It is important for the success of the reform that the Proposer presents a regulatory impact assessment and is open to improving the proposals

22 November 2021



Zakon O Doprinosima I Porezu Na Dohodak

For almost 7 years, there has been talk about changing the tax policy, which will shift the tax burden from work to consumption. This paradigm shift is important, as it should result in higher worker incomes, a better position of domestic companies in the context of investment capacity, employment and competitiveness.

Amendments to the FBiH Law on Contributions and Income Tax are an important reform priority in this context. These laws have financial effects on every person, household and company in the FBiH, and therefore this process should be approached very studiously and be sure of certain solutions.

Therefore, it is necessary to have a broader expert discussion on the offered solutions within these two laws on the basis of facts and adequate analytical bases. We believe that:

  1. Decisions cannot be made without a cost-benefit analysis. The proposer of these laws should present an assessment of the impact of regulations on a) employment, b) wage growth, c) productivity, d) public revenues, including extra-budgetary funds, e) household incomes with one income, f) other social and economic effects, as a basis for further discussion, and allow all stakeholders to comment on the proposed and analyzed. Such discussion and openness of the Government to accept the offered improvements and corrections that appear during the discussion is the only possible way to the success of this reform.

  2. The goal of the reform should not be to achieve a fiscally neutral effect but to reduce the workload while providing funds for extra-budgetary funds. The point of amending the law is to reduce the taxation of salaries, and not to keep the same in the aggregate. The very fact that from year to year, with the exception of the pandemic 2020, we record a significant increase in public revenues, especially direct taxes, shows that there is room to reduce the tax burden and limit public spending.

  3. There are several solutions that are in principle good and meet the objectives of the reform. The package of these laws creates a simple, administrative and cost-effective system of collecting direct taxes, and increases the transparency of the system because for the first time the total price of their work would become visible to workers. Such a system creates the preconditions for any future tax reform to benefit the workers themselves and their net income. However, it is important to emphasize that the expansion of the base and the introduction of a fixed personal tax deduction will have a negative impact on single-income households with 4 or more members, which is why data and analyzes that the proposer should present are especially important.

  4. The opportunity for fiscal relief of craftsmen and equalization of treatment of their work is missing. According to the solutions offered to craftsmen, the coefficients for calculating the contribution base in all categories are increased, and with this increase in the base, approximately the same load is achieved as has been the case so far. Maintaining the current or harmonizing these coefficients with the coefficients in the RS would represent a real relief for this category, and we estimate that the effect on contribution revenues would be a reduction below 1% of total contributions.

  5. The proposed solutions negatively affect freelancers and perpetuate the practice of charging for services that the payer is not entitled to use. The proposed solution to impose higher contributions for health insurance on copyright, work contracts, and income from foreign jobs without simultaneously amending the Health Insurance Act is a continuation of the practice of collecting contributions without the intention to enable the use of rights based on their payment. In addition, the development potential of this category should be considered - knowledge transfer, employment potential, and the social component - individuals who are not a burden to society, have remained in the country, often generate income that only supplements the household budget. Insisting that such contracts be subject to contributions for PIO and health insurance at the same rates as for employment completely excludes developmental and social arguments in the observation of this category, and reduces all arguments to prevent abuse and increase fiscal discipline of companies, at the cost of killing each initiative. Therefore, until the establishment of a system for differentiating freelancers by income level and a package of incentive policies for the transfer of freelancers to the formal economy, it would be advisable to abandon their prescribing.

  6. Harmonization of regulations and tax rates should remain a priority. Although any discussion of tax rate levels is biased without adequate projections, the proposed general income tax rate of 13% in the FBiH is not aligned with the same rate in the RS, which is 10%, and in this context does not serve to simplify and harmonization of systems within the country. In addition, the introduction of different rates of taxation of labor and capital income opens space for future complications of the system.

  7. This is an opportunity for a solution that will involve more women in the active workforce and encourage the early development of children. To increase the number of active women in the labor market and the coverage of children with preschool education, it is important to include (in the exempt income that is not subject to taxation) compensation for preschool education in preschool institutions, or the employer's facility.
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