I. BACKGROUND
1. The necessity of tax reform
Comprehensive tax reform in Slovenia is needed to overcome the excessive burden of wages and the insufficient taxation of real estate. Reform will have to be (at least) budget neutral and harmonised with the country's fiscal rule; further reduction of the public debt should be ensured. Currently, more is collected from income tax than from corporate income tax. If we add to this the contributions to salaries, this amount is significantly higher than that which is collected from the profit tax.
In OECD[1] countries, social security contributions amount to 26% of total tax revenues on average, while in Slovenia, it is almost 40%, which is very high. A Slovenian worker receives only 66.3% of his gross salary. The average in OECD countries is 75.2%. This calls for change. On average, property tax in the EU is 1.8% of GDP, with France having the highest rate at 4.0%. The Slovenian rate is much lower at 0.6% of GDP. Changes are needed here as well. The general tax rate for corporate income tax in Slovenia is 19% (in the EU, it is 21.5%), which means that pressures to lower this tax rate are not justified.
2. Slovenia is among the countries with the highest wage burdens
In OECD[2] countries, social security contributions amount to 26% of total tax revenues on average, while in Slovenia, it is almost 40%. In OECD countries, personal income tax collects an average of 25% of total tax revenues, while in Slovenia, it is only 14%. On the contrary, on average, social security contributions in OECD countries collect 26% of total tax revenues, and in Slovenia, almost 40%. The total rate of social security contributions for employees and the highest income tax rate in Slovenia is 61 per cent, which is the highest among OECD countries.
A Slovenian employee with an average salary receives 66.3% of the gross salary. The average in OECD countries is 75.2%. In terms of the largest share of employee contributions to labour costs, Slovenia is in second place with 19%. Only Lithuania is ahead, where the share of contributions is 19.2%. The OECD average is 8.3%.
The tax burden of the average single worker in Slovenia will be 42.8% in 2022. The average tax burden in the OECD in 2022 was 34.6%. In 2022, Slovenia had the 7th highest tax burden among the 38 OECD member states [3].
Germany, with 61.1%, and Belgium, with 61.6%, are the lowest in terms of the share of gross salary transferred to a bank account. Slovenia is in third place with 66.3%. It is followed by Austria with 67.4%, Italy with 71%, Slovakia with 76.5%, the Czech Republic with 75.1%, Sweden with 75.3, the USA with 77.6%, Australia with 75.9% and Canada with 76, 8.
3. Reform 2021 and repeal of the reform of the income tax scale 2022
There are currently five tax classes in Slovenia's income tax scale: the lowest with 16% income tax and the highest with 50% income tax. In between, there are three tax brackets: 26%, 33%, and 39% income tax.
Tax base (annual, netto) | Income (euro) | ||
Above | Up to |
|
|
| 8.755,00 |
| 16 % |
8.755,00 | 25.750,00 | 1.400,80 | + 26 % nad 8.755,00 |
25.750,00 | 51.500,00 | 5.819,50 | + 33 % nad 25.750,00 |
51.500,00 | 74.160,00 | 14.317,00 | + 39 % nad 51.500,00 |
74.160,00 |
| 23.154,40 | + 50 % nad 74.160,00 |
In 2021, the Government implemented changes to income tax rates and a reduction in the tax rate for the fifth income bracket from 50% to 45%; however, after the 2022 elections, the new government cancelled the mentioned changes and, at the same time, announced an income tax reform for 2023 and 2024, which would simplify the regulation of income tax. It predicts a uniform system of tax deductions for all taxpayers.
4. The fifth lowest real estate tax rate in the EU
One of the main problems of the Slovenian tax system is the low taxation of real estate. Compared to other EU members, Slovenia has the fifth lowest real estate tax rate as a percentage of GDP among the EU-27.
On average, property tax in the EU is 1.8% of GDP, with France having the highest rate at 4.0%. The Slovenian rate is much lower at 0.6% of GDP, which brings in around 280 million euros annually. The majority of these revenues are taxes on the use of building land (compensation for the use of urban land), which amounts to approximately 0.15% of the value of the property. In particular, this tax applies to all real estate, regardless of how it is used.
5. Corporate income tax is below the EU average
The general tax rate for corporate income tax in Slovenia is 19% (in the EU, it is 21.5%), and the rate for withholding tax from income sourced in Slovenia is 15%, both of which are well below the EU average. Reduction of the tax base for claiming tax reliefs, up to the amount of the tax base, is possible for the following purposes: for investments in research and development, for investments in equipment and intangible assets, for employment, for voluntary additional pension insurance, for donations, for employment and for investing in certain regions, for investing in the digital and green transition.
The average tax rate in the EU is 21.5%. They have much higher rates than Slovenia in Germany (30%), France (25%), Great Britain (25), Spain (25), and the Netherlands (25.8%), slightly lower and still higher than in Slovenia in Austria (24), in Norway (22%), in Slovakia (21). They have the same tax on corporate income in Poland and the Czech Republic as in Slovenia but slightly less in Croatia (18%) and Serbia (15%). The lowest rate, which differs greatly from the others, is in Hungary (9%).
II. PROPOSALS FOR THE RENEWAL OF THE TAX SYSTEM
1. Proposal to reduce social security contributions
According to the OECD study, a more significant role of income tax in Slovenia would reduce employees' social security contributions by five percentage points. The proposals of the OECD study are as follows:
- Abolition of the highest income tax class (+ 50% above 74,160.00): the current maximum income tax rate of 50% is too high, especially in combination with the increased social security contributions of employees. Very few taxpayers pay the top rate as it applies to very high incomes, so removing the top rate of 50% would not have much impact on income tax revenue.
- An increase in the tax rate in the second, third and fourth tax brackets (27%, 34% and 39%, respectively) in order to contribute to the financing of the reduction in social security contributions for employees. The increase in the rates on the income tax scale would depend on the extent of the reduction in employees' social security contributions. Income tax rates in the third and fourth classes could rise more than the rate in the second class. However, the income tax rate in the fourth class (i.e. the new top income tax rate) should not be higher than 45%.
- The income tax rate in the lowest class (16%) remains unchanged in order to maximise the impact of the reduction in employee social security contributions on low-income workers. The reduction of social security contributions can be financed by expanding the VAT base and by strengthening the role of real estate tax while simultaneously reducing the role of income tax in the financing structure of municipalities.
2. Sources for compensating the reductions of social contributions - broadening the VAT base
The reduction of social security contributions can be financed by expanding the VAT base and by strengthening the role of real estate tax while simultaneously reducing the role of income tax in the financing structure of municipalities. The abolition of the highest income tax class would result in a small loss of revenue of EUR 13 million; the loss from the reduction of the highest income tax rate from 50% to 45% would amount to EUR 6 million[4]. The analysis from the OECD Study 2018 shows that, for example, increasing the income tax rate in the second, third and fourth classes by two percentage points would bring additional revenues of EUR 61 million if employees' social security contributions remained at 22.1%, and EUR 71 million, if employees' social security contributions were to decrease to 16.86%.
The estimates of the OECD Study 2018 show that much revenue is lost due to the narrow base of the VAT. By expanding the tax base by, for example, 10%, additional revenue of EUR 120 million would be collected, which would be close to the loss due to the reduction of employees' social security contributions by one percentage point. The OECD Study 2018 suggests broadening the VAT base. A range of goods and services are taxed at a reduced VAT rate, from which wealthier households benefit the most. The general rate of VAT is high, and the lower rate of VAT, which is relatively low, is applied to many goods and services. Since the VAT rate in neighbouring countries is slightly lower than in Slovenia, the general VAT rate must be maintained at the current level. However, there is a possibility of eliminating the regressive distributional effects of the reduced VAT rate in Slovenia. Some products and services that are taxed at a reduced rate of VAT benefit the rich more than the poor in both relative and absolute terms.
3. Development cap
The Slovenian Chamber of Economy proposes a development cap (limitation) of 2 times (4,400 EUR) or 2.5 times the average salary (5,500 EUR).
Most Central European countries know the development cap, which is most often linked to pension or health contributions. The limitation may apply to both the employer's and the employee's social contributions. With the development cap, the Chamber addresses the outflow of citizens abroad, especially the highly educated with a high level of specific knowledge, as well as multinational companies that have moved their headquarters in the region to neighbouring countries due to a more favourable wage burden.
GZS proposes a development cap, which would limit the payment of all social contributions above a certain limit of the monthly gross salary and would cover key experts who contribute to the growth of added value in the company. As one of the options, there is a lower limitation of the cap (4,400 EUR) and only on a narrower type of social contributions (for example, pension contributions 2).
4. Tax incentives for rewarding employees and encouraging the growth of innovative and fast-growing companies
According to the Chamber of Economy, the amendments to the Law on employee participation in corporate profit simplify rewarding employees from company profits in the form of ownership (share or option) or a cash scheme and provide companies with tax-appropriate motivation to strengthen employee ownership in the business entity. In this way, companies can increase the loyalty of key employees by focusing on long-term strategy and ensuring higher growth and lower staff turnover.
5. Proposals for the reform of real estate taxation
For more than 15 years, the OECD, the IMF, the European Commission, and domestic companies have been urging Slovenia to increase property taxes while reducing taxes and labour contributions. In 2024, the current government intends to tackle real estate tax reform again. According to the estimates from the OECD Study 2018, there are also many possibilities for strengthening the role of the real estate tax while simultaneously changing the financing of municipalities by reducing income from income tax.
The government intends to maintain the existing tax on the use of building land. In the case of real estate, taxation will be progressive (higher taxation for each additional property, with the value being more important than the number of properties owned)[5].
Some oppose the introduction of the tax, others question its model, while representatives of the economy support it. The calculations show that after the introduction of the real estate tax, the state budget could reduce the income tax revenue sharing ratio from 54% to 36% and then gradually reduce this ratio to between 30% and 18%.
If Slovenia were to collect income from real estate tax in the amount collected on average by other OECD countries, it would collect an additional EUR 280 million. By increasing revenues from real estate taxes to the level of countries with the best results among OECD countries, Slovenia could collect additional tax revenues in the amount of EUR 670 million, which would correspond to a reduction in social security contributions of employees by 6.8 percentage points (OECD Study 2018).
According to the Slovenian Chamber of Economy, real estate tax is a tax source that is unused and also causes inadequate savings habits of the population, due to which owning and investing real estate is the main part of an individual's assets. This also does not encourage the sale of vacant properties. The Chamber proposes the proper implementation of the real estate tax, which would also reduce the current anomalies in the taxation of commercial real estate. According to the Chamber, the income from this tax must remain a municipal resource.
6. Proposal to reduce corporate income tax from 19% to 15%
We found that the corporate income tax in Slovenia is below the EU average, so proposals to reduce this tax are unacceptable. Nevertheless, the Chamber of Economy proposes a reduction of effective income taxation, namely a gradual reduction of the income tax rate from 19% to 15% over four years and a reduction of the withholding tax rate from 15% to 10%. Increase the relief for investments from 40% to 50%[6].
With this, companies should achieve greater investment growth, which is necessary for faster productivity growth. It is also suggested that we expand the concept of investments that are eligible for tax relief because many pieces of equipment do not belong to the tax-eligible costs, which reduces the tax base.
The proposal to reduce the corporate income tax from 19% to 15% is not justified, but it would be reasonable to consider the proposal on progressive taxation of profits by taking into account the ratio between the number of funds for the payment of profit and the number of funds for the payment of labour costs so that a lower tax per profit paid out by a company that has this ratio more balanced.
Conclusion
It is crucial for the economy to have a stable and predictable tax environment. However, the current situation with fragmented and uncoordinated real estate taxes, especially building land use compensation and frequent income tax reform, could be more stable and predictable. This uncertainty undermines confidence in the Slovenian tax system and, consequently, Slovenian tax competition. The Slovenian tax system needs comprehensive reform in order to harmonise with international standards and ensure a fair and sustainable revenue structure. Slovenia has adjusted its tax system several times over the years, several times also unsuccessfully. The calls of international authorities for reform and the need for greater public financial sustainability point to the need to reform the tax system in the following directions:
- Elimination of the highest income tax class (+ 50% above 74,160.00); eliminating the top 50% income tax rate would not have much impact on income tax revenue.
- An increase in the tax rate in the second, third and fourth tax classes (27%, 34% and 39%, respectively) in order to contribute to the financing of the reduction in social security contributions for employees; rates in the third and fourth classes could be increased more than the rate in the second class, with the new top income tax rate) not being higher than 45%.
- The income tax rate in the lowest bracket (16%) remains unchanged.
- The general VAT rate should be maintained at the current level, but some reduced VAT rates should be abolished, where products and services taxed at a reduced VAT rate benefit the rich more than the poor.
- Slovenia should introduce a tax on real estate in the amount that applies in other OECD countries, with which Slovenia could collect additional tax revenues in an amount that would compensate for the reduction in social security contributions of employees.
- The introduction of a development cap that would limit the payment of all social contributions above a certain monthly gross salary limit and would cover key professionals in the private and public sectors.
- Introduction of a tax incentive when rewarding employees from company profits in the form of ownership (share or option) or cash scheme.
- Increase the tax deduction for pension savings from EUR 2,600 and 5.9% of gross salary to EUR 5,000 and 10% of gross salary.
- The proposal to reduce corporate income tax from 19% to 15% is not justified, but it would be reasonable to consider the proposal on progressive taxation of profits by taking into account the ratio between the number of funds for the payment of profit and the number of funds for the payment of labour costs so that a smaller profit tax was paid by the company that has this ratio more balanced.
[1] OECD, Reshaping the Personal Income Tax in Slovenia https://www.oecd.org/tax/tax-policy/reshaping-the-personal-income-tax-in-Slovenia.pdf.
[2] Ibidem.
[3] Ibidem.
[4] The data refer to the year 2018.
[5] Ibidem.
[6] GZS, Predlog mini davčne reforme: v sedmih korakih do višje dodane vrednosti (Okt 23, 2023), kot ukrep na poti do doseganja ambicioznega cilja 100.000 EUR dodane vrednosti na zaposlenega do 2030.
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