MAZARS CEE TAX GUIDE 2020: Czech and Slovak republics among 21 countries with the highest level of labour taxation,

The Czech Republic, Slovakia and Russia lead the rankings of the 21 CEE countries where employers and employees have to pay the highest mandatory contributions to social and health insurance. This is according to the international MAZARS CEE Tax Guide, which monitors the development of direct and indirect tax, labour expenses, wage levels and the area of transfer pricing.

“If the taxation related to consumption will become more important for fiscal income, at the same time the governments will then pay closer attention to more effective tax collection. Because the danger of tax evasion is the greatest in this area, governments are leaning more and more to the use of digital technologies to prevent and uncover any abuse. The goal is the comprehensive monitoring of the sales process, the detection of non-taxable transactions and the limitation of tax fraud. The introduction of online registration registers and special attention paid by the tax authorities to transactions that involve transportation could be an effective tool against tax evasion,” stated the Leading Partner of Mazars’ Tax Department, Pavel Klein.

Hungarians pay the highest VAT 

The highest VAT is paid in Hungary (27%) and Croatia (25%). Four countries, on the other hand, have a zero rate for certain goods and services (Latvia, Poland, Russia and Ukraine). The first two countries have a total of four rates in their tax systems. The lowest ten percent VAT rate in the Czech Republic is above the region’s average. In addition to Czechs, it is also paid by Slovaks, Serbs and the inhabitants of Bosnia and Herzegovina, where a rare uniform VAT rate is specified.

Personal and corporate income tax lowest in Montenegro

The personal income tax rates in the 21 monitored countries in the region are variable. Employees in the Balkans, however, pay the least. Employees in Montenegro pay the absolute lowest rate (9%), followed by employees in Serbia, Romania and North Macedonia (10%). The highest rate, on the other hand is in Croatia (24% / 36%). The tax systems of some states also use a progressive tax depending on the amount of the employee’s income. A progressive tax with a wide percentage range is applied, for example, in Germany, Austria, Greece and Slovenia.

The highest corporate income tax is paid by companies in Germany, where the tax can be as high as 31%, depending on the profit. Austria is also one of the countries with a high corporate tax rate, where the rate reaches a quarter of the profit (25%), followed by Greece (24%). In 2016, the rate in Greece was as high as 29%, though this year Greece decreased the rate to its current level. Greece was also the only country that lowered the tax across the board this year. Poland also lowered the tax for a few taxpayers, thus a certain group of companies pays 9% of their profits.

The lowest corporate tax, on the contrary, is in Hungary and Montenegro (9% in both countries). In Albania and Bosnia and Herzegovina, the tax for a group of companies that fulfils certain conditions can even be zero. The overall average in the region is 16%. With its uniform rate of 19%, the Czech Republic is one of the countries with an above average taxation of corporate profits.

The group taxation of legal entities is only applied in a few countries in the CEE region, specifically Bosnia and Herzegovina, Poland, Austria and now also Hungary, where it was introduced in 2019.

Authorities primarily inspect transfer pricing for cross-border transactions

In the area of transfer pricing, the trend throughout the region is for tax offices to focus on inspections of cross-border transactions within the group. The regulation of transfer pricing is enshrined in the legislation of 19 of the 21 countries in the region. The exceptions are Montenegro and North Macedonia. So far the last country to introduce regulations for transfer pricing in its tax system was Bulgaria.

“The question is how the current crisis related to the Covid-19 pandemic will change the reasonably expected level of group profits or the degree to which multinational companies will have to intervene in their transfer pricing structures. In addition, it will also be very important how strongly the tax offices in the individual countries will dispute the level of the tax base, which will drop considerably and will be lower than in previous years,” stated Mazars Tax Partner Jaroslav Křivánek.

Mandatory deductions are lowest in Lithuania and Romania, while the most expensive work is in Slovakia and the Czech Republic.

The overall cost of labour for employers in the region amount to almost 160% of the net wage. This figure drops in the case of groups with lower income (approximately 155%) and rises in the case of higher income groups (167%). The ratio of expenses for taxes and deductions encumbering the employers averages 16% of the gross wages in the region.

The difference between the countries with the highest and lowest mandatory deductions for employers and employees amounts to more than 30%. While companies in Lithuania or Romania pay 1.77% and 2.25%, respectively, in the Czech Republic it is 33.8% and in Slovakia even 35.2%. 

As far as wages levels are concerned, the countries in the region show a wide spread. While the minimum net wage in Serbia, Ukraine and Kosovo range under EUR 180, in other former Yugoslavian countries or in Albania and Bulgaria it reaches EUR 200 to 300. In the Visegrád countries (the Czech Republic, Slovakia, Hungary, Poland), the minimum wage ranges from EUR 400 to 500. Austria (EUR 1 866) and Germany (EUR 1 620) post incomparable values, significantly above the regional average. Over the last year, the minimum wage calculated in euros increased in Ukraine, Bulgaria, Poland, Slovakia and the Czech Republic (where the minimum wage is currently EUR 476). 

The average net wage in the private sector is once again highest in Germany (EUR 2 221), Austria (EUR 2 131) and Slovenia (EUR 1 241). This is followed by the Visegrád nations, Greece, Croatia and the Baltic states, where the scale of average wages ranges from EUR 700 to 1 100. The lowest net average wage is collected by employees in Kosovo (EUR 361), Albania (EUR 401) and North Macedonia (EUR 418).

Further developments following the Covid-19 pandemic. Will the super-gross wage be cancelled in the Czech Republic?

According to the expectations of tax experts, changes in the tax systems of the individual countries and the planning of fiscal revenues can be expected following the Covid-19 pandemic. Before the pandemic, most of the national governments were primarily building on increasing private consumption, which is why more attention was paid to indirect tax. “In recent years, the value added tax has become the greatest source of income for state budgets, and this may or may not change. Some governments are considering economic stimuli in the form of decreasing the taxation of work, for example. The drop in fiscal revenues can be replaced by types of taxation that have not been applied that much yet, such as sector taxation for selected sectors or a digital tax,” Pavel Klein forecasts.

For example, in this context the Czech government could consider a change to the income tax system and cancel the “super-gross” wage. The super-gross wage was introduced in 2008 as part of the reform of public finances with the goal of showing employees how much they cost to their employers and that the tax rate is not the only factor influencing their tax burden. Nevertheless, the introduction of the super-gross wage is perceived more as a hidden tax increase, since it does not increase the tax rate, but the base for its calculation and the real personal income tax rate from employment is not 15%, but rather 20%.

“The cancellation of the super-gross wage and the preservation of the fifteen-percent tax rate would save quite a bit for employees, thereby increasing their net wage by hundreds or thousands of crowns. On the other hand, this step would mean a significant loss for the state budget. Plus, it would mean additional expenses for the employers due to the changes to the information systems in which the wages are processed. Lowering taxes and leaving more money for the employees is certainly a step in the right direction, though only if it will be accompanied by corresponding savings in the state expenses,” Klein added.