EXENCIONES TRIBUTARIAS ENTENDIDAS COMO GASTO PÚBLICO

2.3.2.1 The tax system

Immediately after its independence Croatia started a number of changes in the fiscal system: for example, the system of personal income tax was introduced in July 1990, war tax in September 1990 and excises in 1993. However, the changes made before 1994 resulted in a non-transparent system with extremely high effective tax rates.142 The period from 1994-97 was dominated by fundamental and technical changes in the tax system. The objectives of the reforms were the establishment of a system compatible with the market economy, the reduction of the tax burden, the increase of the efficiency of the tax administration, the enhancement of fiscal discipline, and increasing the efficiency of tax collection.

The Tax Administration was established in 1994, as an independent administrative organisation within the Ministry of Finance. The key elements of the Croatian tax system in the period 1994-2000 were the Law on Profit Tax, the Law on Income Tax and the Law on the turnover tax of products and services. The latter one was replaced by the Law on Value Added Tax on 1 January 2008.

Turnover tax was the most abundant revenue of the government budget till 1998. Its share in the total budget revenues amounted to 58.6% in 1994 and 45.6% in 1997, in the last year of is application. The reduction of the share of the turnover tax in the total revenues was enabled by the reforms of direct taxation and the introduction of excise taxes. In 1991, turnover tax was divided between eight tariff classes, with rates between 1% and 90%. The number of tariff classes was gradually reduced. In 1993, it was reduced to 7 and the general rate was decreased from 50% to 40%. Since July 1994, the number of tariff classes was further reduced to 5, and the tax rates were between 2.5 and 20% (the latter being the standard rate), for all products except one type of gas, which was taxed 60%. Since 1995, there have been 4 tariff classes and the last change in the sales tax rate was introduced in 1995, when the standard tax rate was reduced to 15%.

Since 1998,value added tax is the most important revenue of the state budget. The tax rates are 22 %, 10%, and 0%.

Other taxes in Croatia’s fiscal system are: income tax, profit tax, tax on insurance premiums for cars, games of chance tax, real property transaction tax, inheritance and gift tax,

142 _{E.g. war tax was introduced on wages and other personal incomes, and all these impositions together with a}

special municipality tax resulted in a marginal tax higher than 90% of the highest incomes. The consequence of such a system was high tax evasion.

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tax on motor vehicles, tax on boats, tax on slot machines for games of chance, consumption tax, tax on country cottages, tax on uncultivated agricultural land, tax on unused business immovable property, tax on inbuilt building sites, firm tax, tax on the use of public area, and local surcharges.143

The system ofpersonal income tax was introduced in July 1990, when a system of direct taxation on personal income was introduced, together with a tax on the total income of citizens. The tax was paid at the end of the year if the annual net income exceeded three times the amount of the average annual salary.

In 1994, a new personal income tax was introduced, based on consumption. The basic characteristics of this system were economic neutrality, fairness and administrative simplicity. As opposed to the previous system, where each type of income was taxed differently, the newly introduced system of personal income tax was equally imposed on all types of personal income. The income tax is assessed on the total income generated by each taxpayer within a year. At the beginning, it included two tax rates: the first tax bracket was subject to a rate of 25%, while the second bracket was paid at a rate of 35%. The limits of each tax bracket depended on the level of basic personal deduction. In 1997, the lower taxation rate was decreased from 25% to 20%, while the non-taxable portion of income went up, with further increases in 1999.

The tax base for the income tax is the total income realised in Croatia and abroad (for foreign taxpayers, income realised in Croatia). The tax is progressive, and the rates are 15%, 25%, 35% and 45%. The distribution of the revenues from the income tax are divided between the state, municipalities, townships and counties at fixed percentages, according to the Law on Financing Local and Regional Entities.

Thecorporate income tax (or profit tax) reform was carried out simultaneously with the introduction of the personal income tax reform. In the period 1990-94, resident entrepreneurs were paying corporate income tax at the rate of 35%, and non-residents at the rate of 17.5%. In 1994, this system was replaced by a single-rate profit tax system. Corporate income or profit tax rate was 25%. At the beginning of 1997, the discrepancy between the personal income tax and corporate income tax was settled when the corporate income tax rate was increased to 35%. The current profit tax rate is 20%.

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Croatia implemented excises in 1993, when excise tax on coffee was introduced. Excises are paid in the absolute amount according to the measure unit (for automobiles, according to the engine power). In 1994, excises were introduced on products which were taxed at high sales tax rates: oil derivatives, personal cars, tobacco and its products, alcohol and alcohol drinks, beer and beverages. In 1997, excises on planes and vessels were introduced. The share of excises in the total revenues (1994-98) ranged between 8.10% in 1994 and 17.25% in 1997.

In 2002, new taxes were introduced, and the specific excise taxes were changed. A tax on obligatory insurance premiums for cars was introduced, while excise taxes on alcoholic beverages were reduced by 40%. The personal income tax in 2002 was somewhat lower than in 2001. At the end of 2002 and in 2003, the Croatian tax system also saw amendments of some tax laws. For instance, in 2003, amendments were passed on the Law on Personal Income Tax, the Law on Profit Tax and the Law on Financing of Local and Regional Self Government Units, whereby new changes were introduced to the reallocation of the personal income tax, and the Law on Contributions for Obligatory Insurance.

2.3.2.2 The welfare system and funding

Compulsory social security contributions are a kind of direct tax that is used to finance the social security system, and accordingly, in a broader sense they form a part of the tax system. The contributions are the primary revenue used to finance expenditure for retirement, and health and employment insurance. The contributions are collected from the employee and from the employer, and they are the revenues of three extra-budgetary funds:

The Croatian Pension Fund - contributions for Pillar I pension insurance The Croatian Health Fund - contributions for health insurance

The Croatian Employment Fund – contributions for accident insurance.

For employees insured in Pillar I, the contribution is paid to The Croatian Pension Fund, and for those insured in Pillars I and II, the contribution is paid to The Croatian Pension Fund and to the private insurance fund. Contributions for the Pillar II pension insurance are paid to the private insurance funds selected by the employee.

In 2007, social contributions paid by the employees and the employers altogether are at a total rate of 37.2%. The contributions paid by the employee include the insurance for retirement under the first and second pillar (20% for the first pillar, or 15 % under the first and

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5% under the second pillar), while the employer pays 15% for health insurance, 0.5% for accident insurance and 1.7% for employment. The total contribution of the employee is 20%, and that of employer 17.2%. The basis for compulsory social security contributions is the salary.

Croatia spends about 8% of its GDP annually on health care. About 84% of the health care spending comes from public sources and the rest from private sources. Within the public sector, the Croatian Health Insurance Institute (HZZO) accounts for 96% of the general government spending on health care. The HZZO also plays a key role on the supply side by setting health care delivery standards and negotiating the volumes and prices of health services with the providers.144