Tax Expenditures and the Efficiency of Croatian Value Added Tax

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

269 36 (3) 269-296 (2012) 10, 2012. Hidden Public Expenditure: Future Hidden Future Public Expenditure: 3

Received: December 28, 2011

The views expressed in this paper are exclusively those of the author and do not necessarily represent those represent necessarily not do and author the of those exclusively are paper this in expressed views The efficiency of Croatian Croatian of efficiency and suggestions. Petar SOPEK Privredna banka Zagreb, Radnička 48, 10000 Zagreb, Croatia of Privredna banka Zagreb. The author thanks two anonymous referees for their insight, helpful comments One of the earlier versions of the paper was presented at the conference e-mail: [email protected] e-mail: Preliminary communication** UDC: 336.2.026(497.5) organized by the Institute of Public Finance in Zagreb on February organized Expenditures of Tax Accepted: March 27, 2012 doi: 10.3326/fintp.36.3. PETAR SOPEK* PETAR JEL: E62, H21 ** *

value added tax added value Tax expenditures and the the and expenditures Tax

- - - . On the other hand, the tax burden is is burden tax the hand, other the On .

introduction

The tax burden in this context comprises total tax revenues and social security contributions paid to the state state the to paid contributions security social and revenues tax total comprises context this in burden tax The ting from the crisis or in the shift context towards of indirect rather a longer-term than direct taxation. The latter shift can be rationalised by the relative efficiency at the level of general government budget. consumption tax revenues, which is especially suitable for transition countries. Consumption taxation is considered to be simpler and more efficient and is less based is which then, model, taxation Croatian The effects. inflationary to sensitive on heavier taxation of consumption, should not be changed (Kuliš, 2007a:1). rates, either as a response to the needs for tly consolidation increased VAT resul generally heavier in the old than in the new EU member states. Still, the tax bur den in Croatia is approximately 2 percentage points higher than the unweighted tax burden average of new member states, which amounted to 31.2% of GDP in 2010 (Eurostat, 2012a). Economic theory generally supports the model based on a heavier reliance on for the financing of public needs in 2010 (Ministry of Finance, 2012). Such heavy Such 2012). Finance, of (Ministry 2010 in needs public of financing the for public consumption requires the provision of sufficient revenues, whosesources main are taxes. The tax burden at the level of average European the Croatian than lower significantly 2010, in GDP of 33% to amounted general government 2012a) (Eurostat, 2010 in GDP of 39.5% of Keywords: value added tax (VAT), tax expenditures, efficiency, the eco Croatian tax efficiency, value expenditures, Keywords: added tax (VAT), Union European nomy, 1 GDP of 39.9% allocated Croatia government, general consolidated of level the At has been suggested that a detailed analysis of the overall value added taxation system should be initiated, with the aim of thre registration optimizing VAT optimal the of determination the on placed be should focus cost-benefits. The main shold, the costs and benefits of the introducedreliefs and exemptions in the tax rate. of the zero effects of the repeal system and the potential lower than in any of the EU new member states, as well as almost twice as low as low as twice almost as well as states, member new EU the of any in than lower the EU-27 average. It can be concluded that the Croatian value added taxation according analysis an by shown additionally was as way, this in efficient is system EU observed the all than indicators efficiency better had 2010 in Croatia which to member states. system The is Croatian VAT mainly harmonized with EU directi ves, but abolition of the zero rate is still expected; this will increase government revenue by approximately 0.4-0.8% depending of on GDP, a chosen scenario. It Abstract The main aim of this paper is to provide a systematic overview of value added taxation in Croatia along with main changes in relevant legislation and to esti mate total amount of tax expenditures. Results show that the proportion of tax in expenditures GDP in in Croatia 2010 amounted to less than 4%, a proportion 0:3), several member states have recen have states member several (2010:3), Commission European to According

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------1995 the number of 1993 to 995 adopted the Value Added Tax Law (OG 47/95), Tax Added 1995 adopted Value the croatia

June st tax

added

value

The House of Representatives of the Croatian Parliament at its plenary session that took place on 21 (OG Rules VAT the by detail in prescribed was Law VAT of application the while rates of tax on turnover was gradually lowered, which indicated certain prepara (Kuliš, 2007b:25). VAT tions for the introduction of by the tax on products and services. Numerous tax rates and which collection, exemptions tax of led control and to regulations of implementation the in difficulties 2 Until the introduction of value added taxation, consumption in Croatia was taxed rison with EU member states. The fourth part is oriented to a consideration of the of consideration a to oriented is part fourth The states. member EU with rison compa in and measurements standard with system VAT Croatian the of efficiency followed by a conclusion. This is rison with EU member states. After the introduction, in the second part of the paper the Croatian value added in changes important the all with along detail in described be will system taxation compa in expenditures tax with deals paper the of part third The legislation. VAT better efficiency indicators than any of the observed EU member states. better efficiency indicators than any of member states, as well as almost twice as low as which the way, EU-27 that in efficient is average. system taxation added It value Croatian that concluded can be ditures in VAT and ditures a in parallel VAT analysis of Croatian tax expenditures made. and be will the states member effi new EU the in those of and system VAT the of ciency in Croatia in GDP in expenditures tax of proportion the that show will results The 2010 amounted to less than 4%, a lower proportion than in any of the EU new taxation in Croatia along with the main changes in relevant legislation and, mo empha special a Thereby expenditures. tax of amount total the estimate to reover, expen tax of size the of causes main the of determination the on placed be will sis of America (Cindori and Pogačić, 2010:227-228). of The main aim of this paper is to provide a systematic overview of value added Union, and it was soon introduced in some other countries that were not members not were that countries other some in introduced soon was it and Union, coun all in consumption final of form taxation a as applied is it Today EU. the of tries all over the world, except in some federal states, including the United States the value added tax (VAT) appeared for the first timethe invalue 1918 added ortax 1919,(VAT) but it was introduction and creation the in importance special a had that Union European the was of VAT gradually VAT. introduced in all member states of the European According to data in financial literature, the idea of turnover taxation by applying by taxation turnover of idea the literature, financial in data to According of consumption taxes, consumption being a broader and more the reducing thereby stable rates, lower for allows base base broader The than incomes. and profits distortive effects of taxation, with favourable effects on growth and employment Commission, 2010:3). (European was additionally shown by the analysis according to which Croatia in 2010 had created favourable conditions for tax evasion. From

------st 1 OG , , 1997. 1 2/99). 76/07). 11

OG January OG st 0% applied also to also applied 10% January 2001. st 90/05) brought in an addi an in brought 90/05) OG September 2000 and organising st July 2009, with the date of entry th 10 1998. It was assumed that the introdu August 2007 the tax rate of rate tax the 2007 August st January 1 st 0 of VAT Law, OG 47/95). The subject of taxation of subject The 47/95). OG Law, VAT of 10 1 54/00) to cover scientific and scholarly journals. Other journals. scholarly and scientific cover to 54/00) OG 10% on the provision of accommodation or accommodation with January 2010, significantly changed the VAT Law; this was due to due was this Law; VAT the changed significantly 2010, January st 1 999 999 the Law Law Amendments to (Article concerning the VAT January 2006. From 2006. January 1 st 73/00) additionally expanded the zero rate to cover certain services: pu 1 June 2000 this list was expanded by another Law concerning Amend st 1 OG 05/99) prescribed a new article that brought in the zero rate for bread, milk, books and and books milk, bread, for rate zero the in brought that article new a prescribed 05/99) tional tax rate of of cation November November 1 The Law concerning Amendments to the VAT Law (OG 87/09), adopted at a ple Amendments VAT to the The Law concerning breakfast, half board or full board in all types of commercial catering objects, as appli of date starting with services stated previously the for fees agency on as well newspapers and magazines published daily and periodically, except on those that are fully or mainly filled with advertisement or on those that are used explicitly for Law, VAT Amendments to the advertising purposes (Law concerning Law ( blic screenings of films, entering into force on 1 ( Law VAT the to Amendments concerning Law The details can be found in Article 4 of the Amendments to the VAT Law, Law, VAT the to Amendments the of 4 Article in found be can details From ( Law VAT the to ments tax exemptions were also prescribed (like film screening services),VAT newthe to Amendments exemp concerning Law The on. so and deliveries import on tions After After almost two years application, a of VAT great deal of lobbying from interest groups led to the of introduction the zero rate for certain products. Hence, from of (more a products nature and medical other similar implants medicines, textbooks, was every delivery of goods or services in the country with compensation, own or with out carried services and goods of deliveries goods, imported consumption, without compensation or by beneficiary conditions to shareholders and members prescri conditions other all if recipients, other to as well as family, closer their of Rules, OG 60/96). VAT 2 of the Law were met (Article VAT bed by the after only one quarter price levels stabilised. The biggest li pressure on citizens’ sector utility in increase the from arose VAT of introduction the after standard ving prices, which increased by 2% in Koprivnica, the lowest rise, and by as much as 2005:286). and Dražić Lutilsky, 31.4% in Bjelovar (Kliment From the beginning of the theofficial tax applicationVAT, rate of was uniform (Article 22% to amounted and 60/96). VAT Law should 60/96). VAT have officially entered into force on 1 Law official VAT the of Application of the on the Postponement by the Law Still, application was postponed to caused fact in it However, effect. inflationary possible a cause might VAT of ction while 1998, of months several first the in 2.4%, only of prices of increase single a nary session of the Croatian Parliament on into force of force into stays paid with transfers from abroad entering into force on 1 stays paid with transfers from abroad entering

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- - - - 34.1 30.5 .3 11 37.7 2010 0.4 11 123.7 334.6 28.9 32.6 .1 11 37.1 2009 3.6 11 128.1 335.2 2/2006/EZ of 2/2006/EZ 11 30.7 34.3 12.0 41.3 2008 134.7 120.4 345.0 34.1 29.8 .9 11 37.7 2007 0.6 11 318.3 126.7 31.1 34.7 12.0 34.9 2006 2.3 11 100.6 291.0 31.3 35.1 12.1 91.8 32.2 2005 103.1 266.7 January 2010. st 31.0 34.8 12.1 96.4 85.9 29.9 2004 247.4 August 2009 Croatia started to apply a standard a apply to started Croatia 2009 August st 1 34.6 31.5 10% is applied oils and fats of vegetable of animal 12.3 81.3 28.1 89.3 2003 228.9 January 2013. st 34.2 31.3 12.4 82.9 75.9 26.0 2002 208.8 a 2 the standard VAT rate has been increased from 23% to 23% from increased been has rate VAT standard the 2012 March st 1 1 10% to the preparation of food and food serving in catering objects, as well as otal tax revenues comprise tax revenues and comprise otal social tax tax security revenues revenues contributions paid to the state at able Share in total revenues Share in tax revenues budget revenues tax revenues Total revenue VAT Share in GDP GDP General government T 25%, while a reduced rate of the level of general government budget. calculation. of Finance (2012); author’s Ministry Source: a T of the general government in total tax of revenues value added tax revenue Share (in billions kuna and in percentages) budget and in GDP The importance revenue of as VAT a proportion of general government budget is illustrated in table 1. revenue and of GDP registration threshold from 85,000 to 230,000 kuna. The latter two amendments should enter into force on 1 serving non-alcoholic beverages, wine and beer in these objects in line with spe VAT the of increase the prescribed also amendment this Moreover, provisions. cial small babies, delivery of water, except for a small water babies, available delivery in of shops water, in bottles or any other packaging, and to white sugar made rate from reduced the either of application sugar envisaged also cane amendment this Furthermore, or beets. sugar of origin, children’s food and processed food on a basis of cereals for infants and The last amendments of VAT Law at the moment of The writing last this amendments paper of VAT were pre application of VAT application Law of with VAT all amendments was regulated by Rules the VAT into force on 1 (OG 149/09) that entered VAT rate of 23%, VAT instead of the 22% that had been in force up to that moment (Law concerning Amendments to the Law, VAT OG 94/09). Detailed formal tion for banking, financial, insurance and re-insurance services (OG 87/09). services (OG and re-insurance financial, insurance tion for banking, As a consequence of the global economic and fiscal crisis, and with the aim of on revenues, budget increasing the harmonisation of Croatian regulations with Council Directive Directive Council with regulations Croatian of harmonisation the This amendment also included a change from institutional to functional exemp the European Union (for details on executed harmonisation see Vlada RH, 2010:3). RH, Vlada see harmonisation executed on details (for Union European the scribed by the Law concerning Amendments to the VAT Law (OG 22/12) and in Amendments to VAT scribed the by the Law concerning clude several significant changes that may be considered important for this rese Since arch. ------. 11:40). 11:40). . In their analysis, they use the use they analysis, their In . 1 percentage point in the observed expenditures

tax

Bratić and Urban (2006) elaborate only the zero rate, since at the moment of publishing of their paper the VAT revenues were up to 2008 the most significant tax revenue of the general government budget (on aver (on budget government general the of revenue tax significant most the 2008 to up were revenues VAT age 34.6% of total tax revenue in the period 2002-08). In 2009 and 2010, owing to a significant decrease in 1 A Table deliveries. of amount total of source relevant a as VAT on report statistical social security con decline), revenue VAT crisis (and associated consumption caused by the global financial tributions have become the dominant tax revenue of the general government budget. in the appendix shows the amounts of taxable and non-taxable deliveries according deliveries non-taxable and taxable of amounts the shows appendix the in to the as (PDV-K, statistical it report is on called) VAT in the period 2005-10. not It do A1 table in shown PDV-K report statistical from data that stressed be should include the total amount of all deliveries, since these data do not include special different of deliveries or entrepreneurs, small for (exemptions) procedures taxation liveries rated at the rate of 10% are deliveries that reduce the tax Bratić liability. and Urban (2006:172-177) in the analysis of tax expenditures estimate loss of go vernment revenue from value added tax exclusively from deliveries lower rated rates, while all with other tax exemptions from deliveries in the import country, analysis the from excluded are deliveries export and government wittingly accepts a decrease in its revenue (Bratić, 20 government wittingly accepts a decrease reduc one and base tax the of reductions three total in are there system VAT the In subject not deliveries are base tax the reduce that Deliveries liability. tax the of tion de while deliveries, zero-rated and taxation from exempted deliveries taxation, to visions to facilitate tax administration, and norms related to international obligations. fiscal Tax expenditures can take a number of forms, including tax exemp government the by used is which interventionism of instrument an actually are res to favour certain groups or categories of taxpayers (sectors, firms or individuals), and to encourage certain economic activities, branches or industries. Thereby the Tax expenditures are defined as itemsTax in the analysed tax forms which represent a loss to the tax revenue of the central government budget, either because they re duce the tax base or (reliefs) concessions are expenditures because tax (1996:9) OECD to they According 2006:133). reduce the tax liability (Bratić and Urban, that fall outside tax norms or benchmarks. These norms include accounting con pro payments, compulsory of deductibility the rates, tax of structure the ventions, period, mainly as a consequence of significant changes in the VAT Law, as already already as Law, VAT the in changes significant of consequence a as mainly period, described in this part of the paper. Without any doubt, it can be concluded along that with social VAT, security contributions, is the most productive tax of the number of taxpayers budget, covering the largest general government 3 Total revenues from VAT in Total revenues the from analysed VAT period 0 2002- 1 amount on average to 34% of total tax revenue, 10 2002- period the while in revenue the average VAT share in Nominally, 30.7%. to total amounts revenue budget general government increased by 45%, from 26 billion kuna in 2002 to 38 billion in 2010. Still, the revenue share in of VAT GDP decreased by rate of 10% had not been introduced. 2). Tax expenditu Tax 2010:12). (OECD, etc. reliefs, deferrals, credits, allowances, tions,

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- - - - - a 15% 5.9 7.5 1.6 2010 5.8 7.3 1.5 2009 5.9 7.4 1.5 2008 0% is calculated as the as calculated is 10% 0%. Thereby in the period the in Thereby 10%. 5.4 6.6 1.3 2007 15% and one or two reduced rates, 4.9 5.9 1.0 2006

5.8 5.8 2005 2 able Taxable deliveries at the rate of 10% deliveries Taxable Zero-rated deliveries Total

Preliminary data. Preliminary rated deliveries and deliveries rated deliveries and deliveries -rated zero of because revenue tax added value Lost the period 2005-10 (in billions kuna) at the rate of 10% in rate is generally allowed only for export deliveries, since VAT on exported goods rate is generally allowed only for VAT export deliveries, since which in land the in i.e. exported, are they which to land the in paid is services and in Cyprus and Luxemburg to the highest 27% in Hungary. All the observed coun observed the All Hungary. in 27% highest the to Luxemburg and Cyprus in tries, except rate, Denmark, while apply super at reduced least one reduced VAT zero of Usage only. states member EU older some in applied are rates parking and This table with the VAT rates applicable in the EU member states shows the rela This table VAT with the but not lower than 5%. This actually means that Croatia is still not harmonized in harmonized not still is Croatia that means actually This 5%. than lower not but in applied rates VAT of list the shows 3 Table directives. EU the with context that EU member states and in Croatia. Reduced VAT rates are particularly of interest for this analysis. Council Directive Council analysis. this for interest of particularly are rates VAT Reduced 2/2006/EZ 11 of the European Union (2006:46-47) prescribes the usage standard rate that must not be lower than of one VAT veries taxed at reduced rates increased from 26.3 due in 2005 to VAT 38 from revenue of loss estimated billion the that seen be kuna can it 2 table From in 2010. 7.5 to gradually rose and 2005 in kuna billion 5.8 to amounted rates reduced the to in rates reduced to due state the of waiver the Cumulatively, 2010. in kuna billion the period 2005-10 amounted to 40.5 billion kuna. 2005-08 the standard VAT rate of 22% was used, in 2009 the rate of 22,42% (wei 22,42% of rate the 2009 in used, was 22% of rate VAT standard the 2005-08 ghted average of the rate of 22% for the first 7 months and of 23% for the next 5 rate of months 23%. The of amount 2009) of and deli in 2010 the standard VAT amount of these deliveries multiplied by the standard VAT rate and amount decreased of by these deliveries multiplied by the standard VAT of rate the at revenue collected actually of amount the Loss of revenue from VAT Loss due of to revenue from zero-rated VAT deliveries is calculated as the total rate, amount while of the these loss deliveries of multiplied by the standard VAT of rate the at deliveries taxable to due VAT from revenue a A1 in appendix. table from calculation based on data Author’s Source: T subjects subjects that were excluded until 10 20 due to an institutional exemption. Accor possible is it (2006:174-177), Urban and Bratić in applied methodology the to ding to calculate loss of revenue from value added tax because of zero-rated deliveries 2. is shown on table of 10%, which rated at the rate and deliveries tively uneven taxation policies among them. Standard VAT rates range from tively VAT uneven taxation policies among them. Standard -

Yes Yes Yes Yes Yes Yes Yes Yes Yes Zero rate Zero January 2012 January st

12 12 12 13 13.5 Parking

4 4 3 2.1 4.8 0, but according to according but 10, 20 January 1 Super reduced Super 2 Malta was still applying still was Malta 2012 January 1 6 5 7 9 8 9 10 10 10 10 12 14 8.5 5/7 5/8 5/9 5/8 5/9 6/12 6/12 6/13 9/13 6/12 5/18 5.5/7 6.5/13 9/13.5 Reduced 18 21 15 21 15 18 19 21 19 20 23 23 24 20 20 23 25 20 23 25 20 23 23 22 27 20 20 19.6 Standard 3 able Sweden United Kingdom Croatia Poland Portugal Romania Slovenia Slovakia Finland Lithuania Luxembourg Hungary Malta Netherlands Austria Greece Spain France Ireland Italy Cyprus Latvia Belgium Bulgaria Czech Rep. Denmark Germany Estonia Country Source: European Commission (2012); author’s adjustment. Commission (2012); author’s European Source: 2) data, as of as data, (2012) Commission European rate in the future. certainly be compelled to repeal this the zero rate, but will T 1 at situation Croatia, and states member EU the in applied rates VAT deliveries deliveries of particular foodstuffs and beverages, as well as to deliveries of phar maceutical products, drugs and vaccines, and Poland was allowed to apply zero rate to certain books and specialised periodicals. Malta was entitled to apply until pharmaceuticals and foodstuffs to rate a zero these these goods and services are consumed. Still, there are some deviations from this rule, so this privilege in an undetermined time period, i.e. “until the applied that states member old some to mainly relevant is VAT establishment”, system final a zero rate at the time of the adoption of the Council Directive. When it is about new member states, the application of a zero rate is allowed only for a transitional limited time period. Until the end of 2010 Cyprus applied a zero rate to the

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t in

1 P Time to 0 P 10% for those Long-term price level under VAT Long-term price level under t

0 t . As the government collects more revenues and contracts the money the contracts and revenues more collects government the As . 0 Underlying price line without VAT VAT Underlying price line without

t 1

1 0

P P General price level price General igure It should be emphasised that in Croatia the list of products eligible for the zero rate zero the for eligible products of list the Croatia in that emphasised be should It includes only basic goods like bread, milk, books, some medicines and certain VAT rate) are equal VAT and after that moment the long-term price level under VAT increase an without (or VAT of introduction the without line price the below stays rate). VAT in the time period time supply, the rate of growth of the general price level starts to fall. At these moment two price levels introduction, (with i.e. and the without increase VAT of a even exert a isdownward deflationary pressure on VAT inflation, i.e. in this case rate incre VAT Figure 1 shows how the introduction,rather i.e. than inflationary. ase leads to a once-and-for-all increase in the general price level from According to Minh Le (2003:46-47) in a case in which VAT is revenue-enhancing, is VAT which in case a in (2003:46-47) Le Minh to According it will help the government to pursue tight monetary may policy, and then VAT Source: Minh Le (2003:47). Source: F price level on general rate increase or a VAT introduction Impact of VAT to lead to a permanent increase in the inflation rate rate increase on the level (Nestić, 2008:27). Figure introduction VAT or a 1 shows the general VAT impact of of prices. on products on which the zero rate is currently applied, the increase of the price level would amount to approximately 0.4%. It is very likely that it would be only tend not should thus and prices other to overflow not should which effect, single a products, the price level would increase by approximately 0.8%. By an analogous analogous an By 0.8%. approximately by increase would level price the products, arithmetical estimate we can conclude that rate the of introduction 5% of a VAT Since Since Croatia will soon join the EU, the abolishment of the zero rate is only the question of time. Nestić (2008:27) estimates that in the case of Croatia, products household final total of 7.5% about represent applied been has rate zero which on consumption and in the case of the rate introduction of of a VAT

- - - - - 2.6 0.4 0.8 1.3 10%. 10%. 25.8 2010 334.6 2.6 0.4 0.8 1.3 25.7 2009 335.2 2.7 0.4 0.8 1.3 26.6 2008 345.0 1.2 2.4 0.4 0.8 24.4 2007 318.3 1.1 2.2 0.4 0.8 22.5 2006 291.0 1.0 1.3 2.6 0.5 26.3 2005 266.7

.3 billion kuna annually, while in case of the 1.3 applica billion kuna annually,

10% in the same period, the government would have col 1.1 and 4 able Potential revenue, 10% rate (% GDP) of zero-rated deliveries Value (billions of kuna) Potential revenue, 10% rate Potential revenue, 5% rate (billions of kuna) Gross domestic product (billions of kuna) (billions of kuna) Potential revenue, 5% rate (% GDP) 10, in case of applied harmonized VAT in the period revenue 2005-10, in case of applied harmonized VAT Potential VAT rates with the EU Council Directive Estimated potential VAT revenue Estimated in potential case rates VAT of harmonized applied with VAT the EU Council Directive is retroactively calculated for the period 2005-10 and on table 4. the results are shown T price inelastic for the majority of goods that are currently taxed by the zero rate rate would probably have just an insignificant effect and that the increase VAT of on the total consumption of these goods. In other words, from the data of delive calculate the approximate amount of money that would have flowed into the go pharmaceuticals, pharmaceuticals, medical aids, scientific magazines and the public goods inelastic price showing typical (2007:8), Economics Copenhagen to According of films. price while households, income low by shares larger in consumed goods basic are income high by shares larger in consumed goods luxury are typically goods elastic households. Hence, it can be concluded that in the case of Croatia the demand is From this brief analysis it can be concluded that the share of tax expenditures in in Croatia at the moment the zero rates are repealed will decrease GDP by 0.4, or are that deliveries for rate reduced applied the on depending points, percentage 0.8 currently taxed by the zero rate. lected twice as much, i.e. between 2.2 and 2.7 billion kuna annually. Hence it can it Hence annually. kuna billion 2.7 and 2.2 between i.e. much, as twice lected guidelines EU the with rates reduced the of harmonization upon that estimated be case in GDP of 0.4% to equal amount the by increase will revenue government the zero the at taxed currently are that deliveries to rate VAT 5% a of application the of of rate VAT a of application the of case in GDP of 0.8% analogously or rate, Source: Author’s calculation based on data from table A1 in appendix. table calculation based on data from Author’s Source: rate of 5% in the period from 2005 to 2010 If Croatia had VAT been applying the on deliveries taxed at the zero rate, the government would have collected so in appendix) it is possible to possible is it appendix) in A1 table (see applied been has rate zero which to ries vernment budget if these deliveries had been taxed at the rate of 5% and mewhere between tion rate of of a VAT

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------

Croatia

Estonia

Hungary

Slovenia

Bulgaria

Romania

Lithuania

Poland

Czech R. Czech Latvia

2 Slovakia 5 0 igure 25 20 15 10 45 40 35 30 50 Source: European Commission (2011); author’s adjustment. author’s Commission (2011); European Source: Croatia (thousands of euro) Croatia F account corporate tax evasion behaviour depending on the registration thresholds in chosen the new EU threshold. VAT member registration states and Croatia are shown on figure 2. applied in September 2011 minimization of the potential distortions arising from the differential treatment of treatment differential the from arising distortions potential the of minimization firms above and below the threshold, butthere are also links to be made with the design of optimal audit strategies. Kim (2005) extends this study by taking into Škreb and Medak Fell, 2008:2). Keen and Mintz (2004:574) stress that in and choo revenue tax increase to desires the besides VAT, for threshold optimal the sing the account into take also should one costs, compliance and administration reduce sons for VAT. On the other hand, a threshold leading that to is a set rela too low, sons VAT. for tively system, large con number of small entrepreneurs participating in the VAT (Kesner- costs compliance increases and administration tax the burdens siderably The level of threshold for VAT registration influences both tax revenues and com and revenues tax both influences registration VAT for threshold of level The the for revenues tax of loss in result may high too is that threshold A costs. pliance government, because of the non-registration of a certain number of taxable per right to deduct VAT that right is to displayed deduct on VAT their input accounts for acquired goods and services. that determines the conditions in which taxpayers (entrepreneurs) are obliged to system. Entrepreneurs that register system become in a the VAT part of the VAT on all of their have deliveries to of charge goods VAT and services, but have the Besides the differences in definition of tax rates in EU member states and Croatia, Croatia, and states member EU in rates tax of definition in differences the Besides thre registration defined the also is system VAT the of criteria unequal the of one year) one in (usually period tax certain a in turnover realized of level the i.e. shold, VAT registration thresholds in the new EU member states, EU-27 average and thresholds registration VAT ------3. This change should favour the ope the favour should change This 2013. January st 1 .3 thousand euro) is above the minimum prescribed threshold of 5 thou 5 of threshold prescribed minimum the above is euro) thousand .3 11 K), but also due to non-inclusion of all factors that may have impacted this amount. this impacted have may that factors all of non-inclusion to due also but K), If we abandon these considerations on factors that impact reduction or extension of the tax base, the amount of tax can expenditures be in estimated VAT rate as and actu the tax base multiplied by a VAT standard between difference VAT the Up to now the main focus of this part of the paper was placed on reduced rates and rates reduced on placed was paper the of part this of focus main the now to Up text the in earlier mentioned already was It threshold. registration VAT defined the seve raise paper the of part former the in expenditures tax of estimations the that – PDV- ral issues primarily due to the data source used (statistical report VAT on threshold will be increased to 230 thousand kuna (somewhere in the region of 30.5 of region the in (somewhere kuna thousand 230 to increased be will threshold from starting euro) thousand costs, business their reduce thus and turnovers lower with entrepreneurs of rations as they will no more be required to determine their tax liabilities or submit the legally prescribed tax system who forms. Taxpayers can wish to stay in the VAT do so, but are then obliged system to for remain another registered 5 in the VAT calendar years (Kuliš, 2012:4). tradesmen whose activities are not seasonal mainly consider that the threshold of the in since position privileged a in are trades Seasonal low. too set is kuna 85,000 repre not does VAT and outputs and inputs of ratio optimal the realize they season men already to According 2004:361). (Dimitrić, them to burden significant a sent gical. To be outside the VAT system brings market competitiveness because lower because competitiveness market brings system VAT the outside be To gical. prices can be formed. Besides that, the fact that is in ac this case the input VAT tually paid does not have any particular negative impact due to the high share of a exists also there craftsmen interviewed the Among structure. input the in labour significant and negative relationship between opinion thre concerningVAT the Therefore, craft. the of characteristics seasonal the and kuna 85,000 of level shold tionship between standpoints on the question lower of a registration with the respondents More threshold VAT income. annual and turnover annual of size the and turnover and income consider that this which threshold means is that set too low, they prefer to system. be Since or the to service stay industry outside is the VAT signifi less of is VAT input trades these in and trades, small in represented mostly this opinion seems cance quite than lo in industries that are not labour-intensive, EU (Kesner-Škreb and Medak Fell, 2008:2-3). and Medak Fell, EU (Kesner-Škreb Also telling of the questionability of registration the thre present Croatian VAT shold is the survey elaborated in Dimitrić (2004:361), according and enterprises both to among divided are which threshold this of opi adequacy the about nions rela significant a is there tradesmen among analysis, this to According craftsmen. Croatia with its registration threshold of 85 thousand kuna (equivalent to approxi to (equivalent kuna thousand 85 of threshold registration its with Croatia member states. It should be noted, however, that a number of new EU member states threshold changed at their the levels time of of VAT their accession to the tioned Amendments Act to (OG the 22/12), VAT the registration Croatian VAT mately mately sand euro (European Commission, ), 2011 but is still trailing behind the new EU

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax 36 (3) 269-296 (2012) 280 financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

281 36 (3) 269-296 (2012)

- - - - - (1) (2) actually collected VAT actually collected VAT R

. Due to limitation of data availabi r – R  r – R  TE = B standard VAT rate, and standard VAT r TE = (FC – R) denotes the amount of final consumption expenditure and all other varia other all and expenditure consumption final of amount the denotes represents VAT base, represents VAT B FC For a detailed overview on methodology of harmonization of the final consumption expenditure and the

:107-108). base see OECD (2011 VAT theoretical Figure 3 shows the estimated tax share expenditures of in VAT the GDP of EU new member states, the EU-27 average and Croatia in 2010, while total statistics These discrepancies between the base theoretical can and such an estimated VAT magni real the of estimation the but calculation, in errors some generate obviously tude of these errors falls outside the scope of this paper. order to obtain base a cannot more accurate be assessment of the theoretical VAT used we paper this in analyses all in Therefore, paper. this of scope the within made final consumption expenditure as an approximation of the base. VAT theoretical market output by the government, imputed rents, tax purchase of dwellings and the and dwellings of purchase tax rents, imputed government, the by output market exemption of financial and insurance services lity in national accounts, the aforementioned adjustments that need to be made in where consumption final (2011:107-108), OECD to According before. as denoted are bles non- of production are: these and items several in differ base VAT and expenditure

VAT revenues should therefore be removed from this amount since the theoretical the since amount this from removed be therefore should revenues VAT basis for taxation should not include the tax itself (OECD, :107). 2011 In other (1), which can be expressed as: words, it is necessary to transform the equation ture (Item P3 of the national accounts). Nevertheless, the figures provided under Item P3 in national accounts do not exactly match the theoretical potential VAT base, since they measure consumption at market prices, that is, including VAT. data on VAT base. However, the closest assessment of the VAT base is the amount amount the is base VAT the of assessment closest the However, base. VAT on data of expenditure on final consumption, exactly sinceVAT represents the a tax on final consumption. National accounts contain data on final consumption expendi (like changes of prices, level of consumption, tax evasion and so on). level of consumption, tax evasion (like changes of prices, available publicly of absence the from derive obstacles methodological main The emphasised that the situation in practice is not as simple as that. Therefore, for the for Therefore, that. as simple as not is practice in situation the that emphasised that assuming imposed, be to has limitation important one analysis this of purpose rate would not imply the any application economic of distortions a uniform VAT lute amount that the government would have collected in a situation in which all taxable goods and services were taxed at the uniform tax rate. Still, it has to be where ally collected VAT revenue in ally a collected specificVAT year, which canbe shown with the fol expression: lowing revenue. The product of the tax rate base shows and the the o- abs standard VAT

- - - -

Croatia

Estonia

Bulgaria

Slovenia

Czech R. Czech

Slovakia

EU-27

Romania

Hungary

Poland Lithuania

3 Latvia igure 0 5 4 3 2 1 9 8 7 6 In 2010 Croatia recorded a share of tax expenditures of in slightly GDP less than Union European the of states member new observed the all among lowest the 4%, Source: Author based on data from table A2 in appendix. A2 in table Author based on data from Source: VAT rate of 23% was applied in the last five months of 2009). rate of 23% VAT F in 2010 (% of GDP) of the VAT tax of expenditures the for VAT a certain year was rate the in average that VAT year, calculated as a weighted average of all applied standard rates in that year, where weights were chosen VAT in average the accordance used we with 2009 in the Croatia of duration case of in example, application For rate. of a VAT certain rate of 22.42% calculated by the summation seven first the in Croatia in applied 22% of of rate the rate standard VAT the (since 7/12 by VAT of multiplied 22% rate of 23% multiplied months by of 5/12 2009) (since and the the standard VAT lected revenues from VAT of lected EU revenues member from states VAT the Eurostat database was used (2012a), while for Croatia this indicator was available in time series of the Croa while in case of Croatia the relevant legislation framework was introduced in the previous in part Croatia. of Used the in paper the that calculation examines VAT 0 are shown in table A2 in appendix. appendix. in A2 table in shown are 10 2006- period the in expenditures tax VAT on For the calculation tax of expenditures VAT defined by the expression (2) and shown in table A2 there were used several different sources. For data consumption expenditure on and final gross domestic product of all observed EU coun tries and Croatia, the Eurostat database has been used (2012b; 2012c). For col 2). Data on VAT rates tian of Ministry the of EU Finance member (2012). states Data ac on VAT cording to different time periods are available in European Commission (2012), 27 average and Croatia Croatia and average EU-27 states, member new EU of expenditures tax Estimated

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax 36 (3) 269-296 (2012) 282 financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

283 36 (3) 269-296 (2012) - - 55 SK LV 50 statistics) 2 R . Therefore . it 45 CZ 40 PO 35 30 LT RO BG SI 25 20 HU VAT registration threshold (thousands euro) VAT EE CRO =0.3767 2 R 4 5 0 5 3 7 6 5 4 9 8

10 igure GDP) of (% expenditures Tax p-value of F-statistics of the observed model. of 38% it can be concluded that the defined VAT registration threshold is relatively is threshold registration VAT defined the that concluded be can it 38% of important causal factor of the total amount of tax expenditures; this relationship may be considered significant up to the significance level of 4.46% prescribed VAT registration thresholds and the share of tax expenditures in GDP. prescribed VAT thresholds Countries mainly with have lower also VAT lower share of tax expe and nditures vice in versa. GDP From the determination coefficient ( Source: Author’s calculation. Author’s Source: The regression line shows that there exists a positive relationship between the F thresholds registration (% GDP) and VAT tax expenditures Scatter plot of VAT threshold and estimated tax expenditures in VAT. Figure 4 shows a threshold scatter and plot estimated of tax expenditures in VAT. thresholds. registration VAT and in GDP tax expenditures VAT the share of However, it was already stressed (see figure 2) that the VAT registration threshold VAT it was already However, stressed (see figure 2) that the the to lead could which countries, observed all to compared lowest the is Croatia in registration VAT the between connection of kind some exists there that conclusion the share of tax expenditures in Croatia, so it can be stated that the Croatian value value Croatian the that stated be can it so Croatia, in expenditures tax of share the is relatively efficient in that manner. added taxation system cantly The higher. highest share of tax expenditures in of GDP, almost 9%, was of shares the with Hungary and Poland Lithuania, by followed Latvia, in recorded approximately 8%. The average of all EU countries was almost twice as high as (counting Croatia as a new member state), as well as lower than the average of all all of average the than lower as well as state), member new a as Croatia (counting EU member states. Relatively similar shares as in Croatia were recorded in Esto nia and Bulgaria, but in the majority of all other countries this share was signifi ------

uniform VAT rate VAT uniform Arguments against the Taxation Taxation costs do not depend that so only, rates of number on technical aspect should have any not impact on decision ing on number of taxation policy. rates and The term regressiveness is usu is regressiveness term The ally linked to annual income, so a single rate VAT system burdens the impoverished mo unfavourab generates it i.e. re, le social effects. - -

tax

added

uniform VAT rate VAT uniform Arguments for the Arguments for value

admi tax complicates products, able rate. it is not a or income matter – at looks one base which of indifference the period which to or consumption, observation relates. However, any possible regressiveness should be corrected by social transfers or by progressiveness of other taxes. rates tax several of introduction The tax of definition detailed a requires nistration and leads to an increase of the administrative costs pared com to a system with uniform The concept of regressiveness since unambiguously, define to is hard of

efficiency able

administration Tax Tax Regressiveness Reason tax rate are shown in table 5. T rate for and against the uniform VAT Arguments ledge-based resource efficient growth (European Commission,Ta 2010:14-15). xation by the uniform tax rate is definitely more often represented by tax experts whi goals, economic and fiscal exclusively achieve should VAT that consider that usual goals social some achieve also should VAT that consider who individuals le VAT uniform the against and for Arguments rates. tax of number larger for vote ly refer to the application of different taxation rates. The Copenhagen Economics study (2007:4) stresses that uniform rates are a superior instrument to maintain a compliance substantial otherwise minimise to efficiency, economic of degree high the hand, other the On market. internal the of functioning the smooth to and costs use of reduced rates as a policy instrument is often advocated notably for health, cultural and environmental reasons to provide easier and more equal access to educational and cultural content and incentives for eco-innovation and know tribution to total amount of VAT tax expenditures is almost impossible to quantify to impossible almost is expenditures tax VAT of amount total to tribution of analysis. in this kind 4 what or system VAT efficient an is what on opinion accepted generally no is There efficiency definitely it should look like, but most controversies VAT connected to is definitely necessary to initiate executionof adetailed analysis of the adequacy of the registration Croatian threshold VAT with the aim of optimization of the costs and benefits of theadded value registra taxation system.VAT Besides the defini also exemptions, and rates reduced like factors, other some threshold, tion tax expenditures. tely their However, have con an important effect on total VAT

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax 36 (3) 269-296 (2012) 284 financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

285 36 (3) 269-296 (2012) ------

uniform VAT rate VAT uniform Arguments against the against Arguments ices, and especially in business activities with competitiveness. pronounced It is acceptable to allow some key sectors to apply reduced rates for certain products services in order or to foster eco competitive and growth nomic ness. Application of reduced rates is often requested in the tourism sector, arguing unfavourable in be will tourism that position with regard to foreign servi tourist where competition ces are taxed by lower rates. Loss of government revenue due to introduction of reduced mitigated be could rates zero or by increased consumption or increase of some other taxes (e.g. excise duties). Lower tax rates (and have may prices) lower conse quently an impact on decisions of cer tain groups of consumers to stop spending in the informal economy (for example in the case of construction or miscel laneous repairs). cer on rates VAT the Lowering tain products/services definite ly leads to the prices on those lowering products/serv of

------

Škreb (1999),Škreb Copenhagen Economics (2007), Kuliš (2007a), - uniform VAT rate VAT uniform Arguments for the for Arguments sionally upgrading their consu Lower VAT rates government budget revenues. mean lower urage the impoverished from occa mption with more expensive prod ucts. Various rates of VAT lead to distor rates of VAT Various tions of consumer preferences and the absence of the neutrality princi luxury of taxation example, For ple. products at higher rates will disco tee of lower prices. In a free market, market, free a In prices. lower of tee prices are formed according to sup ply and demand. Traders set their prices according to the elasticity of demand, that is, according to what irrespective of the market will bear, the rate of taxation. defined in lower ratewhich opens the categories, door to corruption and lobbying, as well as to tax eva sion. rates are Lower not VAT a guaran Taxpayers Taxpayers will attempt to put all products that are not unequivocally

revenue Budget Consumer preferences Prices Tax evasion Tax Reason of the VAT, due to the destination principle, but with the right to deduct tax calcu VAT, of the system has VAT a relatively narrow tax base because of the prevalence of these exemptions. Tax exemptions are classified in three groups: exemptions in the coun the in exemptions groups: three in classified are exemptions Tax exemptions. export try, and import All exemptions. exemptions in the country are without the right of deduction of input tax, while export products are exempted from payment Cindori and Pogačić (2010). Another very important issue in the value added taxation system is linked to tax Source: Author Source: based on Kesner lated in their inputs (Kuliš, 2007b:29). Lejeune :274) (2011 stresses that the EU

------:274). 11 . However, where the input deduction is This also relates to VAT in ThisCroatiasystem also issince relates almostthe to completelyCroatianVAT VAT harmonized with ciency of the VAT revenue ciency collection of system the and VAT these are efficiency ratio (ER) and C-efficiency ratio (CER). the European system. Since there is no clear idea of an efficient VAT system, it is impossible to determine to impossible is it system, VAT efficient an of idea clear no is there Since In this part ofefficiency. the paper the most often used a precise measure VAT of advan their all with along elaborated, be will efficiency VAT the of measures three tages and disadvantages. Ebrill et al. (2001:40-42) define two measures of effi the question whether the tax measure is consistent with policy priorities, and if it realistically addresses an An actual effectiveness need. review should provide an effectively, objectives its meeting is measure tax a whether question the to answer the answers review efficiency An outcomes. unwanted without and budget, within question whether the tax measure is the most appropriate and efficient means to achieve objectives, as compared to alternative design and delivery approaches (Lenjosek, 2004:19). countries that tend to calculate costs and benefits of introduced reliefs and exemp and reliefs introduced of benefits and costs calculate to tend that countries tions in the tax system which narrow the tax base paying or the reduce tax (Bratić, the 2011:39). obligation Evaluation of of tax measures refers to a review policy that assesses the performance of tax measures according to the following answers review relevance A efficiency. and effectiveness relevance, criteria: three Commission, 2010:10). Bratić and Urban (2006:152) also agreed that the various tax of costs the increase system, tax the complicate privileges tax and exemptions necessary absolutely is it Hence, evasion. tax for windows up open and collection tax of form any of introduction the of benefits and costs the of analysis an make to This is additio introduction. system before their tax the existing into expenditure nally proven by the recorded increasing trend of such analyses among different Exemptions are contrary to the principle of VAT as a broad-based The tax. conti Exemptions are contrary to the principle VAT of nued relevance of many of the existing exemptions is questionable. Broadening the tax base by reducing the number of exemptions makes the tax more efficient rates (European and more a VAT neutral valid and alternative to offers increasing other hand, regressiveness is not solved efficiently because these measures do not target low-income wage earners. Therefore, the prevalence exemp of such VAT tions cannot be considered the best practice. Besides that, much litigation has ari mem EU by interpretations different and exemptions of range wide the to due sen ber states regarding the criteria for determining whether a transaction is subject to cases (28%) referred to the Eu an exemption. From 2000 to 2009, 57 VAT of 204 exemptions exemptions without a right of deduction becomes a cost denied, to the the non-deductible provider VAT of the supplies of goods or services. That cost is then passed on to the consumers in a phenomenon uncertainty and distortions create exemptions VAT Hence, cascading. as to referred system from being broad-based and neutral to business. and On keep the the VAT ropean Court of Justice involved an exemption matter (Lejeune, 20 involved an exemption matter (Lejeune, ropean Court of Justice

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- - - - - r (3) (4) (5) standard r -42). 1 :4 1 final consumption expenditu consumption final denotes and nominal GDP, VAT tax base, and VAT

Y B

FC 100 100  

100



r r  r   R R R B FC Y Y ER = 00 percent (Ebrill et al., 200 al., et (Ebrill percent 00 VRR = CER = formula: standard VAT rate. As before, perfect C-efficiency ratio of 100% would be would 100% of ratio C-efficiency perfect before, As rate. VAT standard denotes actually collected VAT revenue, denotes actually collected VAT denotes actually collected VAT revenue, denotes actually collected VAT denotes actually collected VAT revenue, revenue, VAT collected actually denotes r R R R re ere ere tax base can be expressed as the difference between the final consumption expen consumption final the between difference the as expressed be can base tax Thus, it is revenues. necessary to transform ex VAT diture and actually collected pression (5), as shown by the following equation: VAT As rate. already elaborated in the text, a very good VAT approximation of a VAT where can be shown with the following expression: purpose is the VAT Revenue Ratio (VRR). VRR measures the difference between between difference the measures VRR (VRR). Ratio Revenue VAT the is purpose collected theoretically be could that revenues and revenues VAT collected actually which rate, tax uniform a at levied is base tax VAT whole the which in case the in which it covers the whole tax base (final consumption expenditure) by the uniform the by expenditure) consumption (final base tax whole the covers it which rate and when the tax administration manages to collect the whole tax liability. 3), one relatively appropriate indicator for that :106-11 According to OECD (2011 result in C-efficiency of over 1 over of C-efficiency in result Theoretically, a taxation system could be considered fully efficient in a case in C-efficiency ratio would drop under 100 percent. On the other hand, the inclusion of inclusion the hand, other the both On taxation percent. 100 the under in drop would resulting ratio chain C-efficiency VAT the in break a or base, VAT the in investment of finaland consumption some of goods,the will intermediate constituent tend to res, and and res, the of case the in while rate, uniform a of application the of case the in only achieved the services, and goods certain on VAT of rates reduced or rate zero a of application wh which substitutes consumption for GDP, and which can be expressed with following the since all EU countries, as well as Croatia, use the and consumption-type VAT) statistics would also be vitiated by the errors in GDP measurement (Ebrill et al., 2001:41). These issues can be easily bypassed by using the C-efficiency ratio, perfect efficiency ratio of 100% would be achieved only in case of the application application the of case in only achieved be would 100% of ratio efficiency perfect of the (which uniform is rate not on applicable production-type in VAT our case standard VAT rate. The efficiency ratio shows what percent of each GDP percen standard VAT tage point rate of collects. the However, this standard measure VAT may be mi GDP while production, not and consumption taxes VAT principle in since sleading the Thus ). 11 2006: Gendron, and (Bird consumption not and production measures whe The efficiency ratio or the productivity ratio of VAT is the following with defined VAT ratio orThe efficiency ratio of productivity the expression: - - -

(6)

Croatia

Slovakia

Slovenia Romania

VAT revenue ratio VAT

100 Poalnd 

 Hungary

Lithuania C-efficiency ratio (FC – R) Latvia

VRR = VRR Estonia

. Besides that, these measures do not tackle possible econo

Efficiency ratio

Czech R. Czech Bulgaria represents the amount of final consumption expenditure, and all other

5 FC EU-27 0 igure 30 20 10 80 70 60 50 40 For details regarding the tax authorities costs (administrative costs of taxation) see for instance Bratić and efficiency measures mic distortions caused by the nature of these taxes. Pitarević (2004), and for costs of taxpayers see Blažić (2004). sed that these results are expected, according to the estimated share of tax expen ditures which in is GDP, visible on figure 3, and which isVAT directly linked to indicators, efficiency three all of definitions the from However, efficiency. system can attention special a with interpreted be should they which to due disadvantages be observed. none Namely, of the administrative, compliance and taxpayer costs observed the of any in represented are efficiency VAT to linked indirectly are that Croatia had in 2010 the best efficiency indicators ofconsidered be may system taxation alladded value Croatian that means which observedstates, EU member more efficient than that of any of the observed EUVAT countries.According to system efficiency, Croatia is followed byEstonia and Bulgaria, while Latvia is considered the least efficient of all the observed countries. It should be emphasi Source: Author based on tables A3, A4 and A5 from appendix. A5 from A4 and A3, Author based on tables Source: of EU new member states and Croatia in 2010 are demonstrated in figure 5, while 5, figure in demonstrated are 2010 in Croatia and states member new EU of total statistics on each and separate efficiency indicator in the period2006-10 are A5 in appendix. and A4 A3, available in tables F 2010 and EU new member states in indicators in Croatia efficiency VAT where efficiency indicators VAT All three variables are denoted the same way as before.

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax 36 (3) 269-296 (2012) 288 financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

289 36 (3) 269-296 (2012)

- - - 109 to 208 10%. It can be concluded that the share of tax expenditures in conclusion

ssary to initiate a detailed analysis of the whole value added taxation system with system taxation added value whole the of analysis detailed a initiate to ssary This analysis should the ataim of least en the optimization of costs and benefits. costs of tax authorities, i.e. administrative and compliance costs of taxation, the genera distortions economic by induced costs other as well as taxpayers, of costs member states. system efficiency no analyses of the total in the whole However, analysis VAT of concluded that Croatian value added taxation system is relatively efficient in that which was additionally shown way, in the efficiency analysis according to which in 2010 Croatia had a better efficiency indicator than any of the observed EU Estimates show that the proportion of tax expenditures in GDP in Croatia in 2010 in Croatia in GDP in expenditures tax of proportion the that show Estimates amounted to less than 4%, a proportion lower than that experienced in any of the EU new member states, and almost twice as low as the EU-27 average. It can be billion kuna. to reduced rates is treated as a tax expenditure and was estimated at 5.8 billion revenue kuna in 2005, gradually rising to 7.5 billion kuna in 2010. Cumulatively, 40.5 to amounted 10 2005- period the in rates reduced to due state the by foregone From 2005 to 2010 the amount of all deliveries not subject to taxation, exempted from taxation and taxed at the reduced rates increased by 90%, from billion kuna. From that amount, deliveries taxed at due revenues the reduced VAT rates of loss Estimated 2010. in kuna increased billion 38 to 2005 in 26.3 from by the same amount, i.e. 0.4 or 0.8 percentage points, depending on the applied reduced rate. currently taxed at the zero rate, or analogously 0.8% of GDP in case of application of case in GDP of 0.8% analogously or rate, zero the at taxed currently rate of of a VAT in Croatia at the moment of the GDP abolishment of zero rates will also decrease estimated the of effect such changes on Analysis the shows Croatian that budget. case the in GDP of 0.4% to equal amount an by increase will revenue government of the rate application of of 5% the on lowest deliveries prescribed that VAT are some minor harmonisations are expected up to the moment of Croatian accession Croatian of moment the to up expected are harmonisations minor some to the EU, primarily related to abolishment of the zero rate. Since Croatia will be obligated to abolish the currently applied zero rate on some products, this paper beginning of VAT application, the taxation system has experienced significant mo significant experienced has system taxation the application, VAT of beginning difications primarily related to changes of VAT rates,while guidelines, European with compliant mainly currently is exemptions, registration VAT etc. threshold, amount on average to 34% of total tax revenue, while the average share of VAT the Since 30.7%. to amounts revenue budget government general total in revenue 5 added Value tax in Croatia, along with social security contributions, is the most important tax revenue in the general government budget and covers the largest number of taxpayers. Total revenues in from the VAT analysed period 2002-10 ted by the nature of these taxes were included. Therefore, it is absolutely nece - - - ditures in system Croatian should VAT be closely monitored and evaluated by their relevance, effectiveness and efficiency in order to achieve the best practice con broader a on focused be should Croatia in research further Thus, model. VAT of costs different the covers also that one system, taxation added value the of cept taxation, as well as all the potential implications to economic growth and market competitiveness. compass determination of the optimal VAT registration threshold, costs and bene and costs threshold, registration VAT optimal the of determination compass the narrow which system, taxation the in exemptions and reliefs introduced of fits tax base or reduce the tax liability of and the all repeal the of potential the effects zero rate on all participants that will be directly or expen tax indirectly of level the impact that affected exemptions and reliefs introduced All by changes. these

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291 36 (3) 269-296 (2012) a -1.7 12.2 25.8 29.8 74.6 59.7 195.7 485.1 691.3 140.1 495.6 2010 3.9 7.3 4.3 6.0 8.9 8.2 7.9 8.2 7.5 5.2 7.2 4.1 2010 3.0 12.1 66.1 25.7 27.8 72.2 125.8 221.4 540.4 307.0 666.2 2009

2.5 12.6 78.1 26.6 33.5 84.4 3.7 7.3 5.4 3.8 9.8 6.9 8.4 7.4 7.4 5.1 9.1 5.1 618.1 144.4 605.5 762.5 2008 2009

2.5 10.4 24.4 30.9 78.8 72.6 568.1 557.7 702.2 134.2 2007

6.9 5.9 5.9 7.8 6.0 2.5 6.8 3.5 5.0 3.9 4.1 6.1 2.6 8.2 2008 27.8 69.4 64.5 22.5 9.6 11 515.1 506.9 634.8 2006

2.4 56.1 24.4 58.5 26.3 562.1 453.0 453.0 109.2 2005 4.7 5.2 5.7 3.8 5.9 2.7 6.5 4.7 5.3 2.3 7.1 6.1 2007 4.7 6.2 6.2 7.8 6.8 5.6 2.4 6.3 4.2 5.6 2.2 4.1 2006 27 standard rate was used as a weighted average of all members’ standard rates, where where rates, standard members’ all of average weighted a as used was rate standard 27 - A2 A1 a

the right to deduct input tax the right to deduct input the country of which: Deliveries in of – without right of deduction input tax of which: Export deliveries – with of which: Export deliveries K statistical report, nominal amounts (in billions kuna) amounts (in billions nominal report, -K statistical Deliveries not subject to taxation and not subject to taxation Deliveries (1a+1b+1c) total – deliveries exempted ppendix 2a) Taxable deliveries at the rate of 10% Taxable 2a) deliveries at the rate of 22% Taxable 2b) able able a) Deliveries not subject to taxation 1a) Deliveries not subject 1) Slovenia Slovakia Croatia Hungary Poland Romania Estonia Latvia Lithuania EU-27 Bulgaria Czech Rep. 2c) Taxable deliveries at the rate of 23% Taxable 2c) 2) Taxable deliveries – total (2a+2b+2c) deliveries – total Taxable 2) 1b) 1b) – total (1+2) Deliveries b) Deliveries exempted from taxation 1b) Deliveries exempted 1c) Zero-rated deliveries Preliminary data. Preliminary For EU For 27 average in average EU-27 and states member new Croatia, in expenditures tax of Estimate the period 2006-10 (% GDP) PDV a final consumption expenditures. determined by the amount of weights of each country were calculation. Author’s Source: Source: Central Office, Tax Administration, Ministry of Finance; author’s adjustment. Administration, Ministry of Finance; author’s Central Office, Tax Source: T a A T 36.0 34.9 43.9 37.7 34.8 35.3 36.2 33.4 42.5 49.0 46.1 31.6 44.7 59.9 48.7 60.2 39.2 44.4 46.3 44.0 45.9 55.4 42.9 63.5 2010 2010 35.3 45.2 36.4 46.5 28.5 37.5 38.0 33.8 35.0 42.3 35.3 49.3 43.7 56.8 50.6 35.2 49.3 42.4 43.3 55.6 43.6 61.6 41.1 64.1 2009 2009 36.0 54.5 35.6 43.9 37.3 44.4 39.0 36.4 36.3 42.5 54.4 41.6 46.0 65.7 59.6 45.2 52.3 45.5 50.8 59.6 48.6 70.2 51.9 51.3 2008 2008 36.7 33.4 49.2 45.8 45.0 40.3 37.9 42.5 42.3 35.5 53.9 51.8 60.6 48.5 68.9 47.4 60.5 49.4 69.7 54.9 52.5 48.3 51.3 57.1 2007 2007 37.5 53.5 33.6 47.7 50.4 38.0 37.0 42.6 39.3 54.6 42.1 41.7 48.7 59.5 70.3 47.8 62.7 48.4 70.4 57.9 50.0 49.5 45.8 51.7 2006 2006 27 standard rate was used as a weighted average of all members’ standard rates, where where rates, standard members’ all of average weighted a as used was rate standard 27 27 standard rate was used as a weighted average of all members’ standard rates, where where rates, standard members’ all of average weighted a as used was rate standard 27 - - A3 A4 a a

able able EU-27 Bulgaria Czech Rep. Estonia Latvia Lithuania Hungary Poland Romania Slovenia Slovakia Croatia Croatia Lithuania Hungary Poland Romania Slovenia Slovakia EU-27 Bulgaria Czech Rep. Estonia Latvia For EU For For EU For T Efficiency rate in Croatia,new member states and EU-27 average in the period 2006-10 a final consumption expenditures. determined by the amount of weights of each country were calculation. Author’s Source: weights of each country were determined by the amount of final consumption expenditures. weights of each country were calculation. Author’s Source: T period the in average EU-27 and states member new Croatia, in rate C-efficiency 2006-10 a

financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax 36 (3) 269-296 (2012) 292 financial theory and petar sopek: practice tax expenditures and the efficiency of croatian value added tax

293 36 (3) 269-296 (2012) 46.7 74.4 49.0 68.0 53.9 68.5 42.8 49.0 52.4 48.7 50.9 62.3 2010 47.6 74.9 47.6 56.0 69.8 38.0 44.8 55.4 46.8 47.2 62.5 64.1 2009 49.2 57.7 50.6 56.3 67.6 53.6 83.0 50.5 75.6 57.5 66.8 57.1 2008 81.3 63.7 60.9 58.7 56.8 69.0 53.4 52.2 68.9 54.5 79.7 54.1 2007 83.1 71.6 64.6 55.0 55.0 50.9 53.7 67.6 57.3 52.4 53.3 80.7 2006 27 standard rate was used as a weighted average of all members’ standard rates, where where rates, standard members’ all of average weighted a as used was rate standard 27 - A5 a able Slovenia Slovakia Croatia Lithuania Hungary Poland Romania Czech Rep. Estonia Latvia EU-27 Bulgaria For EU For 27 average in the period period the in average EU-27 and states member new Croatia, in rate revenue VAT 2006-10 a determined by the amount of final consumption expenditures. weights of each country were calculation. Author’s Source: T - - - - - [onli http:// 19 (2), 28 (3), , Financial ]. f Towards a Towards - http://www. ]. f ]. ]. http://www.ijf.hr/eng/ International Tax Pro International Tax 0 ]. f [online]. from: Available [online]. Available from: [online]. Available from: [ from: Available [online]. ]. f 28 (3), 355-376. Available from: ]. f Financijska teorija i praksa, Ekonomska misao i praksa . Washington: . International Washington: Monetary ]. f ]. ]. f f “Is VAT the Best Way to Impose a General General a Impose to Way Best the VAT “Is January 2012 st http://eur-lex.europa.eu/LexUriServ/LexUri “Troškovi poreznih vlasti u Hrvatskoj” [onli Hrvatskoj” u vlasti poreznih “Troškovi “Problematika utvrđivanja broja i visine stopa visine i broja utvrđivanja “Problematika 28 (3), 377-399. Available from: [ from: Available 377-399. (3), 28 Study on reduced VAT applied to goods and ser VAT Study on reduced VAT Rates VAT Applied in the Member States of the 95. Available from: Available [ 129-195. ]. Where Where to tax?- ANNEX 1: THRESHOLDS GREEN PAPER On the future of VAT VAT of future the On PAPER GREEN

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