Taxes are undoubtedly among the most important components of every state budget. Tax systems vary, of course, as different states have different political and commercial environments. Nowadays, the globalization of economic relations tends to bring these diverse and different systems closer together.
Serbia’s tax system is highly conducive to investment. Apart from tax rates that are among the lowest in Europe, investors can benefit from available tax incentives which create excellent startup conditions. The Republic of Serbia has signed comprehensive Double Taxation Agreements with 60 countries based on the OECD Model Tax Convention.
Nevertheless, the Serbian economy faces many problems and challenges. One of the key problems, most certainly, is the gray economy, which primarily refers to tax evasion: the non-declaration of income in order to avoid tax obligations, with the goal of increasing total earnings.
Unfair competition and inefficient allocation of resources are among the negative consequences of this phenomenon. The tax system in Serbia creates an unjust environment because most funds are poured into the budget through VAT and excise duties, at the expense of citizens, and a much smaller share in the tax structure of Serbia originates from corporate income tax, which indicates that the profits of successful companies actually contributes to the budget less than those of natural persons. This problem can be solved by reducing inequality, by increasing the rate at which corporate profits are taxed, and by reducing the minimum wage tax rate. Also, establishing a transparent and simpler tax system is key to creating a healthier business climate for existing and new businesses.
According to the Corporate Income Tax Law, the corporate income tax rate is proportional and uniform and amounts to 15%. The general VAT rate is 20% and the special VAT rate is 10%. By increasing the income from VAT, which affects every citizen and is easy to collect, the state creates space for itself to reduce the taxes that affect capital and thus sides itself with the wealthy, in the process creating an unequal environment.
Capital gains are taxed at 15%. However, capital gains are subject to a 20% rate for non-resident taxpayers. Other related withholding taxes (e.g., interests, dividends, royalties) are taxed at between 15% and 25%, but different rates may be stipulated in Double Taxation Agreements.
The competent authority in Serbia regarding tax matters is the Tax Administration, while the Law on Tax Procedure and Tax Administration is the umbrella regulation prescribing in detail tax procedures, the rights and obligations of taxpayers, the registration of taxpayers, tax criminal offenses and misdemeanors, procedures for issuing and revoking authorizations for performing exchange operations, control of exchange operations (including foreign exchange operations), and the procedures related to the performance of state administration tasks in the area of games of chance.
On the subject of personal income tax, Serbia finds itself in a peculiar position, together with Chile, with a mixed system instead of the global and cedular systems used by other countries. The 10% tax rate is proportional, but additional taxation of persons whose income exceeds a certain limit is prescribed, with progressive rates depending on income level. For taxable income exceeding the prescribed threshold of between three and six times the average annual salary, the tax rate is 10%; for net income exceeding six times the average annual salary, the tax rate is 15%.
Frequent changes in tax laws and bylaws in Serbia prove the will of the legislator to improve the entire tax system and to harmonize it with European and global systems. Serbia is a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, which is a clear sign that the legislator wishes to prevent double taxation, and thereby eliminate the gray zones which are now present in this area. However, in practice, BEPS measures – which are the core of the said Convention – are not being implemented, and there is a lack of tax transparency, for which Serbia is being criticized.
Taxes can be a tool with which inequalities can at least be reduced, if not eliminated, and while the Serbian legislator has expressed its genuine intent to improve the entire tax system, there remains ample room for further reform.
By Igor Zivkovski, Partner, Zivkovic | Samardzic