Commission Report 2002 (Slovakia)

• Progress since the last Regular Report
• Overall assessment
• Conclusion

Chapter 10: Taxation

Progress since the last Regular Report

Since the last Regular Report, Slovakia has made good progress with aligning its tax legislation with the acquis. The reform of the tax administration has also advanced.

In the area of indirect taxation, the amendments to the VAT legislation that came into force in January 2002 aligned the Slovak legislation to the acquis as concerns the place of taxation for services provided to foreign business entities and the tax refund for foreign natural persons exporting goods of non-commercial nature. A mechanism for tax refunds applicable to taxable persons not established in Slovakia and the special scheme for travel agents were also introduced. Following amendments passed in July 2002, further alignment will be achieved as of January 2003, in particular on the right of deduction and on reducing the scope of the VAT reduced rate.

In the field of excises, the Act on mineral oils, which entered into force on January 2002, has introduced tax warehouses, the regimes of duty suspension covered by a financial guarantee, the modalities for registration of traders, licensed users and warehouses and the specification of the taxable transactions. Furthermore, the Act ensures equal taxation of all mineral oils irrespective of their origin. Competence in the field of mineral oils has been transferred to the Customs Administration. As to alcohol and alcoholic beverages, amendments passed in July 2002 have significantly increased rates on beer and intermediate sparkling products as of January 2003, introduced provisions on small breweries, and adjusted the definition of beer.

In the area of direct taxation, the transposition of the Merger Directive has moved forward, with the entry into force in January 2002 of an amendment to the Income Tax Act, covering legal provisions in case of mergers, modification or spin-off of companies.

There are no developments to report in the field of administrative co-operation and mutual assistance.

As regards administrative capacity, an amendment to the Tax Authorities Act, in force since May 2002, has created two new offices, the Large Taxpayers Office and the Tax Investigation Office, responsible for investigation of tax crimes, including tax fraud.

Overall assessment

Slovakia has scheduled full transposition of indirect taxation legislation by January 2004. On VAT, alignment is still required in particular on the scope of reduced VAT rates and exemptions, on special schemes and on VAT intra-community trade. On excise duties, significant efforts still lie ahead to align structures and rates of most product categories and to introduce tax warehouses for alcohol and tobacco. Concerning cigarettes, additional efforts are needed, notably to introduce the same taxation rate for long and short cigarettes, and the specific element in the excise duty structure. Slovakia is planning to complete before accession the transfer of competencies on all excisable products from the Tax to the Customs Administration. However, the transfer is made dependent on the approval of legislation on alcohol and tobacco warehouses. Slovakia should accelerate alignment in the area of excises.

As regards direct taxation, Slovakia still has to transpose fully the merger directive. Legislation will have to be reviewed in order to eliminate potentially harmful tax measures, so as to comply with the Code of Conduct for Business Taxation to the same extent as current Member States upon accession. The Commission's initial technical assessment of potentially harmful measures applied in Slovakia is ongoing.

As concerns mutual assistance and administrative co-operation, progress is still limited due to the pending adoption of the relevant legislation. A VAT Information Exchange System project plan provides all key milestones of implementation. The Central Liaison Office is scheduled to be set up by 1 January 2003. No plans for establishing the Excise Liaison Office have been produced so far. Subject to work proceeding as planned, Slovakia should be in a position to meet its information technology obligations by accession.

While a comprehensive and consistent reform agenda is in place to strengthen administrative capacity, some important weaknesses remain. In particular, the VAT system is characterised by an excessive volume of refunds and by the problem of fraud. More in general tax collection remains weak, as shown by the still high percentage of tax arrears. The tax administration suffers from limited autonomy from the Ministry of Finance in managing its own budget, which remains insufficient. Human and information technology resources devoted to audit activities are not adequate and control methodologies need to be improved.

Conclusion

In its 1997 Opinion, the Commission concluded that the acquis concerning direct taxation should present no significant difficulties, and that where indirect taxation is concerned, Slovakia should be able to comply with the acquis on VAT and excise duties in the medium term, provided that a sustained effort was made. The Commission added that it should be possible for Slovakia to start participating in mutual assistance as the tax administration developed its expertise in this respect.

Since the Opinion, and especially over the last two years, Slovakia has made good progress in aligning with the acquis, although a number of aspects remain to be addressed. Slovakia has also made progress with developing the necessary administrative capacity to implement the acquis in this area, and the organisational reshuffle implemented since 2000 represents a major development.

Negotiations on this chapter have been provisionally closed. Slovakia was granted transitional periods as regards the continued application of the reduced VAT rate on the supply of construction work for residential housing (until 31 December 2007) and on the supply of heat energy for private households (until 31 December 2008). Slovakia was also allowed to apply a VAT exemption and registration threshold of EUR 35.000 for small and medium sized enterprises. Furthermore, Slovakia obtained a transitional period of one year from accession in order to apply for the reduced rate on the supply of natural gas and electricity upon accession. In the field of excise duties Slovakia was granted a transitional period regarding a delayed implementation of the excise duty rates on cigarettes until 31 December 2008 and a permanent derogation to continue applying its excise duty scheme for small fruit grower's distillation, provided that the quantity does not exceed 30 litres of fruit spirit per year per household and that the reduced excise rate is not less than 50% of the standard national duty rate for alcohol. Slovakia is generally meeting the commitments it has made in the context of the accession negotiations.

In order to be ready for membership, Slovakia will need to focus further efforts on pursuing the measures undertaken to modernise and strengthen the tax administration. Furthermore additional efforts are needed to complete transposition - except for areas where transitional arrangements were agreed - in the areas of VAT and excise duties, including intra-Community transactions. Slovakia should fully implement the comprehensive reform agenda it has established to address the identified shortcomings, including by strengthening its administrative capacity.

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