Prague, 7 February 1997 (RFE/RL) -- Eastern and Central European countries that hope to become members of the European Union must first bring their tax systems in line with Western European standards. But final details about the necessary changes will remain uncertain until Brussels resolves its debates on a single European currency.
For many Eastern countries, the changes could mean lowering corporate and personal income taxes. Still, governments are being warned by the international financial institutions not to to make big tax cuts which would drastically reduce budget revenues.
Romania is a case in point. The new government in Bucharest has stated its intention to bring its tax rates more in line with those of Western Europe. The aim is to foster the growth of new businesses and to bring in more foreign investment. Bucharest hopes that the expected surge in productivity will lead to increased tax revenues in the long run.
Jean-Marc Bogenmann, tax manager at the Bucharest office of the accounting firm KPMG, says that the proposal would reduce taxes on corporate profits from the current 38 percent rate to about 30 percent. He says personal income taxes also would be reduced from a maximum of 60 percent to no more than 40 percent.
But Bogenmann says he doesn't expect to see the changes for at least nine months. He notes that the International Monetary Fund (IMF) has expressed concern about an initial drop in budget revenues if taxes are cut too quickly. Talks between the IMF and the Romanian government on the issue reportedly are continuing.
Ultimately, the new tax guidelines for aspiring EU members will come from Brussels. Last month, the European Commission said that it would formulate proposals on how to harmonize taxation across the European Union.
German Finance Minister Theo Waigel says Bonn will present a plan later this month for what he describes as "a fairer tax system." Waigel said the plan would restrict so-called "tax oases" within the EU in order to stop unfair tax competition between countries.
Tax harmonization between EU member countries is considered an important aspect of a single currency. French President Jacques Chirac and German Foreign Minister Klaus Kinkel both say that monetary union and the completion of work by the Inter-Governmental Conference (IGC) are needed to create a solid base for EU enlargement.
At the EU's recent Dublin summit, an agreement was reached on containing budget deficits when some EU countries adopt a common currency in 1999. The next EU summit, at Amsterdam in June, is expected to focus on concluding the work of the IGC.
Aspiring members of the EU expect to start negotiations in early 1998 about joining the 15-nation group. Leaders of some Eastern and Central European countries say they still hope to become members shortly after the year 2000. Poland, Hungary, and the Czech Republic are considered as the most likely to join the EU first because of their more advanced economies and democracies.
Breakdown Of Current Tax Systems By Country
Bulgaria's principal tax reform since 1990 has been the introduction of a VAT in April 1994. The move came under pressure from the European Union and IMF, which had demanded introduction of an 18 percent VAT before signing an interim trade agreement with Sofia and issuing stand-by credits. The VAT now stands at 22 percent.
George Smatrakalev, an economist at the Bulgarian Academy of Sciences, says collection of indirect and direct taxes is a major problem for Sofia -- particularly with larger companies in the "underground economy," which accounts for as much as 20 percent of the country's Gross Domestic Product. Since 1995, tax revenues have been substantially less than budgetary targets.
In Bulgaria, corporate profits up to about $1,000 are taxed at a 26 percent rate. Profits above $1,000 are taxed at 36 percent. There also is an additional 6.5 percent community tax on all corporate profits. Meanwhile, personal incomes are taxed, according to a schedule, between 18 and 50 percent.
The Czech Republic's basic corporate tax rate is 39 percent. The marginal rates for income tax range from 15 percent to 40 percent. Funding for social programs was transferred in 1993 from general taxation to an insurance-based system that is funded through payroll taxes. Employers now pay a rate equal to about 35 percent of gross wages while workers contribute at a 12.5 percent rate.
The Czech Republic has conducted a series of changes recently in its VAT with the aim of harmonizing rates with those in the EU. The current VAT is 22 percent for most goods, while there is a 5 percent VAT on most services. There are exceptions in both categories. Food and energy are subject to the five percent VAT while advertising and catering services are taxed at 22 percent. The government is now considering raising the VAT on energy to 22 percent as it moves to deregulate prices in the energy sector.
One change introduced in the Czech Republic at the beginning of this year was the abolition of a 25 percent personal income tax exemption for foreign experts.
Estonia's tax structure is based on a flat rate of 26 percent. More than 50 percent of government revenues are derived from indirect taxes -- particularly from the 18 percent Value Added Tax (VAT). Excise taxes were raised in 1996 to compensate for a decline in revenues that occurred after the tax thresholds for direct and indirect taxes were raised.
Employers contribute 33 percent of wages and salaries toward social security. The European Bank for Reconstruction and Development (EBRD) says that the Estonian government is continuing to try to bring the Estonian tax system in line with EU standards.
Personal income is taxed progressively in Hungary. The top rate, for annual incomes above 900,000 forints, was raised from 44 percent to 48 percent last year. There are two VAT-rates -- 12 percent and 25 percent. Excise taxes on alcohol, tobacco and fuel also are an important revenue source for the government. Both employers and workers contribute to the social security system. Employers pay a rate equal to about 50 percent of wages while the employees contribute 11.5 percent.
Latvia now calculates taxes on a proportional rate structure with uniform treatment for different types of income. The standard income tax rate is 25 percent. There is a 10 percent surtax on annual incomes that exceed $8,000 dollars. The standard VAT rate is 18 percent. A 38 percent social security tax is paid mainly by employers. The EBRD says authorities intend to harmonize the tax system with EU standards.
Property and income tax breaks for some regions are being considered by the parliament in order to encourage development, especially in eastern Latvia.
The EBRD says Lithuania's tax structure has been broadly similar to those in Western countries since a series of reforms were introduced in mid-1990. The VAT rate is 18 percent. The corporate income tax is a flat rate of 29 percent, but the EBRD notes that many exemptions have eroded the tax base. A VAT exemption on food items was abolished at the beginning of the year.
Personal income taxes are calculated on a progressive basis up to a maximum of 33 percent. Contributions to the social insurance payroll tax amount to 30 percent of income for employers and one percent for employees.
Lithuania's new government is preparing a revised tax system, but proposals to reduce taxes are the subject of disagreements within the ruling coalition.
Poland has substantially overhauled its tax system in recent years. By 1996, personal income tax and VAT accounted for 68 percent of state revenues. A corporate profits tax of 40 percent has been in place since 1989. A personal income tax with three marginal rates -- 20, 32 and 44 percent -- is currently in place. The government's medium-term economic program calls for gradual cuts in both personal income and corporate profits tax rates.
There are three VAT rates in Poland -- 0 percent, 7 percent and 22 percent. The current payroll tax to fund social security is 45 percent. The government is considering proposals for comprehensive pension reforms.
In Romania, personal income is taxed on a progressive schedule with a maximum rate of 60 percent. VAT is a flat 18 percent with the exception of food and medicine, which is subject to a 9 percent VAT tax. There is a single-rate corporate profits tax of 38 percent. Branches of foreign companies are subject to an additional 6.2 percent profits tax.
Romanian employers pay social security taxes equal to about 30 percent of workers' wages. Employees contribute one percent of their wages to the system.
Corporate taxes in the Slovak Republic are currently 40 percent while the maximum personal income tax rate is about 47 percent. There is a two-tiered VAT with rates of 6 percent and 23 percent. Employers make health and social security payments equal to 38 percent of employees' gross wages. Employees pay 12 percent toward social security.