What does the “Europe Now” program of the Montenegrin Government bring?
On November 4, 2021, the Montenegrin Government adopted the “Europe Now” program, which was presented as a comprehensive set of changes in tax regulations and which should enter into force on January 1, 2022. The goal of these changes is to reduce the tax burden, primarily for citizens, but also for the economy. Looking more broadly, the program creators’ intention to have a strong social component and to be aimed at strengthening the concept of social justice is obvious.
The program’s basic settings are: increasing the minimum wage, reducing the employer’s total cost by reducing the tax burden on labor and introduction of progressive taxation. From the above, it is clear that this is a substantial change in the tax framework of Montenegro, primarily in the field of taxation of citizens, and each element deserves a separate analysis.
This program aims to lay new foundations for macroeconomic stability and especially the stability of public finances in Montenegro, with the development of entrepreneurship and general performance of the Montenegrin economy. The main instrument for achieving this goal is to reduce the taxation of wages, which should, on one hand, increase employment and tax discipline, in terms of reporting the actual wages of employees and unregistered workers, and on the other hand provide higher disposable income. This would mean higher consumption, personal investments, etc. In principle, this is an adequate reform set-up and a serious impetus for further development of Montenegro, if will be fully implemented in the way it has been set and modelled.
Minimum wage
The minimum wage in Montenegro, from October 1, 2021, is EUR 250 net, i.e. 373 euros gross. Before that, it amounted to EUR 222 net. With the recent increase in the minimum net salary to EUR 250, the number of employees receiving the minimum wage has increased to just over 20,000 employees. The new minimum wage will be EUR 450 net and, with the exception of Croatia with a minimum wage of EUR 453 net, will be convincingly the highest in the region.
Reducing the tax burden on wages
As for reducing the tax burden on wages, the proposed solutions are no less radical. The current situation is such that EUR 39 of taxes and contributions are paid per EUR 100 of gross salary, and Montenegro does not deviate much from the average in the region. Looking at the structure of the burden, the share of taxes and surcharges in total labor costs is 9.4%, contributions 29.6%, while the share of net wages is 61%.
It is specific that currently Montenegro does not have a non-taxable part of the salary, as other countries in the region do (e.g. Croatia has the highest with EUR 532, and Northern Macedonia the lowest with EUR 137). With this in mind, there have been many comments in the previous period to revise the tax policy in the direction of reducing the tax burden on labor. According to the program, this would include the following two measures: introduction of a non-taxable amount of salary of EUR 700 on a gross basis (income tax rate of 0% on a gross basis of up to EUR 700) and abolition of the obligation to pay contributions for compulsory health insurance (abolition of the contribution rate at the expense of both the employee and the employer).
What the program treats is the risk that such changes will not be accepted by the employer as an opportunity for savings based on reducing the tax burden, without increasing the net salary of employees, and it is expected that labor regulations and increased inspections will be instruments to achieve these goals. Also, given the introduction of a very low tax burden on wages, a change in criminal legislation is envisaged in the sense that non-payment of taxes and contributions will be treated as a criminal offense.
Progressive taxation
The program envisages introduction of progressive personal income tax rates in the amount of more than EUR 700 (a rate of 9% is proposed for income in the range of EUR 700 to 1,000, and a rate of 15% is proposed for income in excess of EUR 1,000). The non-taxable part of income and progressive rates are not provided for all types of income, but only for income earned on the basis of wages and self-employment.
On the other hand, proportional taxation, with an increase in the tax rate from 9% to 15%, will be retained for income from property, capital, capital gains, etc.
Progressive taxation is also provided for legal entities. Therefore, it is proposed that, instead of a proportional corporate income tax rate of 9%, progressive rates of 9%, 12% and 15% be introduced, depending on the amount of taxable profit.
Is it possible (or would it be good) to introduce some of the proposals from Montenegro to Serbia?
What was especially interesting for me, as a tax advisor, was the introduction of a dual model of citizen taxation. In fact, progressive rates are envisaged primarily for wages, and on the other hand income from property and capital would remain taxed proportionally, therefore, at the same rate regardless of the amount of income. This solution, above all, respected the ethical principle that people with higher incomes should pay higher taxes. Furthermore, the sensitivity of capital to high tax rates and its potential greater mobility were also taken into account. Namely, capital is more mobile than workers and it would be easier to find a way to another jurisdiction in case of excessive taxation.
I think that this is the direction in which some future reform of the tax system in Serbia could go, of course, with the caveat that it is necessary to conduct all necessary modelling and analyze the effects of such a reform direction.
Is there any other good tax practice from the region or Europe that we could comment on as a good example?
One of the good examples in Europe is tax relief in the case of buying hybrid or electric cars. What our state has provided are financial incentives for the purchase of such cars, and they vary from EUR 2,500 to EUR 5,000, depending on the level of electrification of the car drive. However, tax regulations are silent in terms of possible incentives for individuals or companies to opt for the purchase or lease of vehicles that use this type of energy and to qualify for tax relief on that basis. In general, the tax system should be more adapted to existing social and economic trends or even steer those trends in the desired direction through tax policy instruments.
The economy has been complaining about the large burden of wages for a long time. Would reducing the workload transfer a large number of employees from the gray zone?
First, any reduction in the tax burden on wages would, from a fiscal point of view, require an additional increase in some other taxes, primarily VAT and excise duties. Namely, it is often argued that reducing the taxes and contributions related to work, would result in new employment or legalization of the actual salaries of employees. However, there are many examples from practice that tax reliefs in the field of salaries are “transferred” to employees to a small extent, i.e. reducing the tax burden does not automatically mean that employees’ net earnings will be higher. In the nature of things (their primary goal is to generate company profits), employers will look to reduce their wage costs, and I believe that only clear rules and strict control of such tax changes will lead to higher net wages and consequently bring benefits for the entire economy.
Source: Business Intelligence Review