Impact of investment from lowering capital tax rates effect


Impact of investment from lowering capital tax rates effect

FDI hosts in the Western Balkans have applied for the last 10 years low rates of profit tax (Corporate income tax, C.I.T.) and besides Albania, they apply the flat tax model, with a view to keeping the tax mechanism simple. Nevertheless, it is again seen that attracting investment has not tended to have significant growth, even in countries where this decrease of rates was among the lowest in the Balkans.

Competition of tax rates instead of FDI attraction is a reality in today’s global and Balkan economic environment. It is true that investors routinely compare the tax burden in different countries, as policy makers typically do for places that are similar in terms of location and size of the market.

A widespread view is that taxes are likely to be more relevant to the choice of a host country if the non-tax barriers are removed and if national economies converge with the requirements for recapturing investment in the most competitive form and manner between countries.

While profit tax is recognized as an important factor in investing decisions, practice shows that it is not the main determinant.

From the background of competition between the Western Balkan countries for the lowest tax rates, the evidence of investment realized over the year’s shows that it is not clear whether the reduction in the tax burden on profit is able as a single instrument to attract investors large and medium-sized ones.

FDI has been attracted from countries offering access to markets and profit opportunities; a predictable and non-discriminatory legal and regulatory framework; macroeconomic stability; skilled and responsible labor markets; well-developed infrastructure.

Meanwhile, Croatia and the other Balkan countries, which are part of the EU even though they have a higher burden of profit tax, the fact that they are part of a market with other standardised rules, but also from the guarantee of a developed infrastructure, better public services and hospitable and attractive business environment, reasonable transportation costs, including the market size, then it is pointless to apply for competition from Western Balkan countries only at low tax rates, without even offering similar advantages to them as of the Balkan countries as EU members.

A low fiscal burden can not compensate for a generally poor or non-attractive environment for FDI. Also, while attention often focuses on corporate income tax, the importance of other taxes should be recognized.

Another factor is how friendly is the tax and customs administration business, central and local. Surveys and numerous reports of organizations in the protection of business rights are seen as a common conclusion that in those countries of the region where investors find security, predictability, sustainability and timelines in implementing tax rules, as well as an effective rate tax, then that environment is considered as friendly to business.

The hospitable fiscal environment should also be influenced by the emerging policy task of taking measures against the misuse of the fiscal system by the aggressive international tax scheme, which utilize the differences between the systems.

Western Balkan countries should also consider tax treatment of FDI abroad. Some countries today offer a tax treatment that allows tax relief in the country of origin that goes far beyond the old competition argument that requires a tax exemption from the country of origin or a postponement of the undiscounted income of the activity foreigners, favoring the growth of tax on income generated abroad of fiscal residence.

Western Balkan governments should strive to improve business volunteering to pay their tax to budget, thereby improving transparency and security for a fair tax treatment. Looking ahead, the limits of tax competition can be further tested, further reducing the corporate tax burden on foreign investment, but also by not cutting down on the way of tax cuts, when viewed by policy makers as unnecessary to attract investment, due to the unfulfilled qualities of attracting investment from the host country and the lack of a sense of local context for successful foreign investment.

In the analysis of the impact of investment income tax rates, if we look at the investments made from the government budget funds, both domestic funds as well as those with foreign funds it is noted that in 2015 and 2018 the highest realization as a% of GDP has occurred in Montenegro and Kosovo, which have a low tax rate. Croatia having the highest profit tax rate (18%) holds the last place. Serbia’s holds one position before end of list with investment share to GDP, which has the same tax rates as Kosovo, but also operating as a big competitive economy, hospitable environment and unprejudiced investors, and a more qualified administration than other neighbouring countries.

Albania as a country with a higher tax rate than Montenegro and Kosovo, but also the neighbour with them holds the third place for the level of investments to GDP for the last 4 years.

In this interpretation of the facts it is worth noting that the tax rates application of special relief schemes for big investors (as happened in the case of Albania with TAP and energy projects), which thanks to the geostrategic position but also from the specific needs for some investments is reached a higher level of economic growth. Anyhow, should be considered the fact that big investments need a more competitive administration. But also should be foreseen how to check with the budget revenue targets for the years coming after the big investments will finish, in order to be maintained the tax burden level not very high and which could impact next investments decisions and against standard of achieved economic results.

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