading offer a set of benefits.
3. Various Property taxes include: the Real Estate Tax is payable annually by the owners (individuals and/or legal entities) and the tax rate is 0.10% to 0.20% of the estate’s market value; the Real Estate Transfer Tax is paid by the seller (if not otherwise agreed), on each transfer of property, regardless of the compensation, and the tax rate is 2% to 4% of the market value at the moment of transfer; the Inheritance and Gift Tax applies to real estate or right of usage and usufruct that is inherited or received as a gift; the tax base is the market value of the estate, and the tax rate varies from 2-5% depending on the inheritors and the hereditary lines, with inheritors of the first line exempted from payment.
4. With the new fiscal concept, a high number of contributions were replaced with personal income tax. Only the Contributions for social funds were kept, which are part of the gross salary concept, and include contributions for health, pension, and disability insurance, and insurance in case of unemployment. The basis for calculating and paying social contributions depends on the type of income gained by the taxpayer.
By Vesna Gavriloska, Partner, Cakmakova Advocates
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.