CEE tax systems continue to be stable – Mazars Central & Eastern Europe Tax Guide 2016

Mazars has published its fourth annual regional tax summary, covering the most important issues of current tax regimes of the Central and Eastern Europe (CEE) countries. It shows, among other things, that tax competition between different countries in the region entered a new phase that involves closer cooperation between those countries in order to prevent tax frauds.

Mazars tax advisors from selected countries define the most important new legal and regulatory trends of fiscal policies in the CEE region.

“The aim of report remains the same. Mazars, the leading audit and tax consultancy firm , wants to provide investors interested in the region with focused information about tax in the CEE countries, and also to enable them to compare various competitiveness factors” said Kinga Baran, tax advisor, director of the Tax Advisory Department at Mazars’ Warsaw office.
“As a whole, this year’s survey finds that the region’s tax systems have been relatively stable over the past few years. No further structural changes have been necessary to address post-crisis deficit issues, and each country is moving forward with its own strategy” adds Kinga Baran.

Nevertheless there is fine-tuning everywhere. In previous years Hungary led the way with innovative tax solutions related to the financial crisis, however in 2016 it did not come up with any important innovations. Other CEE countries follow some of regulations that have been introduced in Hungary. One of the examples might be a special sector tax on banks, credit unions, insurance companies and other financial institutions based on their total assets entered into force in 2016 in Poland, which is similar to the surtax imposed on the Hungarian financial sector.

Instead of fundamental tax reforms, the focus has shifted in recent years to two areas, not only on the regional level, but also across the EU and OECD countries. On the one hand, an increasing number of countries in the region have recognized the importance of concentrating on cross-border transactions. Transfer pricing regulations have appeared in the tax systems of almost all countries in the region. In recent years almost all countries in the region (with the exception of a few successor states of the former Yugoslavia) have introduced this obligation in their tax codes. Those that do not follow suit may easily face a situation where income is withdrawn from the country through prices without taxation. This is a relatively new obligation in Russia (2012), Serbia, Ukraine and Latvia (2013), Albania (2014), and in Croatia (2016). Important changes in relation to transfer pricing, introducing more restrictive alterations and increasing obligations of some taxpayers, have been introduced in Poland, however those changes will come into force mostly from 2017.

Transfer pricing is an internationally regulated area, which justifies joint action on the part of the tax authorities of the different countries. This is also indicated by the vigorous efforts within the OECD, organized around the “BEPS programme,” the aim of which is to combat tax base erosion, with transfer pricing being only one aspect of the work. There are, nevertheless, major differences between the individual countries, e.g. in terms of what should be considered as an affiliated enterprise and how significant – or, by contrast, symbolic – the fines are for non-compliance. In Czechia, no fines are imposed for absent transfer pricing documentation and it is only the consequences of the tax base correction that affiliates must deal with; Croatia recently tightened its rules, which had earlier made the documentation optional. In Poland, members of the board are obliged to follow transfer pricing rules. In case of non-compliance, apart from consequences for the company as a whole, they may even face criminal charges.

On the other hand, there are many measures identified in recent years in CEE countries which have the clear aim to combat VAT fraud. The most important initiative in this area is the introduction of the reverse charge mechanism for VAT as far and as widely as possible. One of the initiatives worth mentioning here is the Ukrainian invoice registration system introduced as an experiment in 2015, which is now a permanent element of the country’s VAT regulations. According to the analysis of MAZARS, the effect of these measures is only measurable in the long run, but it should not be forgotten that they also significantly increase the already disproportionately high administrative burdens – and thereby also the costs – of businesses.

The overall conclusion is that tax competition between different countries of the CEE region has entered a new phase. Previously they competed with each other to provide the most friendly tax environment. Now they are trying to cooperate to keep tax evasion on the lowest possible level and keep tax revenues, because in the long run it is crucial to reduce tax burdens and thus improve the investment environment