IREF Yearbook Taxation 2011

Taxation in Europe 2011
The yearly report on the evolution of European tax systems
a publication from the

Institute for Research on Economic and Fiscal Issues
Edited by Pierre Garello

About IREF
IREF is a private institute founded in 2002 by representatives of the civil so-

ciety coming from the academic as well as business worlds. It is designed to be an
efficient platform for the investigation of fiscal and taxation policies. Taxation is
a many-faceted issue and existing studies are mostly incomplete if not biased. It
is the aim of IREF to explore systematically and completely questions related to
taxation and public finance.
IREF has a strong European dimension. Tax studies can no longer ignore the
process of globalisation and its consequences in terms of tax competition. In
particular, tax authorities are currently under the strain of two opposing forces:
centralisation and harmonization on one hand, devolution and competition on
the other. It is IREF’s intention to reintroduce in this debate the essential links
between tax competition and individual freedom.
In order to achieve its goals, IREF relies on a network of specialists. Today, a

team of over 25 scholars or professionals--economists and lawyers--report regu-
larly on the quantitative as well as qualitative evolution of the fiscal systems of
their respective countries or regions.
Besides its Yearbook on Taxation in Europe, IREF is editing books, reports,

briefs and academic studies on topics related to taxation and public finance.
Those studies together with general information on taxation in Europe can be
found on IREF website at: http://www.irefeurope.org
Taxation in Europe 2011
The yearly report on the evolution of European tax
systems
a publication from the

Institute for Research on Economic and Fiscal Issues
Edited by Pierre Garello
© IREF 2011
A short presentation of
IREF ‘Yearbook on taxation in Europe’
Series
Among the many ways to understand the climate of opinion and the culture
of a country, looking at its fiscal system is one of the most rewarding. Sure, fiscal
systems almost always rhyme with complexity; each system bearing the weight of
its history. But the attempts to change the system, to give it a new direction, are
highly instructive.
To observe changes, debates and new directions in tax systems is precisely
what IREF yearbook is all about. In that sense, the yearbook is not in direct com-
petition with other yearly reports on taxation that typically focus on numbers
rather than on the philosophy behind them.
Another unique trait of this yearbook is to provide the latest information
on the topic. What is presented here are the last known figures (this year, data
for 2010) and the on-going debates. This approach allows the reader to judge
whether public decision makers have been keeping their promises or have been
victims of inter-temporal inconsistency; drawing plans that they are later unable
or unwilling to maintain.
The yearbook is conceived for all those who look for a dynamic understand-
ing of tax and budgetary policies. This includes scholars and students, of course,
but also journalists, businessmen and public decision makers. While avoiding
technical jargon, authors do not hesitate to enter the details of a mechanism
whenever it is necessary. For we all know that there is sometimes a world between
notional and real taxation.
Those reports can be used all along the year for quick reference whenever
mention is made of one of the twenty countries presented here. The country
profile cards, that have been added this year for the first time, should further
facilitate such use of the yearbook.
Table of contents
Main findings for 2010 11
Austria 15
Belgium 21
Bulgaria 31
Croatia 39
Czech Republic 44
Denmark 53
France 66
Germany 73
Italy 80
Lithuania 86
Luxembourg 95
The Netherlands 102
Norway 106
Poland 118
Portugal 126
Slovakia 140
Romania 147
Spain 157
Sweden 166
Switzerland 173
United Kingdom 179
Country Profiles 189
Austria 2010 190
Belgium 2010 191
Bulgaria 2010 192
Croatia 193
Czech Republic 194
Denmark 195
France 197
Germany 198
Italy 199
Lithuania 200
Luxembourg 201
Netherlands 203
Norway 204
Poland 205
Portugal 206
Romania 208
Slovakia 2010 209
Spain 210
Sweden 211
Switzerland 212
United Kingdom 213
10 Taxation in Europe 2011
Main findings for 2010 • Pierre Garello 11
Main findings for 2010

Pierre Garello
IREF
Balancing between constraints rather than reforming
Once again, IREF’s yearbook on taxation confirms that in Europe, including

within the European Union, fiscal policies are far from homogeneous.
One obvious reason for this is that countries are not confronted with similar
situations. While some, such as the Netherlands, Norway, Slovakia, Luxembourg,
Germany, Sweden or Switzerland, are close to a balanced budget, others are more
or less - and sometimes badly - in need for fiscal consolidation. The latter group
of countries—those that must urgently reduce public deficit and public debt,
forms a large majority.
But divergences between fiscal policies can also be traced back to “ideolo-
gies”. If today almost no one suggests that deficit and debt could safely be in-
creased (a good point at last after many stimulus packages had to be swallowed
in 2009!), only few believe that the present situation calls for a deep rethinking
of the welfare state. Almost nowhere politicians behave as if the sovereign debt
crisis was calling for a fundamental reorientation of economic policies.
As a result, in most countries 2010 was a year of mild—but sometimes pain-
ful—reforms aimed at balancing the budget or at least at getting the budget
closer to balance. Surely, many governments hope that a strong economic recov-
ery will allow for a progressive reduction of the share of the state in the economy
and, more importantly in their opinion, to the much-desired fiscal consolida-
tion. This scenario is, however, very unlikely. For one thing, the general level of
taxation remains much too high to be compatible with strong growth. But also,
the « social acquis » that make the welfare state require expenses that are likely
to grow at least as fast as the economy. Such is the case with unemployment
benefits, free access to schooling and university, health care benefits, etc. As an
illustration, end of 2010, hundreds of doctors in Czech Republic threatened to
quit their jobs and leave for countries with more “doctor-friendly” environment.
What they must understand, however, is that no real improvement for them will
be taking place unless deep reforms are implemented.
What needs to be done is to demystify the notion of “social acquis”, and, as
all the signals of public finances are turning red, it could be the right time to do
so. It could be the right time to explain that wealth and welfare can’t be written
done in the law—If citizen have a right to the pursuit of happiness, one can’t
guarantee a right to happiness! As a matter of fact, sound economic analysis
teaches us that state-run redistribution mechanisms are difficult to sustain in the
long run and that a much safer and fruitful mechanism for development is to
make individuals responsible for their future. Pooling of risks being of course
welcome.
Trends in taxation
Having made the choice to balance the budget and to restore growth by all
means without introducing structural changes, we observe almost everywhere a
mix of various, predictable policies. More precisely, the trends are:
to lower or—more often—to leave unchanged rates related to direct taxation
(corporate and personal income taxation), but often with a broadening of the
basis (getting rid of exemptions, tax-credits and the like)
to increase indirect taxes, starting with VAT and continuing with excises
to increase top marginal income rate (because, it has argued, an increase of
VAT harms more the low than the highest incomes)to increase international co-
operation between tax authorities.
But these are just trends. In reality, everywhere the making of a fiscal law re-
mains, as Bismark used to say, like the making of sausage - you don’t want to see
Main findings for 2010 • Pierre Garello 13
how it is produced! To illustrate, IREF fellow in Sweden reports that the Swedish
income tax system has become so complicated that the most reliable source of
information is a privately owned and operated website (www.jobbskatteavdrag.
se).
Some of the most original and diverging moves
Reading the twenty reports published in IREF 2010 yearbook, one will get a
taste of the various “sausages” put together by each government and realize that
each one is somehow unique; some, like the Portuguese one, being particularly
spicy in 2010.
Interestingly, one also notices conflicts between recipes. For instance, at the
very moment where France is painfully getting out of its local business tax (a tax
that used to be based on payroll), the Germans are thinking to introduce one!
Germany also got a new trick: “Taxpayers have a right to receive interest pay-
ments by the tax administration if refunds take more than 15 months. From 2011
on, these interest payments themselves will count as taxable income.”
Lithuania has learned a good lesson in economic theory and mechanism de-
sign: The state having decided to pay mandatory health insurance contributions
for the unemployed, a surge in unemployment figure followed as a number of
individuals officially registered unemployed in order to avoid having to pay con-
tributions. The mechanism was then amended.
Romania also received a good lesson. The making of the Romanian “sau-
sage” was made of an increase of VAT by 5 points (from 19% to 24%) and a
shortening of the list of goods benefiting from a preferential rate. The result of
this double increase of rate and base was a disappointing increase of VAT rev-
enues of only 10%. At the opposite, Sweden that consistently lowered taxes for
the past four years was rewarded with higher revenues…
Governments also adopt different recipes to fight fraud and tax evasion.
Hence, in late November 2010 the German Constitutional Court has ruled that
the fact that data on clients of foreign banks had been collected illegally does
not protect tax evaders from prosecution, even if the accusations rely entirely on
illegal sources of information. But in the same time, the Belgian court took the
opposite direction. The Brussels Court of Appeal has confirmed the judgment
of the Court of First Instance rejecting the claims of the Treasury based on list-
ings that came into the possession of the Treasury through the commission of a
crime, namely theft by dishonest employees
Many lost opportunities
Reading last year’s reports we had the feeling that something was cooking but
it wasn’t clear yet what direction the various governments would take. For once,
everyone shared the view that changes had to be implemented, that the bill was
no longer affordable. The title of the preface for the 2009 yearbook was: 2009,
A transition towards what? One year later, one must sadly observe that little has
happened. The goal was survival, not the setting of a new dynamics. As our UK
report puts it, 2010 was a year of lost opportunities in the midst of fiscal panic.
As always in Europe, and fortunately, this is not everywhere the case.
One of the best moves in our opinion took place in Slovakia where employ-
ees will from now on be paid a “super-gross” wage (superhrubá mzda in Slovak).
This means that each employee will receive on his bank account not only his
“regular wage” but also the social and health contributions that used to be paid
by his employers. Hence the wage received will express the total labor cost. This
is in stark contrast with rules prevailing almost everywhere in Europe. More
importantly, it constitutes the best way to prepare the ground for true reforms;
making taxpayers aware of the costs and benefits of the prevailing systems.
2011 is again a year full of uncertainty due, in particular, to the crisis of the
euro-zone that is far from being over. Nonetheless, for decision makers that are
convinced that further postponing reforms is unwise, interesting ideas such as
the one just mentioned can be drawn from those reports.
Austria • Stefan Buczolich 15
Austria
Stefan Buczolich
The Hayek Institute, Vienna
Current situation
Austria is currently one of the countries with the highest tax burdens in Eu-
rope with a progressive personal income tax system with top marginal rate at
50%, a corporate tax rate at 25% (lowered from 34% in 2005) and, as will be
explained, a new flat capital gains tax rate which is independent from individual
income and amounts to 25% for both short and long-term investments.
Notwithstanding this heavy fiscal burden, public debt in Austria was approach-
ing €200 billion on 31st of December, that is, about 68.6% of GDP (Source: CIA
World Factbook). This places Austria at the 25th place globally. Compared to oth-
er Western European countries such as Germany and France with a percentage
of public debt of GDP of 74.85 and 83.5% respectively, and amid rising deficits
all over Europe, the short-term risks in Austria still seems to be moderate.
Development of Public Debt since 2006 in absolute numbers and as a per-
centage of GDP
2006 2007 2008 2009 2010 2011

Debt (€ billion) 145.265 147.376 161.715 168.715 179.1 78 186.903
Debt (% GDP) 56.53 54.18 57.22 61.50 63.42 63.82
Source: Statistik Austria (2010, 2011 estimates)
Because efforts to reform the costly and inefficient administration were omit-
ted in the 2011 Budget, the increase of public debt is expected to continue, al-
though its pace should decrease. The 2011 Budget is expected to lead to a Budget
deficit of 3.2%. The WIFO institute, founded by Friedrich A. Hayek and Ludwig
v. Mises in 1927, recently presented its concept for an administrative reform
yielding cost reductions of up to €5 billion per year.
A long-awaited coalition budget
In 2010, the political agenda was heavily dictated by the budget negotiation
between the coalition partners SPÖ (Social Democratic Party) and the ÖVP
(People’s Party). Rising costs resulting from still high unemployment and bank
bail-outs along with a substantial decrease in tax revenues urged the coalition
to take measures against a further increase of public deficit, although the Social
Democrats and the People’s Party did certainly not agree on how this problem
should be addressed.
The final presentation of the budget was postponed as the coalition intended
to wait for updated information to be offered by research organizations that
would enable them to adapt the budget to the most recent forecasts of economic
growth and predicted budget deficit. According to the constitution the budget
has to be presented in the Parliament ten weeks before the end of the year, on 22
October. Nevertheless, Finance Minister Josef Pröll held his first speech on 30
November. When both parties reached an agreement about the key measures at
a meeting at the end of October, the elections in Vienna were already past. Both
SPÖ and ÖVP had suffered heavy losses, whereas the right-wing populist party
FPÖ could increase its result by almost 11 percentage points to 25.77%. Stress-
ing the importance of savings in order to consolidate the Budget, the coalition
agreed on a ratio of 60:40 of savings and new sources of tax income. In 2010
the SPÖ proposed an Eight-Point plan unexceptionally consisting of propos-
als ranging from new and higher taxes on wealth and capital gains to a bank tax
based on the banks’ assets. Finance Minister Josef Pröll, member of the ÖVP,
repeatedly stated that there were no plans to introduce new taxes in order not to
harm the middle class and small to medium sized enterprises.
The final budget was announced to be one of the most ambitious in the last
decades. Critics however said that the budget lacked necessary broad structural
reforms.
Child Support and tuition fees
Austria is currently one of the countries with the longest child support in the
European Union. The coalition decided to reduce the maximum age for students
to qualify for child support from the 26th to the 24th birthday and also to cut the
13th child support to € 100 and limit it to scholars (child support is usually paid
13 times per year, 12 payments for each month of the year and one additional
payment in September, when school starts in most of the states as compensation
for the costs of books, etc.) The expected savings amount to € 270 million per
year. Tuition fees, that were abolished in 2001 for students who manage to com-
plete their studies within a certain time span (usually the minimum time plus one
semester), are once more considered by the conservative ÖVP, citing the lack of
capacity and deteriorating conditions for students at universities.
Capital Gains Tax
So far profits from security investments are exempt from taxation if the as-
set is not disposed of within one year, whereas the individual’s personal income
tax rate is levied on speculative earnings. A flat 25% tax rate is applicable on
dividends and interest income regardless of the source and regardless of the in-
dividual’s income. As of 1 January 2011 a flat tax rate of 25% is applicable on all
capital gains from stocks and mutual funds, regardless of the individual’s income
and the time the asset has been held. Any short-term capital gains from invest-
ments purchased in 2011 and sold before 1st of October will be subject to the
individual marginal tax rate and have to be declared separately. Income from de-
rivative instruments and bonds (excluding interest payments) will be tax-exempt
after one year. Beginning October 1, any realized profit from assets purchased
after 2010 taxes will be withheld automatically, causing considerable discomfort
since in case of losses in the same period taxes will not be refunded before dec-
laration after the end of the year. The new flat tax is no longer dependent on
neither personal income nor on the time horizon of the investment; it is there-
fore questionable whether the new solution will particularly target speculative
earnings as most individuals with medium to high incomes will pay less taxes on
their short term capital gains, whereas long-term investments aiming to insure a
certain standard of living during retirement will be affected by the discontinua-
tion of the speculative period. One might think the introduced capital gains tax
is similar to that imposed in Germany in 2009, in-depth scrutiny reveals a few
details that differ significantly from the German model.
Losses from financial transactions may not be carried forward in order to
reduce taxable capital gains in the future.
Capital gains from the sale of stocks, bonds or derivatives may not be con-
solidated with other forms of income including interest payments of savings
accounts.
Transaction costs or other brokerage fees such as escrow costs are not tax
deductible.
In contrast to German law that offers a €801 tax allowance for individuals,
such an allowance is not implemented in the current law.
A few other aspects of the new rules will hopefully give rise to further dis-
cussion, in particular the fact that a major discrimination has been introduced,
between asset classes. Profits from life insurance will be exempt as well as long-
term capital gains from real estate, while gains realized within 10 years will be
taxable. If an apartment has been used by the owner, profits from its sale are tax
exempt after two years.
Parallel to the introduction of the capital gains tax, the tax levied on income
of private (for-profit) foundations has been increased from 12.5 to 25%.
As of January 2011 many banks have already voiced their concerns about
the costs related to the new capital gains tax and claim that the short time span
provided to implement the new legislation would cause overall costs higher than
the expected tax revenues. On February 1st 14 Austrian Banks filed suit against
the newly implemented capital gains tax, complaining about the short period for
banks to implement necessary new technologies and high overall cost that are
expected to surmount future tax revenues in the next years to come.
Bank Tax
The „Bankenabgabe“ is a Bank Tax with estimated revenues of €500 million

consisting of €340 million from taxing total assets only targeting larger banks
and an additional € 160million of higher taxation on derivative transactions. Total
assets of banks will be taxed at a rate of 0.04% if above €1 billion Euros, while a
tax rate of 0,08% will be applicable if the bank’s assets exceed 20 billion Euros.
Tobacco Tax
Taxes on one pack of cigarettes will rise by 15 to 25 cents yielding € 100-

150million.
Fuel Tax
Fuel Tax on gas and diesel will increase by 4 cents and 5 cents respectively.
In order to protect commuters from additional expenditures they will be given
additional compensation. The increase of the fuel tax, along with other measures
as the flight tax, is part of a somewhat opaque ambition of the coalition that is
praised to combine tax increases with desired aspects of environmental policy.
Flight Tax
A flight tax of €8 for continental flights with European destinations and a of

up to 35 for international flights will be effective on January 1st and is expected to
yield € 60 million in 2011 and € 90 million per year in the next years. Since both
national and international airlines have to charge the fuel tax for every flight tak-
ing off from Austria, shifts to airports like Bratislava, only one hour away from
Vienna by train, are expected to increase as the tax may make up a substantial
amount of the total price when consumers choose to book a flight with a low
cost carrier. A similar tax was abolished in the Netherlands after having been in
effect for just one year.
Wealth Tax
The last year’s debate ahead of the final agreement on the 2011 Budget was
dominated by the calls for a wealth tax, a (preferably international) financial trans-
action tax, higher taxes for private foundations and a capital gains tax. Although
a wealth tax has not been included in the current Budget, many politicians of
the SPÖ and members of the the Austrian Chamber of Labour have repeatedly
stressed their continuing efforts to introduce a wealth tax. Chancellor Faymann
said he was in favour of a wealth tax applied on net assets above € 1 million with
the tax rate in a range between 0.3 and 0.7%. Supporters of the wealth tax name
high taxes on labour income and comparably low taxes on capitals gains and
wealth in Austria as their main arguments.
Belgium • Thierry Afschrift 21
Belgium
Thierry AFSCHRIFT
Professor at the Free University of Brussels
Lawyer
www.afschrift.com
The Belgian paradox
One could obviously not talk about Belgium without tackling its political cri-
sis. Belgium holds a sad record for facing the longest political crisis in Europe:
being without any government for more than 249 days. Should Belgium fail to
get a new government by March 30 it would beat… Iraq’s world record of 289
days in 2009.
This political crisis has of course enormous consequences on what happened
- or did not happen - last year but could also deeply impact our economic future.
In December 2010, the rating agency Standard & Poor lowered to “negative” its
perspective on the Belgian financial rating, due notably to the legislative paralysis
and the lack of a credible budget policy for 2011.
However, economically, Belgium works relatively well. The growth rate is not
bad. Belgium finished 2010 with a public deficit of 4.6 % of its GDP. This is
better than the 4.8 % deficit determined by the Belgian stability program. In ad-
dition, public debt reached 97.2 % of GDP and it is also less than the forecast.
This is the Belgian paradox. One can nevertheless fear that the caretaker cabinet
will not be able to deal with the economic issues of the future.
While most European countries have adopted various measures to reduce
their deficit for years to come, Belgium has not yet a real budgetary policy or
a concrete tax policy. No-one can predict what will be the fiscal or budgetary
orientations of the future government. However, in order to reduce its astro-
nomical public debt and to avoid its debt reaching more than 100 % of GDP,
the future government - whatever its composition - will inevitably have to cut
spending. It will have to struggle with structural deficits. Far from expecting a
corresponding reduction of taxes, it will be essential to boost investment and
enhanced Belgian competitiveness and attractiveness. The deficit struggle will
certainly involve some fiscal effort. Where the Belgian State already takes 46%
of what its inhabitants produce and spends 53% of it, tax competition might be
the only thing which can still moderate the government’s temptation to always
prefer an increase in receipts to a reduction of expenditure in order to balance
the budget.
Despites the Belgian political and legislative apathy of the last months, few
measures were adopted at the beginning of 2010, and one can underline the case
law relating to privacy, European freedoms, etc. One can also draw an outline of
what could happen in a near future.
Fight against tax fraud and banking secrecy
In accordance with most European countries’ policies on this issue, the Bel-
gian state gives itself more and more means to fight tax fraud and to reduce
banking secrecy to nil. Its interventions are however prejudicial to the right to
privacy.
The new article 335 of the Belgian Tax Code (“BTC”) gives tax authorities
wider investigative powers: any officer is entitled to collect any information re-
lated to any tax, even one for which the officer has absolutely no jurisdiction,
and can convey this information to other tax administrations. It seems at least
doubtful that the new version of this disposition complies with article 8 of the
European Convention on Human Rights, with article 22 of the Constitution and
with the law of 8 December 1992 on the protection of privacy with regard to the
processing of personal data. It creates indeed systematic and spontaneous trans-
mission of information between tax administrations without any preconditions.
In 2010, the fight against banking secrecy continues as it began in the wake
of the economic crisis. Different double tax treaties have been modified in order
to insert “on demand” data information exchange clauses. Many vague proposals
have also been made by different members of Parliament in order to abolish the
last rampart of the Belgian banking secrecy, article 318 BTC. On that subject, the
current political crisis gives this secrecy a few moments grace. However, if the
proposals are adopted without being modified the new law will be prejudicial to
the right of privacy. In this regard it is symptomatic that, in Belgium, the right of
privacy and the right of ownership are most of the time sacrificed in favour of
an always more powerful State.
To strengthen the fiscal anti-evasion policy, a new reporting obligation has
been introduced. The new measure concerns legal persons who make payments
to persons established in a tax haven as soon as the total amount of €100,000 is
exceeded. Consequently these payments should be included in a separate declara-
tion.
In May 2010, the Belgian government published a royal decree updating the
list of the tax havens, and the ‘non-existent or low taxation’ countries. The list
covers countries where certain companies are not or slightly taxed (a nominal
tax rate lower than 10%). This is used to require that any payment to a company
established in a listed country is only deductible if this company is the subject
of a special declaration, and the payment corresponds to “industrial and com-
mercial considerations and not an artificial construction”. We observe that the
Belgian tax authorities do not consider as tax havens: Liechtenstein, Gibraltar,
Hong Kong, Macau or Panama, for example. Therefore payments made to com-
panies established in these countries do not fall within the scope of the new legal
provisions.
A law of 18 January 2010, published in the “Moniteur belge” of 26 January
2010, overloads the legal provisions on the prevention of money laundering, dat-
ing from 1993, which have been reinforced many times since then. Among the
multiple obligations it prescribes, this law states that, from now on, “any person
or entity who acquires securities representing capital or otherwise conferring the
right to vote in stock companies ... and has issued bearer or dematerialized shares,
must declare to the company, not later than the 5th business day following the
date of acquisition, how many securities it owns when the voting rights attached
to those securities achieve a proportion of 25% or more of the total voting rights
... “. The text aims at preventing companies, with bearer or dematerialized shares,
from being able to declare that they are unaware of their shareholder’s identity
when a bank account is opened or during a tax audit. These obligations do not
exist for shareholders holding less than 25% of voting rights in a company, even
if the companies in question are controlled by the same person, by spouses or
relatives. Shareholders wishing to keep their anonymity - which can be for very
good reasons - should place themselves in a situation where they hold less than
25% of the shares. This new measure against shareholders’ anonymity--that the
law justifies by the fight against money laundering--might have consequences in
terms of inheritance. At the time of death, in order to tax the value of the shares,
tax authorities will only have to ask the company who are the shareholders (if the
shares were to be owned by an individual).
Notwithstanding the legislative will to fight tax fraud, tax evasion and tax
havens, the Belgian Courts rightly pointed out that this battle and the repression
of this fraud cannot be conducted at any price or on any conditions. In the tax
component of the KB Lux case, the tax authorities have nothing to be delighted
about because almost all judgments pronounced by our Courts are favourable
to taxpayers challenging tax assessments after the “discovery” of the famous
listings coming allegedly from the Luxembourg bank. One of the arguments
for rejecting the claims of the Treasury was that the listings on the basis of
which the disputed taxes were established are not conclusive: they are mere cop-
ies of microfiches containing no reference to their author, signature, stamp or
other evidence to identify their origin. Another argument has been advanced to
challenge these tax assessments: the listings concerned came into the possession
of the Treasury through the commission of a crime, namely theft by dishonest
employees. As far as the criminal aspect of this case is concerned, the Brussels
Court of Appeal has confirmed the judgment of the Court of First Instance
that relied on this second argument to declare the prosecution inadmissible. One
can only welcome this brave decision which will remind the Public Prosecutor’s
office that, under the rule of law, the end does not justify the means and it is not
possible to prosecute someone for an offence on the basis of the commission of
another. This will give some food for thought in a setting that seems quite similar
to the LGT case in Liechtenstein and the HSBC case in Switzerland.
Corporate Tax
In the wake of the recession, corporate tax receipts have fallen and in order
to boost economic activity, this tax rate could be reduced. With a corporate tax
rate of 34 %, Belgium has in fact one of the highest in Europe. But instead of
that, the maximum “tax deduction for equity capital” rate for the 2011 and 2012
assessment years is reduced from 6.5% to 3.8%. Admittedly the “tax deduction
for equity capital” has played a role in the tax income inflexion, but according to
the National Bank this has been to a limited extent.
Since 1 January 2006, a Belgian company can benefit from a “tax deduction
for equity capital” also known as a “deduction for notional interest” (Art. 205bis-
205novies, BTC). All companies are treated, from a tax point of view, as if they
had borrowed their own funds at an annual rate of interest equivalent to the rate
for ten years bonds issued by the Belgian state. The “notional interest” calculated
in this way is deductible from the taxable base for corporation tax purposes.
Since its coming into existence, this measure has been a disputed one. This de-
duction is presented as “gifts” to companies and one criticizes their cost for the
budget, as well as their social uselessness. It is not impossible that the deduction
will be soon linked to an employment condition. Proposals have been raised in
this direction.
Tax deduction for equity capital
There are three objectives behind this deduction scheme.

• First, to establish equilibrium between the tax treatment of the equity capital
and the tax treatment of loans. Under the former system, it is fiscally more at-
tractive for a company to be funded by means of loans because the interest can
be deductible for tax purposes. The equity capital, on the other hand, gives rise
to non-deductible dividends. The new scheme remedies this situation partly by
decreasing the taxable base by an amount corresponding to the interest that the
company would have paid if it had borrowed the same amount.
• Second, the new measure offers an attractive alternative for “coordination

centres” whose present low tax regime should be withdrawn at some point be-
cause it is incompatible with EU states aid law.
• Last, the new fiscal treatment allows Belgium to compete with the general
fall in the corporation tax rates throughout Europe. Although the nominal cor-
poration rate tax stays at 33, 99%, the new measure cuts the effective rate down
to 26 % on average, a little less than the European average.
Nevertheless, few modifications occurred: a few explanations concerning the

basis for the calculation are inserted in the law and any deduction that is not used
during the taxable period can henceforth be consecutively transferred to the fol-
lowing seven “taxable periods” instead of during seven “years”, as previously.
In the context of tax neutral cross-border mergers, the notional amount of
interest deductible and the tax credits for research and development may now be
fully transferred as if the merger or de-merger had not taken place. Moreover,
the parts taken over or acquired that are located in Belgium must no longer nec-
essarily be used in a Belgian “establishment” (of the acquired foreign company),
but these can also be used in the Belgian acquiring “company”.
The Belgian Tax Code provides that, under certain conditions, dividends
from stocks and shares held by a Belgian company are deductible from the prof-
its of this Belgian company as “definitively taxed income”. This deduction is
allowed up to a limit of 95 % of the gross amount paid. One of the conditions
concerns a minimum participation of 10% in the capital of the paying company
or a minimum participation of at least €1,200,000 (purchase value). As of as-
sessment 2010 year, this condition also applies to dividends acquired by credit
institutions, insurance companies and listed companies. Once again, this comes
with the proviso that any amendment made after 1 January 2009 to the closing
date of the annual accounts is without effect. Moreover, the minimum participa-
tion is raised to €2,500,000 (or still a minimum of 10%). This applies to income
that is allocated or made payable as of 10 January 2010.
Finally, amendments have been made to the favourable so-called “tax shelter”
system. Under certain conditions, this system provides exemption from corpo-
rate tax for investments in recognized audio-visual works. Those amendments
enlarge the scope of the tax shelter system. For example, it is no longer necessary
for the “production company” to be a “domestic company”, but from now on
it may also be the “Belgian establishment of a foreign company”. The notion of
“fiction films” replaces that of “long-play films” and thus includes films not only
of long, but also of medium and short duration.
Personal Income tax
As in 2009, the year was poor in interesting measures. No fundamental modi-

fication occurred at a legislative level. In Belgium, whatever the composition of
the government is going to be, one should fear, in the short or medium term, an
increase in the rate of withholding tax on interest, the imposition of a tax on the
capital gains on shares, and perhaps an increase in the marginal income tax rate
for high incomes.
Its is however interesting to mention that, on 1 July 2010, the European Court
of Justice judged that Belgian legislation imposing an additional local tax on in-
come from capital where the income is received by a Belgian resident without
the intervention of a Belgian financial institution, violates EU laws on the free
movement of capital. Under Belgian tax law, foreign interest and/or dividends
received without the intervention of a Belgian financial institution have to be
reported in one’s Belgian income tax return and an additional local tax (varying
from 0% to 9,5%) is levied. However, in the case of interest and/or dividends
received via a Belgian financial institution, a withholding tax of 15% is deducted
and there is no obligation to report this income in one’s Belgian income tax re-
turn, so that no additional local tax is due. The Belgian Tax Authority confirmed
in its circular letter dated 19 October 2010, that it would abide by the decision
handed down by the European Court of Justice on 1 July 2010.
Moreover one can welcome the setting up of a tax conciliation service, intro-
duced by the “Program” Law of 25 April 2007. This service is operational since
1 June 2010.
The new service, working independently from the Federal Finance Depart-
ment, has the purpose of assisting the taxpayer to find “possibilities for an agree-
ment rather than going to court” according to the Minister of Finance.
Green tax legislation
For many years Belgian tax policy has been influenced by environmental con-
siderations. Energy-saving measures tend to be encouraged by the granting of
tax advantages. The crisis and the budgetary constraints imply nevertheless that
those advantages are tending to be reduced or limited.
As of 1 January 2010, the calculation of the benefit in kind for the free private
use of company cars by employees or company directors depends on the CO2
emissions of the car and is no longer based on the fiscal horsepower.
VAT
Belgium is being found at odds with the interpretation of the Court of Justice
developed in the Breitsohl case for nearly ten years since in Belgium real estate
transactions remained excluded from the application of VAT. However, from
1 January 2011, Belgium complies with the European requirements. From now
on, the simultaneous sale of land and a new building will be subject to VAT. The
new regulation replaces the former registration tax. This measure is favourable
to VAT taxable persons. Indeed, enjoying full right of deduction, they can fully
deduct input VAT in their VAT account. Moreover, they will no longer pay a reg-
istration fee on the land value. Other purchasers of land will bear a heavier tax
burden. Indeed, they will have to pay 21% VAT on the value of the land adjacent
to the building instead of registration tax of 12.5% or 10% and the VAT will not
be recoverable.
Until recently, in order to benefit from the reduced VAT rate in the real estate
sector, construction works on land needed to be executed by a registered building
contractor. This requirement for the application of the 6% VAT rate applicable
in such situations has now been abolished by means of Royal Decree dated 2
June 2010.
Since the 1 January 2010, VAT in the catering industry has been reduced from
21% to 12 %. The measure should have been analyzed and the results submitted
to the Government in late October at the latest. The political crisis postponed
this analysis. This reduction should be maintained if it does not lead to a reduc-
tion in tax revenue.
Conclusion
While a caretaker cabinet is at the helm of a boat without captain, and trying
to keep the trains running on time, fears are growing of threatening economic
troubles. Rating agencies and the nation’s Central Bank have warned of a poten-
tial threat from financial markets if politicians fail to strike a deal soon. “This
chaotic situation… could have long-lasting effects on the Belgian economy…
The markets will be merciless if the country does not emerge promptly from this
unprecedented hell” said billionaire investor Albert Frère, a leading shareholder
in energy groups Total and GDF Suez.
Despite the current political crisis being the biggest challenge Belgium has
to deal with, the country should not delay important long-term economic deci-
sions that will end not only by delaying or avoiding investment projects but also
by corporate expatriation. Measures have to be taken soon in order notably to
reinforce the competitiveness of Belgian companies.
Bulgaria • Petar Ganev 31
Bulgaria
Petar Ganev
Institute for Market Economy, Sofia
2010 was a controversial year for the Bulgarian fiscal policy – the common
use phrase in the recent years “balanced budget” was replaced by “excessive
deficit”; the budget was revised in the middle of the year, even though no ma-
jor changes took place in the tax policy; the health and pension reforms were
debated all through the year; some partial nationalization of private pension ac-
counts for early retirement took place; the shadow economy was once again an
issue. Along with all these, the government started a campaign towards the rich
with helicopters flying over some big estates taking pictures and also a proposal
for introducing a “luxury tax”.
In 2011 Bulgaria will struggle to achieve a “reasonable” deficit below 3 per-
cent of GDP. No major taxes are changed, except for the slightly higher so-
cial contributions and some excise duties. There are, however, concerns that the
budged would have to be revised throughout the year, as happened in 2010.
Fiscal Issues
Bulgarian economy did not improve much in 2010 – the economy grew less
than 1%, employment is source of worries and foreign investments are not com-
ing back. Expectations are now that the recovery will finally happen in 2011,
with an economic growth of 3,6%. The fiscal stability of the country depends
on that growth.
2010 was a bad year for Bulgarian fiscal policy. Throughout the middle of
the year the revenues were far from their expected levels and this led to a severe
revision of the budget – from almost balanced to one with excessive deficit.
Moreover, the deficit for 2009 was also revised upwards, which gave an entirely
new look to Bulgarian fiscal stability. If, consequently, tons of measures were dis-
cussed through the year to get the budget back on track, only a few of them have
been implemented. The revision of the budget didn’t affect the tax policy.
In 2011 Bulgaria is expected to recover partly from the crisis, which means
more revenues and less pressure for the budget. The deficit is projected to be
just below the 3% line, which will be a success after two consecutive years with
excessive deficits. More revenues are expected mainly from VAT and corporate
taxation, thus depending on the recovery of the economy.
In 2011 the government is supposed to redistribute around 36,5% of GDP,
which is slightly less than the previous years – some cuts in the administration
took place and the pensions were frozen. Nevertheless, the pressure on the
government and the budget will remain high, as all sectors are asking for more
money and opposing all unpopular measures. The fiscal debate promised to be
intense in 2011.
Direct Taxation (Corporate Tax & Income Tax)
In 2007 the corporate tax rate in Bulgaria was reduced to 10% (down from
15%). The following year the income tax was also reformed – replacing the pro-
gressive scale (20%, 22% and 24%) with one singe flat rate of 10%. Those tax
cuts made Bulgaria the country with the lowest direct taxes in the EU, excluding
the social contributions off course. Both tax cuts brought about positive effects
for the economy and the state budget that were clearly visible prior to the crisis.
The revenue from corporate taxation went straight up after the reform – both
in 2007 (up almost 40%) and in 2008 (an additional 20%). Nevertheless, the crisis
had a severe impact on corporate tax revenues that felt by almost 20% both in
2009 and 2010, going back almost to their level before the reform. In 2011 the
corporate tax will still be at 10% with projection to stay at that level for the years
to come. The official projections for 2011 are that the revenues from corporate
taxation will start to recover (up 17%) and will reach 1.7 billion levs (€870 mil-
lion) which represents more or less 2.2% of the GDP.
The flat tax story is somewhat different. Since the introduction of the single
flat rate in 2008 the revenues also went up, but also prove to be stable during the
crisis. The positive budgetary effect of the flat tax is indisputable – with a single
tax rate two times lower than the lowest marginal rate of the previous progres-
sive scale, the revenues went up and stayed stable during the crisis. In 2011 the
revenues from income taxation are projected to reach BGN 2.1 billion (€1,1
billion), which is around 2.7% of the GDP. Despite the purely ideological debate
over the flat tax in Bulgaria, the official projection is that the flat tax will stay
unchanged – 10% flat rate and no tax-exempt minimum.
Tax exemptions continue to be an issue. Since the beginning of 2010 some
tax exemptions for farmers were removed--they were not supposed to pay any
income tax in the previous years. Earlier, beginning of 2009, a tax exemptions for
young families with mortgage loans was introduced–deduction of interest pay-
ments. This exemption was highly disputed in the recent years and the object of
several votes in the Parliament. Nevertheless, it will be upheld in 2011. The data
shows that in 2009 more than 5 thousand families benefited from it; a shortfall
in tax revenues of around BGN 2 million (€1 million).
Indirect Taxation (VAT & Excise Duties)
Indirect taxes include VAT and excise duties on special goods such as ciga-
rettes and alcohol beverages. The VAT in Bulgaria is set at 20% and, despite the
various discussions that took place during the year, it is supposed to stay at that
level for the years to come. The budget revenues from VAT are expected to reach
BGN 6.5 billion (€3.3 billion) or 8.4% of GDP in 2011. This is above their 2010
level and back to the revenues of 2009.
Some changes in the preferential VAT for tourism were made – effective 1
April 2011 a single reduced VAT rate of 9% will apply to hotel accommodation
services regardless of whether they are a part of a tourist package or bought

individually. Until now the reduced VAT rate of 7% applied only to hotel accom-
modation if it is a part of a tourist package.
Bulgaria has to harmonize its tax regime with that of the European Union
by introducing the minimum excise duties of the European Community on to-
bacco, alcoholic beverages, and fuels. Started in 2002, the harmonization process
is scheduled to be completed by the end of 2013.
In 2010 excise duties on kerosene, electricity for industrial purposes and ciga-
rettes increased, while on gasoline and diesel, as well as on liquor there were no
changes. The fiscal effect of the higher excise duties on the budget was expected
to reach BGN 300 million (€150 million), mostly due to the higher excise duties
on cigarettes. But in fact, the revenues collapsed even below their 2009 level – the
additional revenue from excise duties on cigarettes never materialized as con-
sumption felt and smuggling went up. Once again the Laffer curve prove to be
right – in this case higher taxes on consumption led to lower revenues, as trade
shifted to the shadow economy.
In 2011 excise duties on tobacco and some fuels have been increased, but still
the budgetary effect of this is expected to be remote. Overall the revenues from
excise duties in 2011 are supposed to reach BGN 3.8 billion (€1.9 billion) or 4.9%
of GDP, which would be more than 2010, but less than 2009.
Social Security Contributions
Social contributions are still the most disputable tax in Bulgaria. In 2005 the
contributions were above 40% of the gross wage, but following a 6 percentage
points cut in 2006 and a 3 percentage points cut in late 2007, they felt to 33.5% of
the gross wage. At the start of 2009 a further reduction of 2.4 percentage points
was enacted, followed by another 2 percentage points cut in 2010, bringing the
contributions bellow 30% of gross wage. The cuts did not reached uniformly all
the contributions: if the pension contributions were reduced, along with those
for unemployment, the healthcare contributions were increased.

Also, starting in 2009 and along with social contributions paid by the em-
ployee and the employer (as in most European countries), the State itself started
to pay social contributions for every worker – 12% of the gross wage. Those
“new” State contributions, however, are more of an accountant’s trick than a real
reform. Actually, the State had always made payments from the budget to the
Pension Fund – the difference is that those payments were called transfers (or
subsidies) and now they are called contributions. Even with these state contribu-
tions, the state pension fund is far from balanced and need further government
subsidies (transfers).
Throughout 2010, the crisis put additional pressure to the pension system
and the government was forced to take action. The negotiations with the so-
called “social partners”, namely the trade unions and the business organizations,
were intense and lasted months. The result was a long term reform plan, which
includes frozen pensions, higher social contributions, higher retirement age for
both men and women (starting 10 years from now), and also some measures to
reduce a wide spread strategy of early retirement. Still, the pension plan was not
welcome and there is a probability that the long term measures would not be
enforced as written.
One of the most heated controversies in the country was the partial nation-
alization of the private professional pension funds – the idea was to transfer
the money from the early retirement accounts in private funds to a newly set-up
state “early retirement” fund. The goal was not so much to reform the pension
system, but mainly to indirectly support the budget. At the end, the government
stepped back and transferred into the National Social Security Institute only the
money of those to retire in the next 3 years– thus, not establishing a new state
“early retirement” fund and not shutting down the private professional funds.
Still, partial nationalization did take place and some private accounts were shifted
to the solidarity system. This action is now supposed to be reviewed by the Con-
stitutional Court.
At the end of 2010 the healthcare system in Bulgaria went through a deep
crisis, pushing for the second time in just one year the minister of healthcare to
leave office. The state of the system was chaos – bad organization and artificial
pricing, lack of financing, perverse incentives and fraud, and absence of agree-
ment on the expected reform. Nevertheless, by the end of the year some changes
did take place – the most important change is that the health contributions (8%
of the gross wage) will henceforth go entirely and directly into the system, while
until now 25% of the money (2 percentage points) was going to the “health
reserve” held at the Bulgarian National Bank. Meanwhile, the money that was
accumulated in the “health reserve” – around BGN 1.5 billion (€800 million),
is now considered to be part of the fiscal reserve. Meaning, it can be spend on
everything, not necessarily health.
In 2011, another 1.8 percentage points will increase social contributions: 1
percentage point increase in pension contribution for the employer and 0.8 per-
centage points for the employee. Thus, the social contributions as a whole will
again be over 30% of gross wage. Again, the employer contributions are higher
than those of the employee, but that is not so important as both of these pay-
ments lay, one way or another, on the shoulders of the employee (as they are
taxes on labour).
Moreover, the 0.1% employer’s contribution to the Salary Guarantee Fund
is abolished for several years, as the amount of money accumulated in the fund
is sufficient. There is also an increase in the amounts of the minimum social
security thresholds for the main economic activities and groups of professions
by 5.6% average. Also the minimum social security thresholds for self-employed
individuals in 2011 will be determined, based on their taxable income received
in 2009.
As administrative measures, the period for calculation of the compensations
for unemployment, pregnancy and birth is increased to 18 months and the period
for calculation of the compensations for temporary disability is increased to 12
months. The current regulation for payment of monetary compensations for
temporary disability by the insurer for the first three days of the disability will be
extended until the end of 2011.
Social Security Contributions in Bulgaria (% of the gross wage)
Social
Contributions State Fund Private Fund
(2011)
Total Employer Employee Employer Employee
Pension 17.80% 7.10% 5.70% 2.80% 2.20%

Illness & Maternity 3.50% 2.10% 1.40% X X
Unemployment 1.00% 0.60% 0.40% X X
Labour Accidents
& Professional 0.50% 0.50% 0.00% X X
Illness*
Health 8.00% 4.80% 3.20% X X
Overall 30.80% 15.10% 10.70% 2.80% 2.20%
(*) The rate for Labour Accidents and Professional Illness is averaged – there are several
rates depending on the labour category – varying from 0.4 to 1.1 percent.
Further changes in the social security contributions are to be expected in the
forthcoming years. Either the pension plan will be enforced as written or a new
plan will be developed – in both cases changes in contributions and retirement
age are coming. The healthcare system has proven to be highly vulnerable in the
recent years and it is expected to remain so in the years to come – changes in
health contributions are also possible.
Local Taxes and Issues
The local taxes were also an issue and recently some changes took place:
◘ In 2011 Bulgarian municipalities will be allowed to set the annual real estate
tax rate within the range between 0.01% and 0.45% on the highest of the gross
book value and the tax value of the immovable property. Before that the maxi-
mum rate was 0.25%.
◘ A new tourist tax has been introduced replacing the tourist fee. As of 1
February 2011 the rates determined by municipalities should be in the range of
BGN 0.2 to BGN 3. The tax is due per night and is payable by the property own-
ers providing lodging.
Along with these, the debate focused around the government campaign to-
wards the rich –helicopters were sent to fly over some large estates to take pic-
tures while a proposal for introducing a “luxury tax” was made. Those actions
(and pictures) were all over the media, triggering vivid discussions, but achieving
nothing substantial.
Conclusions
Fiscal policy in Bulgaria has played a crucial role for the development of the
economy in the recent years. Balanced budgets and low taxes proved to be a
success prior to the crisis, while the excessive budget deficits in 2009 and 2010
did not strengthen the economy. 2011 will be a tough fiscal year, as the deficit is
supposed to stay below 3% of GDP.
As for the taxes, the 10% flat income tax, the 10% corporate tax and the 20%
VAT should remain untouched in the years to come. Social contributions will
once again drag attention, as further reforms in pension system and healthcare
are inevitable.
Croatia • Giorgio Brosio 39
Croatia
Giorgio Brosio
University of Torino
A delayed economic recovery
A very few substantial tax measures have been introduced in Croatia in 2010.
The most important of which, the earlier repeal of the special tax on salary in-
come introduced in 2009, has been due to the necessity of sustaining household
consumption in the face of the persisting slow-down of the economy. The sec-
ond measure, consisting in a restructuring of the tax rate schedule applying to the
personal income tax, has a more structural character and it is also oriented to re-
align the Croatian tax system to the structure prevailing in most EU countries.
Tax measures have clearly to be inserted in the evolution of Croatia’s econ-
omy that continued to be affected, even in 2010, by the global economic crisis.
GDP continued to contract in 2010, although at a decelerated pace. The decrease
of 5.8 percent observed for 2009 was reduced to an estimated 1.6% in 2010.
While the drop in 2009 was due to a huge fall of exports of goods and services
(consisting mainly of tourism) and to a contraction of personal consumption-
-exacerbated by the tax measures--the surge in foreign demand that took place
in 2010 was not big enough to compensate for the sluggish trend of domestic
demand. Domestic consumers still felt the burn of the increases of VAT and of
special tax on salaries. Household consumption was also negatively affected by
repayment of personal loans to banks and by the reduced propensity of the lat-
ter to extend new loans to families. Domestic investment showed a further drop,
particularly in the construction sector, where the activity had reached a huge peak
just before the time of arrival of economic crisis. Projections for 2011 show the
return of the economy to positive although modest growth: GDP is expected to
increase by 1.5 percent under the stimulus of personal consumption and recon-
struction of inventories in firms.
Tax measures
As mentioned above and in the previous report, to keep the public sector
deficit under control the government introduced in July 2009 a special crisis tax.
This was a temporary levy – to be applied until 31 December 2010 - on salaries,
pensions and other income with a tax rate of 2 percent on incomes exceeding
HRK 3,000 (the equivalent of €409 per month) and with a tax rate of 4 percent
on incomes exceeding HRK 6,000 (€818 per month).
This levy was rather substantial and was seated on top of an existing personal
income tax that, while not particularly productive, holds the top statutory tax
rates among Eastern European countries. (The same applies also to the corpora-
tion income tax).
The prolongation of the economic downturn brought to a sharp inversion of
the tax policy. On July 2010 the Croatian parliament decided to eliminate, starting
from July 1, the special tax of 2 per cent, and to eliminate the remaining special
tax of 4 per cent starting from November 2010. It has been calculated that some
1,254,000 taxpayers had been affected by the tax measure and that it has contrib-
uted about €400 million to the central government budget.
Moreover, significant changes meant to slightly reduce the tax burden and to
realign the tax rates applying to different categories of income have also been
introduced with an amendment to the personal income tax law approved by the
national parliament in 1 July 2010. They are detailed in the two following tables.
Table 1. Croatia: changes in the personal income tax applying to

income from wages and salaries
New tax schedule from 2011 Tax schedule applying to 2010 filings
Tax rates Income brackets Tax rates Income brackets

Kunas Kunas
12% 43,200 13,50% 43,200
25% 43,200 - 129,600 25% 43,201 - 108,000
40% 129,600 30% 108,000 - 129,600

37,50% 129,601 - 302,400
42,50% 302,400
The changes in the tax rates schedules were accompanied by the elimination
of a number of tax relieves that have a considerable importance weight for tax-
payers. They are, more precisely, the deduction from income of expenses for:
◘ health services;
◘ voluntary and additional health insurance;
◘ insurance premiums paid in respect of life insurance with a retirement sav-
ings component;
◘ certain costs for the purchase or construction or maintenance of a first
main (principal) residence, as well as interest expenses paid for these purposes;
and;
◘ rental costs for a main (principal) residence.
On the other hand, it was also decided that employer payments to pension
funds – payments by employers made to Croatian voluntary pension funds (pillar
III pension insurance) on behalf of employees up to a maximum of HRK 500
monthly per employee will be treated as non-taxable income for PIT purposes
(and as a corporate profits tax deductible expense for the employer).
Table 2. Croatia: tax rates schedule applying on income from capi-

tal
Tax schedule applying Tax schedule applying

until June 30, 2010 from July 1, 2010
Income from renting property 15% 12%
Income from interest 35% 40%

Income from dividends 15% 12%
Income from insurance 15% 12%
Budgetary policy
Central government revenue declined by 1.4% during the first eight months
of 2010, compared with the same period of the previous year (National Bank of
Croatia, Economic Bulletin, N-164, December 2010). The decline was due to a
large extent to the combined effect of the impact of the system of collections of
the taxes on business and to the slowdown of the economy in 2009 (tax advances
on profits in a year are based on effective profit of the previous year). Also social
contributions have had a sharp decline because of the fall of wage bills. The
decline in tax revenues would have been much sharper without the introduction
in mid 2009 of the special tax on salary income that impacted positively on col-
lections also in the year 2010.
Government expenditure stagnated during 2010. Stagnation derived from the
combination of widely diverging trends in the components. While expenditure
for personnel declined due to cuts taken in 20009, expenditure for pensions and
social benefits increased. In particular, unemployment benefits had sharp in-
crease. To keep expenditure under control the government had to cut programs
of capital expenditure.
The combined effect of declining revenues and stagnating expenditures has
been to increase the public sector deficit that is estimated to reach a level of 4.2
in 2010, up from the 2.9% of the previous year.
Table 3. Structure and recent evolution of tax revenue in Croatia

2007-2010 (millions of kunas)
% % %
% on
2007 on 2008 on 2009 2010 on
total
total total total
Personal
1772.7 2.9 1687.0 2.5 1399.0 2.5 1200.8 1.9
income Tax
Profit tax 8816.3 14.5 10564.7 15.9 9439.8 15.9 6314.8 10.2
Taxes on
578.6 1 635.9 0.9 532.2 0.9 491.2 0.8
Property
VAT 37747.9 62 41308 62.2 37050.3 62.2 37884.9 61.1
Sales tax 168.5 0.3 166.5 0.25 123.5 0.2 122.1 0.2
Excises 9096.9 15 588.6 0.9 8205.1 0.8 11283.7 18.2
Taxes on
games and 505.1 0.8 543.8 0.82 532.8 0.8 609.4 1.0
gambling
Taxes on
international 1641.5 2.7 1900.80 2.8 1721.2 2.8 1658.1 2.7
trade
Other taxes 509.6 0.8 0 0 1590.1 0 2436.3 3.9
Total tax
60837.1 100 66344.9 100 60594 100 62001.3 100
revenue
Source: Ministry of Finance of Croatia
Czech Republic
Jiří Schwarz jr.
Resident Research Fellow, Liberální Institut (Prague)
The year 2010 was an election year in the Czech Republic. The debates both
before and after the election were concerned mainly with growing deficit. In
order to reverse the trend of recent years, the newly elected government imple-
mented a number of measures on revenue and expenditure sides with a plan to
lower the deficit under 3 % of GDP in 2013. However, no deeper reforms were
so far implemented, nor planned in greater detail. It is therefore not clear what
ways will the government use to further balance the budget. Without profound
reforms, there may be no other way to tame the deficits than to increase the tax
burden.
“PIGS” effect and the deficit
The year 2010 was markedly influenced by the development of the so-called
PIGS, or southern-wing EU countries – Portugal, Italy/Ireland, Spain, and espe-
cially Greece. Whilst during the previous years after the financial crisis outbreak
the emphasis of fiscal and monetary policy was put on fight against the reces-
sion and financial system instability, in 2010 the sustainability of public finance
became one of the most important issues.
The Czech Republic was having deficit problems already in 2007, that is, even
before the crisis hit its economy. Extraordinary and unexpected high tax revenues
in 2008 temporarily pushed the deficit below the 3 % Maastricht criterion. How-
ever, the inability to seriously tackle the issues of budgetary imbalance resulted
in a government deficit of 6.1 % of GDP in 2009. According to the methodol-
ogy of the ESCB (European System of Central Banks), the cyclical part of the
Czech Republic • Jiří Schwarz jr. 45
deficit was literally zero. In other words, even if we adjust for the impact of the
business cycle and one-off factors, the remaining structural deficit of the Czech
Republic in 2009 was 6.1 %.
It became were soon clear that without restrictive measures the deficit in
2010 was going to reach 8 % of GDP. The technical government, appointed
after the previous government fell due to a vote of no confidence, was therefore
looking for ways to decrease the deficit. Political pressures from both ends of
the political spectrum led however to such measures on both revenue and expen-
diture sides, that the resulting mix was more a tax increase than an expenditure
cut. Still, the government managed to decrease the planned general government
deficit for 2010 to 5.3 % of GDP, which remains nonetheless far above the level
generally understood as sustainable. As a consequence, the new government co-
alition committed to bring the deficit down to 4.6 % in 2011 and under the 3 %
threshold by 2013.
Revenues and expenditures in 2010
Changes to the tax system may not have the predicted impact on the tax
yield. This might be due either to unexpected external shocks or to the fact that
taxpayers alter their behaviour in reaction to the changes. A closer look at the tax
yields reveals that even though the predicted real GDP growth of 0.3 % was two
percentage points below the actual 2.3 % GDP growth in 2010, the tax yields do
not even reach the budgeted amounts. The corporate income tax yield, even after
the fall of the rate from 20 to 19 percent, was predicted to be 20.4 % larger than
in 2009. The statistical data show that it rose only by 3.6 percent. The excises
were expected, also due to increased rates on fuels, alcohol, beer, cigarettes, and
tobacco, to bring almost 14 percent more to the budget than in the last year. In
reality, only 5.7 % more was collected during 2010.
Similar development could be observed on the social security contributions’
side. Even though the contribution ceiling increased, the year-on-year growth in
2010 was only 2.3 %, while it was expected to be 5.5 %. Not even the VAT yield
reached the expected growth of 6.7 % and was 0.4 pp lower. To sum up, despite
expectations and relatively positive economic development, the total revenues
of the state budget increased only by CZK 25.9 billion (€ 1 billion; 2.7 % y-o-y).
As a reaction to some minor savings measures and the economic recovery, the
expenditures of the state budget in 2010 fell by CZK 4.1 billion (€ 160 million;
-0.9 % y-o-y).
The reality observed in 2010 gives us therefore a slightly blurred image. On
one hand, the decrease of expenditures and their structure confirm that the eco-
nomic growth was stronger than expected. On the other hand, the inability to
collect budgeted taxes goes against intuition. The only plausible explanation is
that the economic agents altered their behaviour – either as a consequence of the
crisis or due to the tax increase.
Tax changes
As usual, very important changes appeared again on the revenue side of the
state budget. During 2010 a number of changes in the tax system were intro-
duced which come into effect with the beginning of 2011. The most significant
ones occurred in the area of social insurance, sickness insurance, and health in-
surance. Under the sickness insurance, employees and self-employed persons in
the Czech Republic are entitled to benefits in case of sickness or parental leave.
Not only do the minimal insurance contributions increase (by approx. 4 % for
the social and health insurance, and from 1.4 % to 2.3 % for the sickness insur-
ance), but less individuals will benefit from it, as the self-employed persons will
be eligible for the sickness benefits only after twenty-two days of sickness (until
the end of 2010 it was fourteen days).
A so-called “flood tax” has been introduced that should be effective only in
2011. The mechanism is that a general income tax deduction will be lowered by
CZK 100 a month (€ 4), that is, by almost 5 %. Starting in 2011, payments going
to former soldiers and policemen won’t be subject to tax exemption. The same is
true for the president’s salary and the rent of the former president. Various non-
salary payments to politicians and judges will also for the first time be subject to
the income tax.
In order to lower the deficit as much as possible without increasing tax rates,
the government resorted to abolition of various tax exemptions. In addition to
the measures mentioned in the previous paragraph, the minister of finance de-
cided to make the interest on building savings (i.e. a government-subsidized sav-
ings account meant to be used for building or obtaining housing) subject to the
15% personal income tax. Moreover, government subsidy of the building savings
from 2010 is going to be retrospectively taxed by 50 % in 2011 and decreased in
the following years.
Last new source of government income in 2011 will be the solar energy.
There was an unexpected solar energy boom in 2010 in the Czech Republic
that was caused primarily by high fixed purchase prices (guaranteed price of
the electricity produced by solar power plants set by the government) and long
income tax holiday. This development is a typical example of how the govern-
mental subsidy of renewable energy sources can go wrong. At the time the law
was approved in 2005, the fixed purchase prices were set according to then ex-
pected investment return. However, already during 2008 the technologies started
to cheapen. The drop was so dramatic that returns on photovoltaic power plants
went through the roof which attracted an extremely large number of investors.
As the distributors are forced to pay the fixed purchase prices for renewable
power, the tremendous increase in the solar power output would lead to soaring
selling price in 2011 – that is the price the consumers have to pay.
The government argued that, in order to restrain the growth of price, it had to
cancel the tax holiday and implement a special income tax on solar power plants
put into operation in 2009 and 2010 with the rate of 26 percent. The solar tax
revenues will be then partly given back to the distributors in order to cover some
of their expenses related to the solar power which would allow them to keep the
selling price of electricity lower. A welcomed side-effect would be approximately

CZK 4 billion from the solar tax that is expected to stay in the state budget.
To sum up, the changes to the tax system introduced in 2010 had two main
goals. To increase the tax revenues as much as possible in order to push down
the deficit but, at the same time, to keep unchanged the tax burden for the over-
whelming majority of the tax payers, including the highest-income groups. The
revenue side of the state budget in 2011 is planned to increase by 2.1 % com-
pared to 2010.
Public sector and the debt
Without taking any restrictive measures, the deficit of the general govern-
ment would reach 6.7 % in 2011. Considering that the Czech Republic repre-
sentatives still were not able to carry out or prepare any deeper reforms, such
level of public finance deficit could send the Czech Republic to the group of
unsustainable countries such as Greece and Ireland. Only with one fundamental
difference: as the Czechs do not have the euro, rich eurozone members wouldn’t
feel the need to bail them out. Moreover, according to a Deutsche Bank analysis
of public debt sustainability published in March 2010, from 2020 on the Czech
Republic would face grave difficulties with its debt if it doesn’t quickly imple-
ment some reforms.
Deutsche Bank experts simulated various possible paths of macroeconomic
development over the next ten years in order to assess the stability of debt levels
in 38 different developed and emerging economies. Needless to say, the predic-
tions are to a large degree mechanistic. However, they do provide a useful way
of comparing possible public debt development in various countries. Using the
most plausible baseline scenario, the Czech Republic public debt would reach
69 % of GDP in 2020 with a further increasing trend. This places the Czech
Republic into the group of four worst performing emerging markets. Among
developed markets the position would be significantly better. But still the debt-
to-GDP ratio would be far above the 60% Maastricht debt threshold.
It is no surprise that the topics of deficit, debt and fiscal sustainability formed
the core of the debates preceding the general election in May 2010. Also due to
the course of the Greek crisis, two new political parties promising to introduce
budget responsibility and fight corruption made it into the parliament. Together
with the conservative Civic democrats they formed a coalition government with
the emphasis put on dealing with deficit and corruption.
In order to avert the grave scenario of skyrocketing debt, the new finance
minister prepared a set of remedies on the expenditure side of the state budget
based on the coalition agreement that, as in other European countries, raised
stout resistance. To accompany the above described increase in revenues which
he expected to reach CZK 20 billion (€ 0.8 billion), he made a plan of saving over
CZK 58 billion (€ 2.3 billion) from the state expenditures. Most of them were di-
rectly taken away from the budgets of ministries. Hence, CZK 13.3 billion (€ 0.5
billion) will be saved in 2011 by a one-tenth decrease of the amount of money
allocated to current expenditure of the ministries and a reduction of investment
expenditure by one fifth. Funds for salaries of public employees will be lowered
by 10 percent, which should save another CZK 11.4 billion. The only exception
are the teachers – their salaries will on average increase by 3.5 percent in 2011.
Apart from these major items, the government decreases by one tenth the
budgetary reserves (CZK 11.1 billion), and fewer resources will be available for
road and railroad construction (CZK 3 billion), farmers (CZK 3 billion), poor
and mildly disabled (CZK 3.5 billion), and new-born child benefit (CZK 1.3 bil-
lion).
Reform and other plans
The major shortcoming of the budget for 2011 is a complete lack of any
deeper modification of either the revenue or the expenditure side of the bud-
get. In addition to the already introduced saving measures, the governing coali-
tion agreement sketched a roadmap of proposed longer-term goals they want to

reach. Two main topics connected with the area of public finance are the pension
and the health-care reforms.
Both reforms have already been subject of public debates for several years.
A health-care reform has been prepared that benefited from the Slovakian ex-
perience. Unfortunately, mainly due to fierce opposition from social-democratic
politicians and very fragile majority of the coalition parties in the Parliament in
the period 2006-2008, it was impossible to implement a single component of
that reform. Without surprise, this inability to deal with the under-financing of
the Czech health sector led to protests of thousands of doctors some of whom,
in the last months of 2010, announced that they were quitting their jobs in order
to work in countries with more “doctor-friendly” environment. What those doc-
tors do not understand, however, is that without deeper changes in the way the
health-care is financed, it is not feasible to allocate more resources to health-care,
especially when high public deficits prevail. Plans for such changes are still very
preliminary, though.
Similarly, a proposal for pension reform has been prepared during 2010 by
an expert advisory committee which was asked to update of similar report writ-
ten as early as in 2005. According to the calculations, the Czech pension system
will inevitably generate a deficit of 4 % of GDP each year starting in 2050. As a
consequence of social security payments and taxes adjustments during the crisis,
the system generated a deficit of CZK32 billions (approx. 0.8 % of GDP; €1.3
billion) already in 2010. The expert committee proposes two possible ways of
reforming; both of them assume a decrease of the social security contribution
rate from 28 % to 23 % of gross wage, that social security contribution ceiling
be halved, and, in order to fiscally compensate, that the two VAT rates (10 and
20 %) be unified to one 19 % rate which should be enough to cover not only the
current deficit but also the consequences of the reform in the coming years.
The first and preferred proposal requires to direct 20 percentage points from
the 23 percent point of social contributions into the currently existing pay-as-
you-go (PAYG) pillar, whereas the remaining 3 pp. will go into new funded pillar.
The reformed pension funds, investment companies or other asset managers will
then manage investment of the pension savings within the framework of the
second pillar according to the participant’s choice. Participation in both reform
pillars will be compulsory for all individuals under 40. The third pillar will, be-
side life insurance, consist of reformed voluntary pension insurance with a state
contribution.
In the second variant the whole 23 percent will be directed into the first
PAYG pillar. The second pillar will be managed by the reformed pension funds
and the direct state support will be 3 percent of the gross wage, provided the
participant saves at least the same amount. The entry into this second pillar will
be voluntary.
The government made a promise to follow the conclusions of the advisory
committee to the largest possible extent. Part of the plan is to use all future
privatization incomes and dividends from state-owned enterprises for smooth
transformation of the pension system. The timing is however so far unknown.
As a part of the coalition agreement, the government committed to simplify
the tax system, explicitly mentioning transformation of inheritance tax and gift
tax under the income tax. Moreover, the government wants to abolish most of
the existing income tax exemptions. They stated that they do not want to increase
the progressivity but are determined to eliminate regressivity that occurs when
the tax payer hits social security and health security ceilings. Last major planned
modification of the tax system is higher taxation of lottery and gambling.
The future
In a fight against structural deficit the Czech government prepared in 2010

a mix of measures that should raise revenues by CZK 20 billion and shrink
expenditures by CZK 58 billion. At first glance the strategy was successful, but
there are still several risks awaiting. To begin with, according to the Czech Na-
tional Bank, the ministry of finance builds on overoptimistic prediction of the

2011 GDP growth: while the ministry expects the economy to grow by 2.3 %,
the CNB would rather bet on 1.6 %. And lower growth means, of course, lower
revenues and higher expenditures.
Second, there are no sign that a specific reform allowing for a sizable and
permanent decrease of government expenditure will come soon. It is very un-
likely – or totally unrealistic – that the minister of finance will be able to continue
balancing the budget in following years by further cutting the salaries of public
officials and current expenses of the ministries.
And last but not least, there also exists a risk for the taxpayers – that continu-
ous shift from direct to indirect and less visible taxes would allow the politicians
to silently and unobtrusively increase the tax burden while keeping the most vis-
ible income tax constant as promised. Without profound reforms, there may be
no other way to tame the deficits in the end.
Denmark • Jacob Braestrup 53
Denmark
Jacob Braestrup,
M. Sc (Political science)
Senior adviser, Confederation of Danish Industries
In January 2010, the largest tax reform in more than ten years began taking
effect, shifting some DKK 30 billion (€ 4.0 billion) of tax revenue when fully
implemented in 2019. Of this, more than DKK 25 billion (€ 3.4 billion) is used to
lower the marginal tax on income in order to encourage work and investment. In
2010 the top marginal tax rate was lowered from 63 percent to 56.1 percent – its
lowest level in at least 40 years. Later in the year, an “economic recovery package”
postponed some of the tax cuts and increased other taxes in order to improve
public finances. Along with the tax reform and other (minor) tax changes, the
combined effect has been a general lowering of almost all marginal tax rates
alongside a broadening of the tax base that will increase the overall tax burden in
what is already the world’s most heavily taxed country.
Lowest marginal tax since 1970
The most notable element of the tax reform, which was agreed upon in 2009,
and which began to take effect in 2010, was the abolition of the middle income
tax rate of 6 percent. This effectively changed the Danish tax system from a
three-tier system to a two-tier system. More importantly it also reduced the top
marginal tax rate on labour income by some 5½ percentage points. The bottom
income tax was also reduced by 1.5 percentage points, taking the total reduction
in top income tax rate on labour to 6.9 percentage points (from 63 percent to
56.1 percent).
The tax reform also increased the threshold for the top income tax, therefore
reducing the number of people affected by the tax. The threshold was increased
from DKK 377,400 (€ 50,630) in 2009 to DKK 423,800 (€ 56,860) in 2010. As
a consequence, the number of taxpayers paying the top income tax fell from
just over 900.000 persons in 2009 to less than 640,000 persons in 2010 (from
19 percent to 13 percent of all taxpayers). Originally, the threshold was set to be
increased further in 2011 (to DKK 444,700 / € 59,660), but, as part of the “eco-
nomic recovery package” agreed upon in 2010, this increase has been postponed
to 2014.
For persons earning less than the threshold for the top income tax, the re-
duction in the bottom income tax has lowered the marginal income tax by 1.4
percentage points to 40.9 percent and 42.3 percent respectively, depending on
whether one benefits from the reduction in marginal tax due to the “employment
deduction”, which reaches its maximum at an income (gross labour income) of
DKK 320,000 (€ 42,930). The reduction in the bottom income tax also lowers
the tax on transfer incomes such as unemployment benefits, etc.
The very positive effects of the tax reform on marginal taxes were unfor-
tunately marred by one aspect of the reform. In order to offset the effects of
higher energy taxes on poorer households, the centre-right (minority) govern-
ment originally proposed a lump sum “green cheque” for every adult person.
During the proceeding negotiations with other parties in parliament, this was
changed to an income-adjusted tax rebate of maximum DKK 1,300 (€ 170) per
adult and DKK 300 (€ 40) per child (maximum DKK 600 / € 80 per mother),
The income adjustment of the “green cheque” adds 6.9 percentage points to the
effective marginal tax at income levels between approximately DKK 395,000 (€
53,000) and DKK 413,000-422,000 (€ 55,410-56,620), depending on the number
of children. In this income interval, the marginal tax on labour income is de facto
increased from 42.3 percent to 49.2 percent.
Lower tax on capital income
The reduction in tax rates and the increased threshold for the top income tax
have also had a significant impact on the taxation of personal – net positive –
capital income (excluding income from shares/stocks which is taxed separately).

Since the 8 percent labour market contribution only applies to labour income,
the 2009 top marginal tax on capital income was 59.7 percent for top income tax
payers with net positive capital income. For those not paying the top income tax,
the rate was 38.8 percent.
The reduction of income tax rates in the tax reform reduced the marginal
taxes on capital income to 52.2 percent and 37.3 percent respectively, while the
higher threshold for the top income tax reduced the number of taxpayers af-
fected by the top rate. This effect was boosted by the introduction of a DKK
40,000 (€ 5,370)/person/year deduction in the capital income subject to top in-
come tax. The deduction may be shared between spouses, thus ensuring that a
married couple does not pay top income tax on the first DKK 80,000 (€ 10,730)
in net positive capital income, regardless of their labour incomes.
Since the implementation of the tax reform, a further reduction of the top
tax rate on capital income has been passed by parliament. In January 2010, the
government – under pressure from the EU – proposed an end to the special tax
treatment of certain (Danish) bonds. Hitherto, capital gain on certain high-yield
bonds (provided they were issued in DKK) was tax-free (the interest was taxed
as capital income). The government proposed – and later parliament agreed – to
end this discrimination between Danish and foreign bonds by eliminating the tax
advantage linked to these bonds. The resulting revenue was used to lower the
top tax on capital income even further. In 2010, the top rate on capital income
was lowered to 50.2 percent, and in the coming years the rate will be gradually
reduced to 42.7 percent in 2014.
Taking into account the reductions already agreed upon in the tax reform,
the combined effect will be a reduction in the top tax rate on net positive capital
income from 59.7 percent in 2009 to 42.7 percent in 2014. An increase in the
after-tax marginal income of more than 40 percent.
Finally, the tax reform also lowered the tax on capital income from shares,
which is taxed separately from other incomes. In 2009, dividends and capital
gains from shares were taxed at 28 percent up to a total of DKK 48,300 (€

6,480); at 43 percent for the amount between DKK 48,300 and 106,100 (€ 6,480-
14,240); and at 45 percent for any amount above. The thresholds are automati-
cally shared between spouses. As part of the tax reform, the 45 percent bracket
was abolished and the top rate lowered to 42 percent. Thus, a married couple will
pay 28 percent on the first DKK 96,600 (€ 12,960) in combined income from
dividends and capital gains from shares – and 42 percent on any amount above
this level. In 2012, the low rate will be reduced to 27 percent.
Improved tax regime for foreign researchers and experts
As part of the budget for 2011, parliament decided on some changes to the
special tax regime for foreign researchers and experts.
The very high taxes on personal incomes have traditionally made it difficult
for Danish companies to attract foreign experts. As a consequence, foreign sci-
entists and high-earning experts have since 1991 had access to a special tax re-
gime with a low flat tax in a limited number of years. The rules for the special
tax regime have been modified several times, and in 2008 the existing three-year
arrangement was supplemented by a five-year arrangement.
Persons who had not been Danish taxpayers for a period of three years (i.e.
foreigners or Danish ex-pats), and who were either scientist/researchers or who
had yearly gross salary exceeding DKK 832,000 (€111,630) could chose either to
work up to three years with a flat tax of labour market contribution (8 percent)
plus 25 percent (totalling 31 percent); or up to five years with a flat tax of labour
market contribution plus 33 percent (totalling 38.36 percent). At the end of the
three or five-year period, people would automatically transfer to the regular in-
come tax system.
For all but the most highly paid, the new five year arrangement was, however,
unattractive compared to three years on the low flat tax and two years as a regular
taxpayer, and thus very few persons chose the five year option.
In 2011, the two arrangements were replaced by one, five year special tax re-
gime with a flat tax of labour market contribution plus 26 percent (31.92 percent
total). At the same time, the “quarantine period” required as a non-taxpayer to
Denmark in order to be able to use the special tax regime was extended from
three years to ten years in order to discourage Danes from “abusing” the sys-
tem.
Broader tax base
In line with all other major Danish tax reforms for the last 30 years – and
indeed most tax reforms in the OECD countries – the lowering of marginal
taxes on personal income were in large parts financed by a broadening of the
tax base.
The single largest contribution came in the form of a one-year (2010) freeze
of the automatic adjustment of all thresholds in the tax system. Normally, all
thresholds in the tax system are adjusted upwards yearly to take account of the
increase in wages. The adjustment is based on the development in wages two
years prior, that is, the 2010 adjustment would have been based on the (quite
substantial) wage increases of 2008. By suspending the adjustment, the govern-
ment permanently increased the tax revenue by DKK 5 billion (€ 670 million),
financing one sixth of the total tax reform.
As part of the economic recovery package, passed in 2010, the threshold
freeze was prolonged another three years, meaning that tax thresholds will not
be increased until 2014.
The tax reform also broadened the tax base by instituting maximum levels for
some tax deductions, such as a DKK 100,000 (€13,420) maximum tax deduction
for contributions to certain pension schemes. Hitherto, contributions to labour
market pension schemes with monthly pension payments for at least 10 years
(not lump sum pensions) were deductible against all income taxes except the 8
percent labour market contribution (consequently, payments from pensions are

not subject to labour market contribution). Now, only the first DKK 100,000
(€13,420) will be deductible against other taxes, except if the payments are made
into a lifelong pension scheme (annuity), in which case there is no maximum
deduction.
Related, the tax reform introduced a temporary “equalisation tax” on large
pensions payment meant to offset the “unfairness” that current pensioners or
persons facing pension in the near future (with large pensions) would pay a maxi-
mum marginal tax on their pension payments of 52.2 percent, while having (as
workers) enjoyed a deduction on their pension contributions of up to 59.7 per-
cent (top marginal tax excluding labour market contribution). Originally, the gov-
ernment toyed with the idea of having the equalisation tax for some 30 years, but
in the end, a 6 percent surtax was agreed upon (reflecting the abolished “middle
tax”) for the years 2011-14, where after the rate will be reduced by one percent-
age point in the years 2015-2020. The tax applies to total pension payments
exceeding DKK 362,800/year (€48,680).
The tax base for personal income taxes were also broadened by introducing a
number of add-ons to taxable income, such as an add-on to taxable income for
employees with company car available for private use. The size of the add-on
depends on the mileage of the car and comes on top of the regular taxation of
company cars.
More controversially, a DKK 3,000/year (€ 400) add-on to taxable income
was introduced for employees with (partly or fully) employer-paid telephone, PC
or Internet available for private use outside the workplace. This corresponds to
a tax of DKK 1,200-1,700/year (€ 160-230) depending on income (top income
tax payer or not). This “multi-media tax” has been hotly criticised and, late in
2010, the tax was amended so that married couples – if both are eligible for the
tax – receive a 25 percent discount on the tax.
More fundamental, the value of most tax deductions to the personal income
will be gradually reduced, beginning in 2012. Today, expenses related to the earn-
ing of income (e.g. unemployment insurance contribution, labour union mem-

bership fee, and a standardised transportation expense based on the distance be-
tween home and work) as well as any net negative capital income are deductible
against municipal taxes and the 8 percent health contribution, which replaced the
county tax in 2007 (making for an average tax value of 33.6 percent).
Beginning in 2012 the health contribution will be gradually phased out one
percentage point per year, while the bottom tax rate will be increased correspond-
ingly. By 2019 the health contribution will be abolished and the tax value of most
standard deductions will thus be reduced to 25.6 percent (average municipal and
church tax rate). As part of the tax reform, some standard deductions have been
raised to (fully or partly) offset the effect, and the first DKK 50,000 (€6,710) in
net negative capital income (double for married couples) will still be deductible at
against municipal taxes plus 8 percent. However, the amount will not be indexes
and thus be reduced in real terms by inflation.
Higher “sin taxes”
The tax reform was also financed through increased taxes on tobacco, alco-
hol, sugar and fat.
In 2010 there was a 25 percent increase of the tax on ice cream, chocolate
and candy (sugar-free candy exempt) as well as an increase in the tax on soft
drinks containing sugar (and lower tax on sugar free soft drinks). Also, taxes on
tobacco and cigarettes were increased. Later in 2010, as part of a “service check”
with various amendments to the reform, the tax on tobacco was increased even
further, and so too were taxes on wine and cider and “alcopops”.
More controversially, the tax reform also included a tax on saturated fats.
Originally, the tax was supposed to take effect from January 2011 and to include
only oil and dairy products (except milk) at a rate of some DKK 20-25 (€ 2.7-
3.4)/kg saturated fat. This proposal, however, proved unacceptable to the EU,
and as part of the “service check” of the tax reform, the tax was expanded to
include meats, while the rate was lowered. A final proposal has not yet been put
before parliament, and the tax will not take effect till July 2011. At present it
looks like the final rate will be DKK 16 (€ 2.13) per kg of saturated fat
Higher taxes on pollution and energy consumption
The tax reform included a number of tax increases on pollution and the use
of energy, most of them related directly to businesses, while others have an im-
pact on private individuals as well. One such example is the DKK 1,000 (€ 134)/
year surcharge for diesel powered cars without particle filter. The surcharge not
only applies to new diesel cars, but also existing passenger cars (existing, but not
new, cargo vans are exempt from the surcharge). The surcharge was supposed to
lower particle pollution, but has been hotly criticised because most existing diesel
cars cannot easily (and without substantial costs) be fitted with particle filters. As
a consequence, only around 1000 out of more than 350,000 diesel driven pas-
senger cars have been fitted with a filter.
In 2010, the tax on waste for landfills was also increased from DKK 375/
tonne to DKK 475/tonne (€ 50 to € 64), and in 2011 the taxes on pollutants in
sewage will also be increased. Beginning in 2012 the government has introduced
a tax on toxic waste (hitherto exempt from tax to prevent illegal dumping). The
tax will be DKK 160/tonne, rising to DKK 475/tonne in 2015 (€ 21 rising to €
64).
The increases in energy taxes consist first and foremost of a 15 percent in-
crease of the tax on fossil energy consumption and electricity, which took effect
January 2010. But there was also a number of other energy related tax increases
in 2010 such as the reintroduction of tax on lubricating oil based on the energy
content (DKK 60 / € 8 per GJ), and a tax on green house gasses other than
CO2 used for energy consumption at DKK 150 (€ 20) per ton CO2-equivalent.
Beginning in 2013, toxic waste used for energy will be taxed at DKK 19.6 (€ 2.6)
per GJ.
More controversially, 2010 also saw the introduction of a tax on energy used
in the processing industry. Hitherto, energy consumed in the manufacturing pro-
cess has been exempt from energy tax (but not CO2-tax) in order to preserve
the competitiveness of businesses exporting out of Denmark. But as of January
2010 this “process energy” is taxed at DKK 4.5/GJ (fossil fuels) and DKK 16/
MWh (electricity) (€ 0.6/GJ and € 2.15/MWh). The tax was originally supposed
to more than triple from 2013, but as part of the “service check” of the tax
reform, it was decided that this would be too detrimental to competitiveness.
Instead it was decided to bring forward the increase one year, while at the same
time reducing the increase. The rates will thus be DKK 8/GW and DKK 31/
MWh (€ 1.07/GJ and € 4.16/MWh) respectively from 2012 onwards.
In the next couple of years, the production industry will also be affected by
the gradual reduction of the tax exempt CO2-emissions granted to heavy in-
dustry not part of the European Trading System (ETS), which were part of the
tax reform, and which are set to mirror the reduction in free CO2-quotas in the
ETS.
Finally, it was decided that all energy taxes should be adjusted yearly to ac-
count for inflation. In 2007 it had already been decided to do this for the period
2008-15 (to finance a lowering of the income tax in 2008 and 2009), but it has
now been decided that this regulation will continue after 2015 – in theory indefi-
nitely. The controversial part of this decision is not so much the decision itself,
but more the fact that the generated revenue was not used to finance lower taxes,
but rather to improve the public finances (see later).
Other tax increases for companies
In addition to the increased taxes on energy consumption and pollution,

which will mainly be felt by businesses, the tax reform entailed a number of
other tax increases on companies, including a nominal freeze on funds allocated
as state aid in the years 2010 to 2015, as well as a reduction of the (already very
low) number of VAT-exempt services. In 2010 and 2011 estate agents and travel
agencies respectively will no longer be exempt from VAT.
Banks and other financial institutions are still exempt from VAT, but have
instead been paying a special tax based on their total payroll. As part of the tax
reform, it was decided to increase this special payroll tax for the financial sector
from 9.13 percent to 10.5 percent. The rise was not supposed to happen till 2013,
but as part of an emergency tax relief package for the farming sector (lowering
the tax on farm land), it was decided in the summer of 2010 to move the tax
increase forward to 2011.
Effective from 2010, the tax reform also reformed the way shares held by
companies are taxed. Hitherto, taxation depended on the number of years the
shares had been held – with no tax on shares held for more than three years. Now,
taxation depends solely on the number of shares held by the company. If a com-
pany owns less than ten percent of another company (“portfolio shares”), any
capital income (dividends, capital gains) from these shares is added to corporate
income and taxed accordingly; whereas capital income from daughter companies
(ownership of ten percent of the shares or more) is tax-free. At the same time,
the tax system was changed so that companies are now taxed based on the value
of their portfolios at the end of the year compared to the beginning of the year
(any losses may be carried forward), rather than when assets are sold (unlisted
shares may still be taxed when sold, rather than based on current value).
The new system for taxing companies’ financial assets was generally wel-
comed by the business community, especially when companies were given the
option to exclude unlisted portfolio shares from the yearly taxation (and choose
to have them taxed when sold instead). However, for some business angels and
entrepreneurs, the new 10 percent limit proved troublesome. As newly founded
companies grow – and bring in new investors to fund the expansion – the share
owned by the original investors (through parent companies) may drop below the
10 percent limit, meaning that profits will be taxed twice (once in the expanding
company and then again in the parent company). This fact was strongly criticised,
and in the fall of 2010, the government made an amendment that will ensure tax
freedom to the capital invested in the earliest stages of a small or medium sized
enterprise, providing the shares are kept for at least five years.
The tax reform also included a reform of the registration fee for taxies (which
is much lower than the standard fee for passenger cars). The change effectively
lowered the (taxi) registration fee on cheaper cars and increased the registra-
tion fee on more expensive cars. This was done to encourage taxi companies to
choose cheaper and more fuel efficient cars. With the same intention, the base
for the yearly tax on cargo vans was changed from weight to mileage – and in-
creased. It now follows the same principles as the yearly “green” fee on passen-
ger cars. The change only affects new cargo vans, as existing vans will continue
to be taxed based on weight. Finally, the reform included the introduction of
road pricing for lorries / trucks, which were originally planned for 2011. Due to
technical difficulties, the introduction has been postponed several times, and is
now not due till 2013 at the earliest.
Death of the “tax freeze”
As already mentioned, the tax reform was constructed in such a way, that
while the tax cuts would initially be underfinanced, this would soon change as tax
increases took effect. Officially, the reform was to be underfinanced in the years
2010-12, to balance in 2013, and then give a net profit to the treasury from 2014
onwards. In the long run, taking into account interest, the reform would be net
neutral to the public finances, ensuring that the reform conformed to the general
principle of the government’s “tax freeze” which had been in place since 2001
(see box).
The tax freeze
Upon taking office in November 2001, the centre-right government of Prime

Minister Anders Fogh Rasmussen instituted a so-called “tax freeze”: No tax or
duty could be increased. If the tax was defined in terms of a percentage, that
percentage could not be increased. If defined as an amount, that amount could
not be increased (and was thus effectively lowered by inflation). Furthermore, the
property tax on owner-occupied property (one percent of the public property
value) was fixed in nominal terms, so that the basis of the tax was the lower of
the following: The 2001-evaluation of property value plus five percent; the 2002-
evaluation; or the most recent evaluation.
The original tax freeze could only be violated, if it was deemed absolutely
necessary, e.g. for environmental reasons. But then any revenue from higher taxes
had to be reserved for lowering other taxes. Also, should the EU or other in-
ternational obligations force Denmark to lower a tax, the lost revenue could be
recovered through other taxes.
This very rigid tax freeze was generally observed from 2001 to 2009. Some
minor tax changes did violate the principle of being “absolutely necessary”, but
in these cases, the overall principle of the tax freeze was observed by using the
extra revenue for other tax reductions.
In connection with the preparation for the tax reform, the government an-
nounced that the rigid tax freeze would be suspended during the reform: any
tax could be raised, but only as long as the overall tax freeze was observed, i.e.
the revenue from tax increases had to finance lower taxes elsewhere. After the
reform, the rigid tax freeze would once again be in effect.
In the end, however, this proved not to be the case.

Firstly, the tax reform directed some of the extra revenue raised by higher
taxes towards covering the inflationary loss arising from the nominal tax freeze
of property tax and some duties in the period 2016-19. Without the reform, the
government would have had to cover the inflationary loss by cutting expenses (or
increased the deficit), and thus effectively saved almost DKK 3½ billion (€ 470
mill.) on the yearly budget by this manoeuvre (permanently).
Secondly, the government used the pretext of the tax reform to simply abolish
the nominal freeze of energy taxes from 2016 onwards. The freeze had already
been suspended for the period 2008-15, but this was – in accordance with the tax
freeze – in order to finance lower taxes on income. From 2016, energy taxes will
automatically be inflationary adjusted, and revenue will not be redirected to the
taxpayers – but simply go to the state purse. The long run effect of this change
is quite substantial, with the public finances being improved by some DKK 15
billion (€ 2 billion) per year.
Lastly, the increased tax revenue from the supply side effects of the tax re-
form – estimated at some DKK 5½ billion (€ 740 million) per year - will also not
be used to lower taxes (in violation of the overall tax freeze). Instead, the revenue
will be used to increase the public budget. This all adds up to a net effect of the
tax reform of increasing long run tax revenue to the tune of DKK 24 billion (€
3.2) per year.
In addition, the economic recovery package, which was passed in 2010 as an
emergency measure to ensure that the Danish state budget would adhere to the
EU budget requirements, added another DKK 8½ billion (€ 1.1) per year in per-
manent tax increases, primarily by extending the one-year freeze in tax thresholds
(already part of the tax reform) another three years.
So while Denmark now has the lowest marginal tax rates in a generation if
not more, the tax burden – already the world’s highest – is set to rise even further
in the years to come.
France
Vesselina Spassova
IREF
Faithful to a tradition several years old, France is using taxation as a tool for
economic policy, rather than a mean for funding specific public services. The
new fiscal law is introducing a myriad of changes, serving one main purpose:
the maximization of tax revenues for the rescue of shaken public finances. The
way chosen by the government this year consists in the abolition of several tax
loopholes, as well as the introduction of some new taxes, an increase of marginal
income tax rate, taxes on capital gains and social contribution taxes.
Public finances and economic context
Following the huge increase of public deficits of the past two years, the gov-
ernment is claiming the beginning of a new era and promises to limit the budget
deficit to 6 GDP points in 2011 (down from 7.7% in 2010). If this 1.7 GDP
points reduction of deficit is reached, it will be the first time in 50 years that such
an effort to restrict public spending ends with success. But will the government
reached the target this time? One should indeed keep in mind that public deficit
has been increased by 4.4 GDP points in the past two years, and the public debt
by more than 15%. According to the latest data, the total amount of government
expenses reached €422.5 billion in 2010 including € 70 billion classified as “ex-
ceptional expenses”. A bizarre naming since almost half of those € 70 billion has
been used to compensate for the fall in local communities’ revenues due to the
suppression of the professional tax; and we don’t see why things should be dif-
ferent in the future. Meanwhile, the social security system’s deficit in 2010 sadly
France • Vesselina Spassova 67
but not surprisingly broke a new record at € 23.1 billion.

At this point, it is easy to understand that any reform that would save money
or increase revenues is good for the government to take. For example, until 2013,
only one out of two retiring public servants will be replaced (except in the educa-
tion sector). Also, the pensions’ reform, harshly contested in 2010, is expected to
reduce public deficits in the following years by some 0.5 GDP points (everyone
knows, however, that the effects of this reform will be short-lived and a new
reform will soon have to follow). Also, the government is committed to keep
public spending stable in nominal value in the 3 coming years, except expenses
for the service of the debt and pensions. To reach that goal, an impressive panel
of no less than 150 measures has been announced.
Abolition of tax loopholes
The economic crisis of 2008 has spurred a lively debate—widely echoed in

the media—on the fairness of the current fiscal system. Many voices came out
claiming the system is unfair and the rich should be taxed more heavily. On the
other side, the government must take into account the fact that the economic
recovery would be impeded if higher taxes were to be forced in. The choice went
therefore to the middle way – the abolition of tax loopholes that often favour the
highest incomes. Indeed, in the fiscal law 2011, there are several measures that
abolish or reduce some advantages granted to specific groups of taxpayers.
For most of the remaining tax breaks, the law introduces a 10% decrease of
the allowed tax credit or tax deduction .The additional fiscal charge resulting
from those measures is estimated to reach € 9.4 billion in 2011.
Local taxes
Local governments have increased taxes by 2.8% on average in 2010. The

increase is about to follow its way in 2011. Let us simply recall that, in the past 10
years, the average increase of local taxes in France has been around 37%.
Personal Income Tax
Any income exceeding € 5,963 is subject to the personal income tax in France.
The tax rate is starting at 5.5% for the lowest bracket and reaches 41% (previ-
ously 40%) for those earning more than 70 830 €:
Income Tax rate

Below € 5,963 0%
From € 5 963 to € 11 896 5.5%
From € 11 896 to € 26 420 14%
From € 26 420 to € 70 830 30%
Above € 70,830 41% (up from 40% in 2009)
Value added tax
The rates remains unchanged but the base is increased. In France, the service
of providing television signal for the final user has been traditionally benefiting
from a reduced VAT rate of 5.5%. Many people, however, are now receiving their
TV signal as part of a larger triple offer including the internet and telephone.
Since 2007, the law stipulated that the reduced VAT rate can be applied to 50%
of the composite offer. Obviously, the fiscal authorities realized that there were
some gains to be realised here (near € 1.1 billion, according to the estimations).
Consequently, they decided that from now on the reduced rate would apply only
where television is provided to the consumer separately from other services.
Social contributions
In France, a social contribution is levied on the quasi-totality of taxable in-

come categories-- the so-called “prélèvements sociaux”. Those contributions are
there to fit the deficits of the social security system (pensions, health insurance,
social benefits). Interestingly this is a flat—mostly withholding—tax. Initially
fixed at 1.1%, those taxes are matching today 12.3% (0.2% of increase this year),
distributed as follows:
CSG (Generalized social 7.5% on personal incomes and 8.2% on

contribution) capital gains
CRDS (Contribution to the refund
0.5%
of social debt)
Prélèvement social (Social
2.5%
contribution)
Contribution to the RSA (minimum
1.1%
revenue guaranteed by the State)
Taxes on Capital gains
Several of the reforms in the 2011 Tax Law concern capital gains. Unfortu-
nately for investors and savers, the news is not exactly cheerful.
In France some capital gains are taxed with the so-called “prélèvement libéra-
toire”, which is a proportional tax applied, for instance, on dividends or revenues
from fixed-rate securities. Its rate will be increased from 18% to 19%. The same
rate will be applied on revenues from shares’ transfer; revenues which previously
were also taxed at 18%. Capital gains from real estate will be taxed at the rate of
17%, instead of 16% in the past.
To this must be added the 12.3% compulsory social contribution taxes men-
tioned above. Moreover, and curiously, those increases will not be taken into
account by the fiscal administration when calculating the amount of taxes paid
to see whether the fiscal shield must be activated. That is, if those additional im-
putations are toppling the total amount of taxes paid by the taxpayer over 50%,
the fiscal administration will not make him benefit from the shield and will not
refund the amount exceeding the 50%. Arithmetically speaking this is of course
equivalent to a weakening of the shield.
In order to finance the crushing pensions load, the new tax law is repealing
the 50% tax credit on distributed dividends. This measure is estimated to save
some € 600 million to the State.
Another fiscal reform is expected to contribute to the (empty) social security
funds with another € 180 million - the taxation of capital gains realized from the
sale of securities. Previously, for each household, the first € 25,830 were exoner-
ated (this amount is referring to the total volume of the sale, not just the gain).
Starting in 2011, this will no longer be the case.
Other taxes
Real estate:
In 2011, the government is actively promoting “zero rate loans”, that is a loan
without interest, to those who attempt to access to property for the first time
(58% of French leave in their home). This measure, which is going to entirely
substitute for the tax credit policy introduced after the 2007 election of Presi-
dent Sarkozy, is targeting low incomes households. Nevertheless, as the US credit
market recently taught us, the danger behind the ambition to encourage access to
property is the expansion of risky loans to under-qualified borrowers.
Green taxes:
Following the fashion of green taxation, France put in place several fiscal
tools designed to encourage some environment-respectful activities. Neverthe-
less, the government seems to revise this policy and several tax advantages are
cancelled or reduced. For instance, the State encourages agriculture, especially
when it comes to biologically clean agriculture, because of its positive effects on
environment and, supposedly, on employment, and because of the increasing de-
mand for its products (which, in a way, makes the encouragement unnecessary!).
In the past years, the tax credit granted to those businesses was € 2,400 €, plus €
400 per hectare, in the limit of € 1,600 €. This measure is prolonged to 2012, the
amount being however reduced to € 2,000 from this year on. Also, the 50% tax
credit for investment in photovoltaic is reduced to 25%.

2011 also announces the end of the scrappage premium - a benefit given to
people in order to encourage them to get rid of their old vehicles and replace
them with new, more environment-friendly, vehicles. This means less public
spending, but also less tax revenues from car industry for the near future.
Tax on the banking system:
According to the logic behind the new fiscal law, the banking system crisis of
2008 revealed the importance of systemic risk and, in order to prevent similar
situations in the future, there is a need for a new tax on banks. Of course, one
can doubt the validity of this logic and wonder whether this is not just another
pretext for increasing short-term tax revenues. Nevertheless, the capital stock of
the bank will serve as tax base and the rate applied has been set at 0.25%. The
details of the logic are that not all assets will be taxed alike. Instead, the riskier
the assets of the bank, the higher will be the rate. This tax is going to add to the
State budget another € 500 million in 2011 and is expected to earn even more
in the following years. It will come on top of the “supervision tax” introduced
at the beginning of 2010, and of the “exceptional” contribution to the fund for
the guarantee of deposits (fonds de guaranties des dépôts) that is still active. In
2013 those three taxes are expected to bring more than a billion euro to the State
budget.
Future trends
As we enter 2011, several possible reforms are being discussed. The first one,
that would fit an ambitious strategy of tax harmonization between the French
and German systems, is the abolition of the wealth tax today levied on real estate
property worth more than 800 000 €. A good decision for the French economy,
since France is one of the last European countries to levy such a tax. Also, a
decision that would save taxpayers some € 4 billion. The problem, of course, is
that the government desperately needs revenues and this is why the minister of
the economy and President Sarkozy are already speaking about a new tax to be
applied on the gains realized through the sale of the main residence.
There are also rumours that the unpopular fiscal shield will be withdrawn,
which in fact is already almost done, since, as explained earlier, most of the 2011
tax increases are set with the express condition that they will not enter into the
calculation of the total tax burden. It is however questionable if such a populist
measure is really needed at that point. Indeed, it will save the State not more than
€ 450 million, while increasing the (unfortunately difficult to measure) problem
of tax evasion and pushing more wealthy people outside the jurisdiction’s bor-
ders.
Putting things together, a package of “no wealth tax, no tax shield” could be
interesting, especially if you add to it a return to lower marginal personal income
tax rate.
Germany • Jan Schellenbach 73
Germany
Jan Schnellenbach, PD Dr.
Ruprecht-Karls-Universität Heidelberg
Alfred-Weber-Institut für Wirtschaftswissenschaften
The big picture
As we have reported here in last year’s IREF report, the German government
that has been newly elected in autumn 2009 did have plans for a comprehensive
tax reform. These plans included the introduction of an income tax schedule
with stepwise increasing marginal tax rates, and possibly only three rates of 10,
25 and 35 percent. There had already been some doubts last year that a majority
for such an ambitious reform could be organized. And indeed, the conservative-
liberal federal government was characterized by almost complete fiscal policy
inertia in its first months.
The plan apparently was to sit out important state elections in Northrhine-
Westphalia before introducing potentially controversial legislation on income tax
reform. This plan, however, failed miserably when the state elections, and with
them also the majority in the Bundesrat, the upper chamber of parliament at the
federal level, were lost to the left-leaning opposition parties. Under this new set
of political restrictions, a large-scale reform of the German income tax along
the lines of the federal government’s initial plans becomes very unlikely. Rather,
inertia is likely to persist indefinitely, since a window of opportunity with a cen-
tre-right majority in both houses of parliament is very unlikely to open up again
within the next years.
The second major project announced in 2009 was a reform of municipal
taxes, which included plans to abolish the local business tax (the Gewerbesteuer)
and to substitute it with other sources of revenue for the local level, such as an
increased share in VAT revenue or a local surcharge on the personal income

tax. Such plans would have led both to a significant simplification of the tax
system (the Gewerbesteuer is quite costly to administer, since its tax base is dif-
ferent from that of the corporate income tax), and to a large reduction of the
tax burden on corporate income. The remaining tax burdens on the corporate
level would have been only the corporate income tax at a rate of 15%, and the
solidarity surcharge of 5.5%. However, this second major reform project is also
in danger of failing.
In November 2010, Wolfgang Schäuble, the federal minister of finance, has
introduced a novel proposition for the reform of local taxes. The main pillar of
the Schäuble Plan is to allow municipalities to levy a surcharge on the personal
income tax. However, in contradiction to the coalition accord between the cen-
tre-right parties, and contrary to the pundits’ initial understanding, this proposi-
tion does not include the abolishing of the local business tax. Instead, Schäuble
proposes to lower the federal income tax burden in order to compensate for
municipal surcharges. His aim is to adjust the federal income tax schedule such
that the overall tax burden remains roughly the same for individuals residing in a
typical municipality that levies an average surcharge.
The main thrust of Schäuble’s concept is somewhat surprising, since the abol-
ishment of the local business tax is a major political goal of his liberal coalition
partners, and the coalition accord explicitly mentions it. But in the discussions
on local tax reform, the aim of granting municipal governments more flexibility
to adjust their tax revenues to local financing needs currently overrides the aim
of reducing the tax burden on businesses. Quite to the contrary: Plans to even
revitalize the Gewerbesteuer by also forcing self-employed freelancers such as
attorneys, tax advisers or even doctors to pay the tax are currently gaining some
political momentum. From the opposition parties and from some representatives
of municipal governments, there are even suggestions to extend the tax base
further beyond profits and to include capital employed, or the sum of wages in
order to have a tax base that is less volatile over the business cycle.
While there is no acute danger of such more extreme propositions turning

into actual policy, one has to bear in mind that any reform of municipal taxes
needs a majority in the Bundesrat. Since the centre-right government does not
have a majority there, any piece of legislation on comprehensive local tax reform
will necessarily have to be a compromise and include some measures favoured by
the left-leaning opposition parties. Postponing the reform and remaining in the
status quo indefinitely may, on the other hand, not be an option. Local jurisdic-
tions have become increasingly indebted in the recent years, and there is a struc-
tural incongruence between their revenue and their financing needs, where the
latter follows to large extent from spending decisions made on the central level.
Some changes in detail
There is a long list of small changes to the tax system coming into effect in
2011. The purpose clearly is to facilitate fiscal consolidation, and the method is
to increase (or even invent) many small taxes, each of which is not felt to a large
extent by the taxpayers. The aggregate revenue from all these small taxes is, how-
ever, expected to be significant. From a theoretical perspective, it is rather obvi-
ous that the government attempts to exploit the phenomenon known as fiscal
illusion. The most important of these small tax increases are the following:
The option for degressive write-downs will be removed. From 2011 onwards,
only linear deductions are possible. The degressive option had been introduced
in 2009 in order to provide an investment stimulus during the economic crisis.
Flying from Germany will become somewhat more expensive in 2011. Short
flights up to 2.500 km are charged an air travel tax of € 8 per person, flights up
to 6.000 km are taxed at € 25 and longer flights are worth € 45.
A fee on electric energy intended to finance transfers to suppliers of ecologi-
cally sustainable energy rises from 2.04 ct. per kilowatt-hour to 3.53 ct. Given the
market situation, it is expected that this will translate into an increase of 10 to
15% in the price of electricity in Germany.

Smoking will become more expensive. From May 2011, the tax on a standard
pack of cigarettes will increase by 8 ct.
Taxpayers have a right to receive interest payments by the tax administration
if refunds take more than 15 months. From 2011 on, these interest payments
themselves will count as taxable income.
On the other hand, there are also a few small changes that will benefit taxpay-
ers. The lump-sum tax allowance for employed persons will increase from € 920
to € 1000. If they do not have additional income e.g. from self-employment, then
employed taxpayers and retired persons now have an option to file a tax declara-
tion only every two years and not annually, and it is again allowed to deduct costs
for a home-office from the taxable income.
By and large, 2010 has however been an extraordinarily calm year in German
tax policy. As can be seen above, the legislative and judicial steps taken all are
piecemeal changes.
Taxpayers’ rights
There has been some political and legal controversy recently over the ques-
tion if illegally obtained data can legally be used in the prosecution of tax evad-
ers. In several cases during the recent months, law enforcement authorities had
been offered to buy copies of data CDs containing client data of banks from
Switzerland and other countries. With the tax law being enforced by state-level
authorities in Germany, some states decided to buy stolen data, while others did
not due to legal concerns. Moreover, there have also been several ethical objec-
tions against the state paying seven-digit amounts to criminals who trade stolen
data. However, in late November 2010 the Constitutional Court has ruled that
this process is legal: The fact that data on clients of foreign banks has been col-
lected illegally does not protect tax evaders from prosecution, even if the accusa-
tions rely entirely on illegal sources of information.
Tax evasion has therefore become significantly more risky for German citi-
zens in the past years, given these legal clarifications, and given also the inability
of many foreign banks to protect their client data. At the same time, and fol-
lowing another high court decision, the government has decided to narrow the
conditions that allow tax evaders to avoid prosecution by voluntarily submitting
a corrected tax declaration. So far, a taxpayer had the opportunity to salve his
conscience without fear of punishment by reporting previously underreported
income before the formal process of law enforcement began. This was also the
case for partial revelations. Suppose a tax evader has some income underreported
from x, and some from y. If he has reason to believe that his secret on x is not
safe, then under the old law he had an opportunity to declare x, and even if y
were also discovered by the tax authorities later, his evasion of income from x
would not be punished. This option for a tactical and partial voluntary correction
of tax declarations is now void.
Germany is also currently in negotiations with Switzerland. In October 2010,
revisions to the German-Swiss-Double-Taxation-Treaty have been agreed upon.
Switzerland now follows the OECD standards on tax-related information ex-
change with Germany. This agreement, however, only concerns new cases of tax
evasion. Further negotiations will have to clarify how old cases of tax evasion
are to be treated. The German ministry of finance mentions as goals for these
negotiations, among others: to legalize untaxed funds hidden in Switzerland, and
to enforce retrospective taxation of these funds.
In Germany itself, every taxpayer is now associated with a unique tax iden-
tification number that identifies him vis-à-vis the tax authorities. In the near fu-
ture, employers will report the identification numbers of their employees to the
tax authorities, and in return receive information regarding personal tax allow-
ances of their employees, which in turn allows them to calculate the monthly tax
amounts that are to be deducted from gross wages.
Outlook
Despite 2010 having been a calm year for tax policy, there are significant fiscal
issues looming at the horizon. Germany has enacted a constitutional debt brake
that will gradually come into effect until 2016 (on the federal level) and 2020
(on the state level). It will require low regular deficits at a maximum of 0.35%
of GDP on the federal level, and a strict zero deficit policy on the state level. It
remains to be seen whether the debt brake will actually discipline fiscal policy, or
whether it will turn out to be hapless cheap talk similar to the European Stability
and Growth Pact. It is, however, likely that the German government will attempt
to avoid the embarrassment of an immediate failure of the debt brake. Given
the high level of current deficits – for 2010, a deficit of 4 percent of GDP is
predicted – the necessity for fiscal consolidation is obvious.
Some recent developments will support consolidation. Earlier in 2010, the
Constitutional Court has ordered a re-calculation of benefits for long-term un-
employed persons. The Court has, however, not enforced an increase in benefits,
as has been feared by the government beforehand. The problem identified by
the Court was a lack of transparency in the calculation of benefits, not the actual
amount. The result of the new, transparent calculation is that appropriate ben-
efits are not higher than the status quo. In terms of the fiscal burden, this was a
huge relief relative to alternative scenarios that have been considered prior to the
ruling of the Constitutional Court. Similarly, the current, relatively rapid growth
of Germany’s GDP and the positive macroeconomic indicators for the near fu-
ture lead to an expectation of increasing tax revenues and a relatively smooth
path of fiscal consolidation.
There are, however, also significant risks. Amidst the turmoil of the Europe-
an debt crisis, interest rates on newly issued German public debt are increasing,
albeit from a very low level. Even if there will indeed be no formal introduction
of Eurobonds, as the current political situation suggests, debt service is likely to
become gradually more expensive for Germany, with the eventual extent of the
effect still being very uncertain.

Summing up, it is not unlikely that current macroeconomic developments, in
conjuncture with the newly introduced debt brake, will force Germany to choose
between significant spending cuts and tax increases sooner rather than later.
Italy
Giorgio Brosio
University of Torino
A fiscal status quo expected to last
Tax policy changes have been practically absent during 2010. This is under-
standable considering the working of two forces pulling in opposite directions.
The first one refers to tax reductions. Italian taxpayers are expecting the tax
reductions long time promised to them by the government and which are badly
needed. The second one refers to the precarious financial conditions of the pub-
lic sector. International financial investors would severely penalize any reduction
in revenue that would not be accompanied at least by an equivalent reduction in
public expenditure. In other words, an alleviation of the tax burden could take
place only at the cost of a greater reduction of public expenditure that is quite
difficult to implement in the present times. Hence, tax changes are to stay almost
necessarily minimal, until a substantial recovery in the economy will take place.
This remains quite unlikely in the short run. Italian GDP growth remains
among the lowest in the euro area and has been slowing down during the year.
According to the most recent estimates by the Bank of Italy, GDP growth has
been in the order of 1.0 per cent in 2010, will stay the same in 2011 and will
slightly increase to 1.3 per cent in 2012.
The main impetus to economic activity continues to come from exports, but
the international competitiveness of the Italian economy remains insufficient
and there are no government efforts to improve it. The contribution of domestic
demand remains not only modest, but has even diminished in connection with
the slowdown in investment in machinery and equipment following the termina-
tion of tax incentives. Households’ spending continues to be governed by cau-
tion, in view of the weakness of disposable income and the bleak perspectives
Italy • Giorgio Brosio 81
about resumption of employment. A good fiscal stimulus through tax conces-

sions would greatly help, but it is presently incompatible with EU regulations and
with the present situation of the Italian public finance.
Tax policy
As mentioned above, actual tax changes, adopted with Decree Law 78/2010,
have been minimal. They consist in a few measures aiming at increasing revenue,
partially matched with other measures impacting negatively on collections. As a
result of their combination, a net additional revenue of €4.1 billion is expected
for 2011.
The measures that increase revenue are mainly in connection with the fight
against tax evasion. The most important provisions concern: the introduction
of caps on the possibility of offsetting tax credits and debits; the strengthening
of assessment and actual collection of tax dues, above all by reducing the time
between the notification of assessment and forced execution; the strengthening
of controls on firms that systematically make losses or close within a year of
opening for business; the obligation made to taxpayers to give electronic noti-
fication to the Fisc of any transaction of €3,000 or more subject to VAT; some
changes to the rules on table-based assessment of income; the application of the
OECD guidelines on the documentation of transfer prices; and the application
of a withholding tax to payments for restructuring works in residential property
subject to tax benefits.
Other increases in revenue derive mostly from the introduction of charges on
sections of the motorway network that were still exempt and from increases in
the cost of motorway concessions and the updating of the property register with
the inclusion of previously unrecorded buildings. The measures that decrease
revenue mainly concern the possibility of reducing, in a future decree, the size of
the payment in advance of personal income tax due for 2011.
As it can be seen, all these measures should concur to reduce tax holes and
opportunities for evasion that remain very high.
Fiscal federalism and debate on tax reform
Mention has been made in the previous Report on Italy of the approval in
June 2009 by Parliament of law 42. The law authorizes the government to is-
sue decrees to determine the revenue system of regional and local governments
implementing the constitutional reform of 2001. The law is quite complex. Some
progress has been made concerning the financing system for Regions, whose
basic functions will be funded mostly by grants. During 2010 the government
has advanced a proposal for Municipalities that is currently under discussion.
The proposal is based on the introduction of a new municipal tax that will merge
together a number of existing taxes, such as: the present property tax that is pres-
ently levied only on commercial and industrial property; the tax on refusal collec-
tion and, other minor taxes. In addition, Municipalities will also benefit from the
devolution to them of the existing tax on the transfer of property and of the part
of the personal income tax that refers to the rent from property. More precisely,
the income from rent of property is presently included in the personal income
tax, which is a central government tax and on which sub-national governments
can levy their own surtaxes (which are, however, presently frozen). According to
the proposal the rent from property will be taxed with a separate 20% flat tax
and the collections will be transferred to Municipalities. By ceding to Municipali-
ties the revenue from the transfer tax on property and the revenue on income
from rents on property, the government intends to compensate them for the loss
of municipal real property tax on the first residences that was introduced since
2009.
Table 1. Summary of recent tax policy measures
Tax changes
Tax rebates leading to revenue
increases
Fight against tax evasion 5 063
Of which
Strengthening of assessment and collection 955
Ban on offsetting credits 700
Electronic invoices 628
New presumptive income tables 741
Regularly loss-making and “open and shut”
633
firms
10% withholding tax on building renovation
756
payments
Application of OECD transfer pricing

651
guidelines
Other 1 351
Reduction in personal income tax payments on
account
- 2 300
Other
- 18
Net effect 4 097
Budget policy
In 2010 tax revenue recorded in the state budget fell by 1.0 per cent. The
fall is mainly due to the expiration of the foreign assets disclosure scheme that
had been introduced the previous year and that had contributed in a substantial,
although temporary way, to revenue collection. A factor of opposite sign was
the postponement of receipts to 2010 as a result of the temporary reduction in
the percentage of the personal income tax payment on account due at the end
of 2009. Personal income tax receipts, buoyed by that measure, rose by 4.5 per
cent. VAT receipts registered relatively high growth of 4.6 per cent, fuelled par-
ticularly by those from imports, while receipts from flat-rate withholding taxes
on income from financial assets fell significantly, by 42.5 per cent, due to the fall
of dividends (particularly from banks) and to the generally very low rate of inter-
est on bonds and other fixed income instruments and those from excise duties
decreased by 5.7 per cent.
The government has also tried to contain expenditure operating in the two
areas: sub-national finance and social protection, where there still is some sub-
stantial meat” to cut. More specifically, Regions, Provinces and Municipalities are
required to reduce significantly their expenditure following a substantial cut to
grants to them. A significant contribution is also expected from the measures re-
garding social security, which are expected to produce progressively larger savings
over the three years. In particular, these measures concern: the postponement of
the starting date for pensions that mature after 31 December 2010 (setting the
interval between the retirement date and the payment of the first monthly instal-
ment equal to 12 months for employees and 18 months for self-employed work-
ers); the payment of public-sector severance pay in excess of €90,000 by instal-
ments (in two or three annual payments depending on whether the amount is less
or more than €150,000); and the tightening of checks on disability pensions and
of the requirements for eligibility for such assistance. The government has also
mandated cuts in the spending of Ministries by reducing budget appropriations
by 10 per cent, including on capital account, which reduce expenditure by €2.1
billion on average per year. Major adjustments are also made to the compensa-
tion of better-paid employees in the public sector with cuts amounting to €1.4
billion on average per year. This result derives from the freezing of individual
pay at the 2010 level, the extension to 2012 and 2013 of the 20 per cent limit on
the replacement of departing staff in central government (excluding the police
forces, firemen and university teachers, to whom less stringent limits apply), and
the postponement to 2011 of the effects of the reorganization of careers in the
security sector and the armed forces. Provision has also been made aimed at re-
ducing pharmaceutical expenditure, primarily by reducing the margin of whole-

salers and pharmaceutical companies.
As a result, the deficit of the public sector has been contained. More precisely,
the ratio of net borrowing to GDP fell in the first three quarters of 2010 com-
pared with a year earlier by 0.4 percentage points to 5.1 per cent. It has also to be
mentioned that primary expenditure decreased by 0.4 per cent: capital expendi-
ture contracted more sharply, by 18.2 per cent, while primary current expenditure
expanded by 1.2 per cent due to the growth of 2.4 per cent in social benefits. The
available information suggests that net borrowing in 2010 should be lower than
expected and should contract further in the following years. Despite all these
efforts the ratio of public debt on GDP continues to raise, given the practical
immobility of the denominator of the ratio.
Italian public finances are still in a precarious state that could worsen abruptly
should the world economy recovery and monetary policies lead to an increase of
interest rates.
Table 2. Italy Net borrowing and debt as a % of GDP
Net borrowing
2009 2010 2011
5.3% 5.0% 3.9 %
Debt as a % of GDP
2009 2010 2011
116.0% 118.5% 119.2 %
Lithuania
Kaetana Leontieva
Policy Anlyst, Lithuanian Free Market Institute, Vilnius
Lithuanian taxpayers experienced drastic tax increases in 2009, yet higher tax
rates did not bring in as much revenue as the government had expected. Despite
widespread public encouragement for lowering taxes, the government decided
to decrease only the corporate income tax back to its previous level, while other
tax increases remained in effect. At the end of 2010, personal income tax for in-
dividual business activities decreased threefold and double taxation of payments
to board members was abolished. Although some beneficial changes were indeed
made, the government failed to sort out very sensitive issues such as a require-
ment for all individuals to pay health insurance tax even if they have no income.
Budget Deficit and Public Debt
Lithuania had quite a low public debt to GDP ratio when it was hit by an eco-
nomic crisis in late 2008. Since then, the growth of public debt has been stagger-
ing: total public debt in absolute terms has more than doubled between 2008 and
2010. The ratio of public debt to GDP has grown from 16 percent of GDP in
the end of 2008 to 36 percent of GDP in September 2010. According to official
forecasts, at the end of 2011 total public debt will reach 40 percent of GDP.
As projected by the law on state budget, state budget deficit in 2010 will
amount to 37 percent of state budget revenues (excluding revenues from EU
funds), while state social security fund budget deficit in 2010 will be around 27
percent of its revenues (5.2 and 2.8 percent of GDP, respectively). According to
2011 budget laws, budget deficits are expected to be lower – state budget deficit
is projected to be 15 percent of its revenues, and state social security fund budget
Lithuania • Kaetana Leontieva 87
deficit is expected to come up to 24 percent of its revenues (5.6 and 2.7 percent
of GDP, respectively). Total deficit of the public sector in 2011 is projected to be
5.8 percent of GDP. It should be noted that the state budget revenue projections
appear to be very optimistic. However, for the first time in Lithuania’s history
the law on state budget includes a clause ensuring that if revenue projections are
not being met, a draft law amending the law on state budget will be drawn up to
prevent the total deficit from exceeding 5.8 percent of GDP.
Most Important Tax Law Changes
Personal Income Tax
As of 2010, new rules on taxing income-in-kind came into effect. Previously,

a governmental decree specified which income was regarded as income-in-kind.
This list included property or services provided to an employee instead of salary
payments, which had to be evaluated according to the market value of that prop-
erty or services. After the law on personal income tax was changed at the end
of 2008, the law specified which income was not regarded to be income-in-kind,
while a new governmental decree produced in mid-2009 stated how to evaluate
certain types of income-in-kind, among them the use of automobiles belonging
to an employer or any other person and privileged loans with lower interest rates.
The government’s original plan was for the new decree to come into effect on
July 1, 2009, yet due to public outrage it pushed back its coming into effect to
January 1, 2010. It should be noted that since 2002, companies cannot deduct
VAT of purchased automobiles and even though income-in-kind from automo-
bile use is now being taxed, VAT taxation of automobiles has not changed.
At the end of 2010, a new law on personal income tax came into effect which
decreased personal income tax on individual business activities and agriculture
from 15 to 5 percent. The lower tax rate will not be applied to “free professions”
(which include lawyers, bookkeepers, doctors, journalists, and the like) and to
income from stocks. Prior to the new law, tax-exempt income from agriculture
was based on the size of farming area, yet as of 2011 agricultural income is
tax-exempt for those farmers not registered as VAT payers (registration as VAT
payer is mandatory if the total value of goods supplied in any one calendar year
exceeds 100,000 LTL or €29.000).
The new law excludes selling or renting real estate from the definition of indi-
vidual business activities. This means that income from real estate will be taxed at
the standard 15 percent rate, unless that property was the seller’s residency or has
been in his possession for more than 5 years (previously, this limit was 3 years).
As of 2011, individuals will be able to deduct bad debts from their individual
business income if certain criteria are satisfied, for example, if an individual can-
not retrieve them for more than a year.
As of 2012, individuals who pay a fixed amount income tax and then register
as VAT payers will no longer be able pay a fixed income tax and will have to pay
5 percent income tax.
Mandatory health insurance contributions
Until 2009, Mandatory Health Insurance Fund was funded by personal in-
come tax revenues, while during the reform personal income tax was decreased
and new mandatory health insurance contributions were established. In the first
year of these contributions’ existence, some of their most illogical provisions
were abolished. In 2009, mandatory health insurance contributions were levied
on such inactive income as dividends and rent income, yet as of 2010 such in-
come is exempt from mandatory health insurance contributions.
Scandal broke in early 2010, when taxpayers received preliminary tax declara-
tions and learned that even if they did not receive any income during the year
they were obliged to pay mandatory health insurance contributions based on a
minimum wage (monthly contribution payments amount to LTL(Litas) 72 or €
21). Thus, individuals were forced to pay for “insurance” they were never able to
benefit from and if they had used public health services in 2009, their expenses
were not compensated by the state. Since the state pays mandatory health insur-
ance contributions for those registered unemployed, there was a surge in unem-
ployment figures after this scandal as a number of individuals officially registered
unemployed in order not to pay the contributions. This provision of the law
remained in effect throughout 2010, meaning that some individuals may learn in
early 2011 they owe taxes to the state.
Beginning 2011, individuals whose mandatory health insurance contributions
are paid by the state and who buy business certificates and pay a fixed amount of
mandatory health insurance contributions will be able to pay this tax based on
the number of days their business certificate is valid, rather than for the whole
month.
However, even though the most obvious mistakes were abolished, further il-
logical provisions remain in place. For example, individuals who receive salaries
and simultaneously receive income based on author’s contracts have to pay this
tax twice, even though paying more does not mean they get more or better ser-
vices. This is because these contributions do not buy an insured person a definite
set of products: all individuals gain access to exactly the same services regardless
of contributions paid. This tax is mandatory for all individuals, while the state
pays contributions for more than 2/3 of the population (pensioners, children,
etc.).
Corporate Income Tax
Corporate income tax rate was increased from 15 to 20 percent as of 2009,

yet the higher rate was in effect for only a year as the Coalition government ad-
mitted increasing the rate was a mistake and brought it back down to 15 percent.
Dividends are still taxed at 20 percent personal income tax rate.
Along with the lower rate for regular businesses, corporate income tax rate
was also reduced for small businesses. Before 2010, tax rate of 0 applied to the
first LTL 25 000 of small businesses’ taxable profit; further profits were taxed
at a rate of 20 percent. As of 2010, a tax rate of 5 percent applies to all taxable
profit of small businesses. The definition of a small business was revised, with
the maximum amount of income to qualify being reduced from LTL 1 million to
LTL 500,000 (€ 290 000 and € 145 000, respectively).
An important change to corporate income taxation was that group taxation
of corporate profit came into effect on 1 January 2010. Groups are able to bal-
ance profits and losses: losses can be transferred among different entities of a
group if the controlling entity holds at least 2/3 of the shares of the controlled
entity.
Beginning 2010, interest income when its source is in Lithuania and it is paid
to companies registered in the European economic area became tax-exempt.
This provision makes it cheaper for local companies to borrow abroad. Other
new provisions of the law on corporate income tax allow companies to deduct
expenses on employees, if those expenses are included in the base of the em-
ployee’s personal income tax.
An important change to corporate income taxation just came into effect on

January 1, 2011: payments to board members will no longer be treated as ex-
penses that are not deductible, thus, double taxation of these payments will be
eliminated and they will be taxed only with personal income tax.
Value Added Tax
Numerous changes were made to the law on value added tax that came into
effect on 1 January 2010. The most important concerned the relevant location of
services’ provision, in accordance with the new services’ VAT directive 2008/8/
EB. Prior to the new rules, location of services’ provision was deemed to be
where the provider of a service was established. Since 2010, in business-to-
business transactions the location of services’ provision is that where the buyer
of the service is established. The new rule ensures that the VAT is paid in the
country where the service is being used. One exception to this rule was cultural,
art, education and similar services, which were considered to be provided in the
country of the seller if they were physically provided (or performed) here. This
will change in 2011, when such services provided to VAT payers will be consid-
ered as being provided in the country of the buyer.
When services are provided to individuals who are not VAT payers (business-
to-consumer), the old rule applies, that is, the service is deemed to be provided
where the service provider is established.
Council directive also envisioned a “one-stop” principle for receiving refunds
of VAT paid in EU member states. As of 2010, VAT payers registered in Lithu-
ania can submit electronic requests for VAT refund to the local tax administrator,
rather than deal directly with other EU tax administrators, which is a consider-
able simplification for VAT payers.
At the end of 2010, the parliament amended the law on value added tax
and extended the use of VAT reduced rates. Reduced rate of 9 percent applied
to heat energy, hot and cold water was set to expire on August 1, 2011 and the
parliament extended it to December 31, 2011. Reduced rate on books and non-
periodicals was set to expire on December 31, 2010, while the parliament abol-
ished a reduced rate expiration date for such products. Deadline for applying a
reduced rate on medicine and other medical services compensated by the state
was extended from December 31, 2010 to December 31, 2011. Importantly, a
new reduced rate can be applied to hotel and special housing services throughout
2011. Reduced rate on hotels was previously abolished in the end of 2008.
Excise Duties
As of 1 January 1 2010, electricity in Lithuania became an object of excise

duties. The rate for business use of electricity is LTL 1.8 (€ 0.5), twice less than
for non-business use – LTL 3.5 Litas (€ 1.01). Excise duty on electricity is not
levied on electricity used in electricity production, distribution or transmission;
electricity produced by energetic renewable resources; electricity used by private
households; electricity exports or delivery to other member states, etc.
In the end of 2010 the Parliament voted in favour of reducing excise duty
levied on alcohol products from LTL 4,416 to LTL 3,200 per hectolitre of pure
alcohol (€ 1,280 and € 928, respectively). However, President of Lithuania Dalia
Grybauskaite vetoed alcohol excise duty reduction as a sign of her fight against
widespread use of alcohol products and alcoholism. The parliament decided not
to overturn the president’s veto.
Some changes were made to the law on excise duties in late 2010, namely, an
increase on excise duty levied on gas oil from LTL 947 to LTL 1,043 per 1,000
litres (€ 274 and € 392, respectively), on cigars and cigarillos from LTL 38 to
LTL 80 (€ 11 and € 23, respectively), and on smoking tobacco from LTL 111 to
LTL139 (€ 32 and € 40, respectively) as of 2011. Excise duty on smoking tobacco
is set to increase throughout the next decade, rising to LTL163 (€ 47) in 2013,
LTL187 (€ 54) in 2015 and LTL 208 (€ 60) in 2018.
During the past few years, excise duties on tobacco in Lithuania were in-
creased threefold in order to meet EU minimum requirements. As of 2011, a
new rule of minimum excise duty on cigarettes applies, which states that mini-
mum excise yield of € 64 per 1000 cigarettes applies not only to cigarettes of
most popular price category, but to all cigarettes. This rule increases excise duty
on cheaper products without proportion.
Social Security Contributions
Social security contributions rate for regular employees remained stable

throughout 2010 and is not set to change in the near future. The contributions
rate did increase for recipients of royalties, sportsmen, performers and farmers,
who were brought into the state social security system as of 2009. Beginning
2010, a distinction was made between those individuals who simultaneously have
employment contracts and those who do not. Social security contributions are
levied on half of the royalty, performance etc. income received by individuals
without employment contracts. For others, contributions are levied on full in-
come. In 2010, social security contributions for individuals with employment
contracts amounted to 16% of their income. and in 2011 the rate will be in-
creased.
Throughout 2010, changes were made to social security contributions paid
by owners of individual businesses. Since owners of individual business by law
cannot have employment contracts with their business, social security contribu-
tions are levied on all income taken out from the business. As of 2010, a mini-
mum amount of social security contributions came into effect and owners had
to pay it regardless of their business income. This change caused uproar among
the public, which regarded the change as being unfair. In mid-2010 parliament
passed amendments to the law on social security, making social security contribu-
tions temporarily optional for individual business owners. This provision is set to
expire on 1 January 2012.
Real Estate Tax
Currently, real estate tax is levied on real estate owned by companies or by

individuals that use it to engage in business activities, while residential real estate
is not taxed. Current right-wing government has included introducing real estate
tax on residential property in its program and in May 2010, Ministry of Finance
produced five possible alternatives for this tax. Four of the five alternatives deal
with different ways to calculate tax-exempt value of the first property, while the
fifth alternative suggests taxing second, etc. property. No agreement was reached
on which of the alternatives to choose and the debate on introducing residential
property tax has died down, although it may resurface in 2011.
Future Prospects
It would be difficult to predict whether Lithuanian tax rates will remain stable
throughout 2011. A moratorium on tax rates was in place in 2010, yet it has
expired, so in case of a budget revenue shortfall, there could be attempts to in-
crease standard VAT rate. Discussions on progressive income taxation will likely
continue without any results, while discussions on taxing residential property
may gain a more concrete form as the government could seek to implement its
program.
Luxembourg • Serge Tabery 95
Luxembourg
Serge Tabery
Avocat à la Cour
Tabery & Wauthier, Luxembourg
After two difficult economic years in 2009 (with a yearly economic recession
of 3.4% of the GDP) and 2010 (with a yearly economic recession estimated at
2.2% of the GDP), the recent encouraging macro-economic figures in the last
months of 2010 have induced Luxembourg government to lighten a series of tax
measures aiming at increasing state resources.
The measures are brought together in the 2011 financial Law regarding the
financial and economic crisis. The law has been drafted with clear goal to return
to a balanced budget in 2014 at the latest although a deficit amounting to 1.2%
of GNP is still forecasted in 2011.
From the projection made end of 2010, the overall financial ambition would
be to reduce public debt so that it reaches between € 17.8 billion in 2014, if gen-
eral expenditure were not drastically reduced, and €12.9 billion with appropriate
measures.
Early in 2010, OECD experts have warned the authorities on the heavy bur-
den that could generate the retirement charges – the payment of pension monies
– should nothing be done to substantially revise the present system. This system
is indeed among the most generous ones in Europe and it depends for its sur-
vival from a sustained and continuous growth, which is by no means certain. It
could therefore simply become unaffordable within the 20 coming years.
Are also criticised the automatic indexation of wages, linking wage increases
to inflation as well as the extremely high level of the minimum salary € 1.724,81
(at the index level of 1.719,84 on 1 July 2010).
Needless to add, politicians hope that an economic turnaround in the two
coming years will save them – one knows however well enough that this scenario
is overoptimistic –, or that inflation will painlessly help blow up the public debt
– one also knows that this is no longer regarded as a serious threat and that it
generates, anyway, other pains in the long run–, unless they carelessly hope for
the two.
Tax measures for individual taxpayers
New measures applicable as from the 1 January 2011 are as follows.

◘ A new, higher, maximum tax rate of 39% has been set. All tax payers earn-
ing income exceeding € 41,793 for single tax payers (tax payers of class I) and
€ 83,586 for married tax payers (more precisely, married or in partnership) (tax
payers of class II), will be subject to a maximum tax rate of 39% versus the rate
of 38% applicable until 2010.
◘ A “crisis contribution”-- in clear, a new tax--set at the rate of 0.8% will
also be levied. It is supposed to be temporary for the years 2011 and 2012 only,
although in a subsequent release the government has indicated that it would not
even be applied in 2012.
◘ The so-called “solidarity tax”, that already was in place, will be increased
in 2011 from 2.5% to 4% or 6% of taxable income for taxpayers earning re-
spectively over € 150,000 (if class I taxpayes) and over € 300,000 (if class II
taxpayer).
This means an effective maximum tax rate of 42.14% for high income. It is a
very bad signal for non-residents possibly contemplating moving to Luxembourg
and in particular HNWI (High Net Worth Individuals) which the authorities en-
deavour to attract. In contrast, the situation for residents earning income from
sources other than lucrative activities--salaried or self-supporting person whose
income is essentially derived from ones own estate, remains luckily unchanged. If
carefully planned, even the 10% withholding tax on interest (2005 “Relibi Law”)
can be avoided.
Further cuts in tax benefits have also been introduced such as notably the
withdrawal of children allowances after the age of 18, which is particularly harsh
for parents having children pursuing university studies who so far could count
on such allowances during the whole course of studies. Meanwhile a new system
of “cheap” loans is put in place for local resident taxpayers if and only if their
children continue university level studies abroad.
This measure is therefore causing a lot of damages to the thousands of in-
habitants of the neighbouring countries who commute every day to come to
work in Luxembourg. They immediately loose all children allowances, as they will
not be entitled to receive them in their country of residence where they are not
contributing to the national security system.
Tax measures for companies
The novelties for 2011 are:

◘ The provision of a minimum corporate income tax effectively for
SOPARFIs
A minimum corporate income tax is set at € 1,500 for companies incorpo-
rated under the form of ordinary commercial limited liability companies which
do not need to obtain a business permit from the authorities.
Luxembourg imposes that, before starting its activity, any company irrespec-
tive of its form must apply for a so called business or trading permit from the
Ministry of the Middle Classes. The permit is granted, if in line with its corporate
object clause, on the basis of the future company’s management education and
competences.
This tax is therefore mainly geared towards financial companies, that is those
for which more than 90% of the assets consists of participations, securities or
bank deposits and in particular the SOPARFI. This financial investment company
enjoyed so far the very favourable tax exemption on participations dividend and
capital gains income (for further details see: S. Tabery “The SOPARFI, Financial
Investment Companies in Luxembourg – August 2010” see www.tabery.lu ).

This amount will be increased by the special contribution for the employment
fund and therefore reach € 1,575 for any such company.
◘ Increase of the overall contribution to the employment state fund by 1%
from 4% to 5%.
◘ Increase by 1% of the investments tax credits. Tax credit for global invest-
ment increases from 6% to 7% for investments up to € 150.000 and from 2% to
3% for amounts above. Also, tax credit for complementary investments increases
from 12 to 13%.
◘ Increase of the maximum rate for special depreciation from 60% to 80%
for investments in the interest of the protection of environment and in energy
savings.
◘ Cap of tax deductibility for companies of farewell or departure monies – ef-
fectively golden handshakes – which will no longer be deductible for the portion
exceeding € 300,000. The tax treatment of such monies, in the hands of the ben-
eficiaries, is not concerned by this measure.
◘ Since the 1 November 2010 regulation, a much tighter and tougher control of
employees or workers on sickness leave is applicable. Outings are no longer permit-
ted during the first five days of the sickness leave, absolute prohibition, unless for a
medical visit and from the 6th day on, outings are not permitted before 10 am and
after 6 pm. One can only support this new regulation which is deemed to prevent
abuses as it legitimately prohibits sport or social activities or going to a restaurant
when one is supposed to be ill. Effective controls will for sure take place.
◘ No corporate tax rate or municipal business tax rates increases are to be ex-
pected. However due to the increase of the overall contribution to the employment
state fund, the total corporate taxes rate will be of 28.8% in Luxembourg City in
2011 instead of 28.59% in 2010 (21% for corporate income tax increased of 5%
and 6.75% for municipal business tax in Luxembourg which is the most expensive
municipality: 21x 1.05 + 6.75)
Overall grants for companies will be reduced by 10%.
Tax highlights
The well-known 1929 Luxembourg Holding Company, whose tax privileged

status has been abolished by the law of The 28th of December 2006, has been
in operation until the 31st of December 2010. It no longer is possible to set up
such companies that will have served many purposes since 1929, which is a very
good example of the Grand Duchy’s stability and of the length of service of
Luxembourg laws. If they have not been converted into SPF (société de patri-
moine familial – private family estate company) before the 31st of December
2010, all remaining Luxembourg 1929 Holding companies have automatically
been converted into fully taxable companies subject to the ordinary corporate
tax regime.
As of the 1 January 2011, the standard corporate tax is at the rate of 28.8%
including the Corporate Income Tax at 22.05% (increased with the employ-
ment fund contribution of 5%) and the Luxembourg Municipal Business Tax
of 6.75%.
The Luxembourg tax authorities have published two tax circular letters on the
12th of January 2010 (direct taxation) and the 17th June 2010 (registration tax
and VAT) concerning Islamic Finance that allow the implementation of transac-
tions and instruments conforming to the Charia without domestic tax downsides
or obstacles.
As of the 1 January 2011, more than 60 tax treaties are in force with Austria,
Armenia, Azerbaijan, Belgium, Bahrain, Brazil, Bulgaria, Canada, Czech Repub-
lic, China, Denmark, Estonia, Finland, France, Estonia, Germany, Great Britain,
Greece, Hungary, Iceland, Indonesia, India, Ireland, Israel, Italy, Japan, Latvia,
Lithuania, Malaysia, Malta, Mauritius, Mexico, Monaco, Mongolia, Morocco,
Norway, Poland, Portugal, Qatar, Romania, Russia, Saint Martin, Singapore, Slo-
vakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Thai-
land, The Netherlands, Trinidad and Tobago, Tunisia, Turkey, the United Arab
Emirates, the United States of America, Uzbekistan, Vietnam.
Conclusions
2011 is expected to be the last transition year, from crisis to growth, as was
2010.
In this context, the burden of taxation is being increased significantly for
individuals and companies that, until now, had been relatively protected in order
for the Grand Duchy to remain an attractive place for business.
Indeed, Luxembourg’s economy is much dependent from its attractiveness
for foreign investments and this attractiveness comes in large part from its tax
and legislative assets. Hence, any tax increase inevitably harms its competitive-
ness. In addition, it is worth mentioning that from an internal point of view, the
top 3.79% of the tax payers contribute to 42.5% of the total direct tax revenue
and that 15% of them contribute to 75% of it or that 5% of them contribute
for 51% to total direct tax revenue (Prime Minister’s declaration on the Nation
state of May 2010), thereby making of any tax increase a very dangerous weapon
to use.
Regrettably, one hardly sees courageous measures for fundamental structural
reforms. The biggest part of the effort does indeed lie on the taxpayers, big and
small, not on the beneficiaries of the State expenses, including State’s manage-
ment. It is clear that States’ expenses continue to grow faster than its revenues
permit; which is unacceptable.
It is obvious from the EUROSTAT figures and from the 2011 budget that
the ordinary State current operating charges have and will continue to increase,
for some of its segments by double digits figures. But on top of that one must
considers the fact that other expenses are coming from entities which are not
“the State” but are nevertheless “controlled or mainly financed by the State”
have been separated from the State’s budget. Not only do those expenses sub-
stantially increase but also it may become more difficult to draw a complete and
trustworthy picture of public finances because of the lack of transparency that
consequently prevails. This trend has severely been criticised and will hopefully
be corrected in the very near future.

Should one add the all but reassuring pension issue, which, as the OECD
experts have underlined, will become unbearable if the naïve belief remains in-
tact that growth will pay for the future generations retirement monies, one can
conclude that Luxembourg must during this year prepare for the huge challenge
that a sound management of public finance demand.
The Netherlands
Hans van Engelen
Tax partner at Independium – International Tax Advisers, Amsterdam
A first step towards recovery
The Netherlands are gradually recovering from the credit crisis and its con-
sequences. Unemployment is falling and positive economic growth, partly driven
by the export to Germany, is back (3% in 2010). The government has also set a
new trend, reducing the deficit of the State Budget. No major changes in the tax
system were introduced, although a fully new income tax system is considered
which might involve a flat tax considering the preference for such system by one
of the major political parties currently associated to the government.
Budgetary changes per 2011
On September 21, 2010 the State Budget 2011 was presented. This bud-
get gives rise to many questions about the path chosen for economic recovery.
Dutch public finances have, due to the credit crises, substantially deteriorated so
that strong measures are needed to keep them afloat and healthy. In the newly is-
sued Miljoenennota 2011 presenting the State Budget 2011, the first step is made
towards financial recovery; the idea being to replace last year’s stimulus package
with measures aiming at fiscal consolidation. In the Netherlands the transition
from stimulating the economy to improving the public finance situation coin-
cides with a change of political power.
In 2011 to further reduce the deficit of the State Budget, extra expenditures
undertaken to stimulate the economy will gradually be cut. In the Miljoenennota
the package of savings on public expenditures should reach €1.8 billion in 2011,
The Netherlands • Hans van Engelen 103
including the supplementary savings agreed upon by the coalition. Furthermore,

a package of measures to save € 3.2 billion on structural expenditures has been
adopted. More than half of this amount is supposed to be realised in 2011 al-
ready.
The public debt is likely to increase the next years from € 382 billion in 2010
to approximately € 406 billion in 2011 (66 percent of GDP). The budgetary
deficit will, however, decrease substantially with the combined effects of rising
income and expenditure savings. It will nonetheless remain high, around 4 per-
cent of GDP: The consequences of the credit crises will be tangible for a long
time, even when the economy picks up again.
In 2011 Dutch economy is expected to grow with 1,75 percent of GDP. This
means that the Dutch economy, after a historical negative growth of 4 percent in
2009, will face a relatively normal growth in 2011.
The Dutch government claims it has chosen a balanced package. The expec-
tation is that the purchasing power will slightly decrease. The consequences for
people becoming unemployed can however be substantial. The unemployment
rate is expected go up from 4¾ percent in 2009 to 5½ in 2010 and 2011.
Tax changes per 2011
A number of tax changes have been introduced per 2011. The majority of
these changes concern the corporate income tax:
In 2010 the royalty box was converted into the innovation box, enabling com-
panies to reduce the tax burden on the exploitation of self-developed patents to
5% corporate income tax (in 2009, 10%). Also the ceiling for profit falling under
the scope of the 5% taxation was abolished. In 2011 the innovation box will also
be applicable on profits generated before the patent is officially recognized.
A further reduction of the corporate income tax will be applicable: the first
bracket up to € 200,000 remains unchanged at 20% CIT, but the second and last
bracket drops from 25,5% to 25%.
The temporary measure for an optional carrying back of losses from 1 to 3

years is extended for another year. Losses carried forward, if preferred to the car-
rying back of losses over the past three years, will be reduced from 9 to 6 years.
Furthermore the loss compensation is limited to a maximum of € 10 million
per year.
The temporary measure for flexible depreciation, as a result of which assets
can be depreciated in 2 years, is extended for another year.
In order to reduce the administrative burden, the different non-taxable fixed
remunerations for expenses paid to employees will be replaced by a fixed 1.4%
of the employees income. There is a transitional period of 3 years in which the
employer can decide to use the old system or the new system.
The wage tax credit of 46% paid to employers engaged in a business involv-
ing research & development is maintained. The wage tax credit is maxed to a total
of wages not exceeding € 220,000. Above this amount, the wage tax credit is 16%
of the wages paid, above € 11 million of wages there is no wage tax credit.
The State old age pension AOW will per 2020 no longer start at the age of
65 but at 66.
Privacy and individual rights
The tax administration will get further legal possibilities in 2011 to enable
automatic exchange of information to non-EU countries regarding bank and
savings accounts. For the EU countries, the current possibilities will be amended
in such a way that other bank information, like insurance products and portfolio
investments, can also be exchanged.
Future developments
On 1 November 2010 the majority of the Dutch Parliament has declared that
it is time to review the current income tax system and to investigate the possibili-
The Netherlands • Hans van Engelen 105
ties of a fully new system. Currently this is being investigated; a proposal for a
draft plan for a new system is expected by the end of March, 2011.
One of the two parties forming the government coalition, the CDA, has
embraced the introduction of a flat tax already a number of years ago. It goes
without saying that the flat tax will be part of the considerations when coming
to a new tax system.
The introduction of a new tax system would help the tax administration to
realize the objective to cut expenses in the next 4 years by a total of € 400 mil-
lion. In this respect, it was announced that 5,000 jobs would be cut in the tax
administration in the coming years. Currently 30,000 people work for the tax
administration.
The Dutch government also announced a plan to cut the administrative bur-
den for entrepreneurs in 2011 by 10% in comparison to 2010.
Currently the Dutch economy seems to pick up, sparked by the increasing
export, of which a large part is linked to Germany which country seems to flour-
ish despite the credit crisis. Whether the Netherlands will be able to maintain its
growth depends for a large part on the economic achievements in our neigh-
bouring country Germany.

Norway
Jan I. Frydenlund
Attorney at Law
Advokatfirma Frydenlund
Macroeconomy - General
The oil and gas activity in the North Sea puts Norway in a rather enviable po-
sition in relation to most other countries. In recent years, we have seen that more
than 25% of the general government revenues have been generated from this ac-
tivity. These revenues are deposited in the Government Pension Fund Global*)
and the return from the Fund is used to finance the public sector.
The Government Pension Fund Global and the Government Pension Fund
Norway constitute the Government Pension Fund. The purpose of the Govern-
ment Pension Fund is “to support Government saving to finance the pension
costs of the National Insurance Scheme and long term considerations in the
spending of Government petroleum revenues”.
The Norwegian economy has performed better since the financial crisis than
most other industrialised countries. Following a downturn in the second half
of 2008 and a few months into 2009, economic activity picked up in the second
half of 2009. Nevertheless, I believe it is fair to say that the performance of the
Norwegian economy in 2010, on the whole, was somewhat weaker than expect-
ed. However, according to the Ministry of Finance, several indicators suggest a
somewhat brighter future with increased growth.
Mainland economy is expected to grow by approx 3.1% in 2011 (compared to
approx 1.7% in 2010). The unemployment rate in 2010 averaged approx 3.5%,
Norway • Jan I. Frydenlund 107
which is just a tad better than expected for 2011.

By the end of 2010, The Central Bank’s (Norges Bank) key policy rate had
increased by 0,75% since its lowest level ever in 2009. It is expected that this
trend will continue and that the Central Bank will carefully coach the increase of
the key policy rate in 2011, which will subsequently cause higher interest rates on
bank lending to households and to trade and industry.
Fortunately, Norwegian industry is less concentrated on ICT-products, cars
and other products that were most severely hit by the downturn in the global
economy. Furthermore, households’ debt ratio is high and since most borrowers
have floating rate loans, the speed and extent of the reduction in the interest rates
have kept and are still keeping households’ demands on a high level.
With the prospect of growth above trend in the Norwegian mainland econ-
omy in 2011, and expected stabilization (more or less) of unemployment, the
Norwegian Government proposed a budget for 2011 on par with the rather ex-
pansionary budget for 2010. The estimated non-oil and gas deficit is NOK 128
billion (€ 17 billion according to the exchange rate NOK/EUR by the turn of
2010).
The proposed 2011 budget implies an unchanged spending of petroleum rev-
enues in real terms. Measured as a share of the trend GDP for Mainland Norway
(ex oil and gas that is) the structural non-oil deficit is reduced by 0,2% from 2010
to 2011. This indicates a mild fiscal tightening.
Some of the main elements in the 2011 budget are:
◘ A structural, non-oil budget deficit estimated at NOK 128,1 billion.
◘ A structural non-oil deficit estimated at the same level in 2011 as in 2010
in fixed prices.
◘ A maintained overall tax level and tax revenue.
◘ A real, underlying growth in the Fiscal Budget’s expenditure expected at
approx 2,25 %, which is slightly below the average over the past 25 years.
The State’s net cash flow from oil and gas activities is estimated at approx
NOK 288 billion in 2011. Net allocation to the Government Pension Fund
Global is estimated at NOK 153 billion. The fund is estimated to reach a market

value of about NOK 3,360 billion by the end of 2011.
Employment
The turnaround of the Norwegian economy in the wake of the financial crisis
resulted, as predicted, in a somewhat weaker labour market. The increase in un-
employment, however, has turned out to be substantially less than in most other
industrialised countries; on average, only slightly higher in 2010 than in 2009. In
2011, unemployment is expected to reach an average of approx 3,6 % of the
labour force; - fairly low both in historical and international context.
However, the government still face the fact, compared with the OECD av-
erage, that sick leave and the percentage of individuals on disability- and other
social security benefits are high in Norway. Approx one out of five individuals in
the “working age” of the population are currently receiving benefits from health-
related schemes. No doubt some unemployment is hidden in these figures.
In the 2011 budget, the Government states its commitment to continue the
key features of what they call the “Norwegian welfare model”. In addition to
“cooperation and joint efforts, universal income insurance schemes and a broad
range of public services that includes health care, child care and education” are
stated as other key factors in the process of enhancing the Norwegian welfare
model.
Taxation
Total tax revenues in 2011are estimated at NOK 1 113,1 billion. The figures
consist of direct and indirect taxes from oil and gas activities (NOK 173,9 bil-
lion), other oil and gas revenues (NOK 139,1 billion), direct and indirect taxes
from Mainland Norway (NOK 737.6 billion) and other (mainland-) revenues
(NOK 62.5 billion).
The Norwegian tax system is characterised by a relatively high share of indi-

rect taxes by international standards. Value Added Tax (VAT) and excise duties
currently amounts to approx 32% of total tax revenue. Personal income tax and
tax on net wealth levied on individuals represent about 24% of the total tax rev-
enues. Corporate tax, (including employers’ part of social security contribution),
amounts to approx. 21% and tax levied on petroleum activities approx. 20% of
total tax revenues.
In the 2011 budget, the Government states the objective for its tax and fiscal
policies to be “to ensure public revenue, contribute to a fair income distribution
and a better environment, promote economic growth and employment in the
entire country and improve the functioning of the economy.”
The Government claims to have “strengthened the redistributive aspect of
the tax system through more stringent taxes on dividends and gains on equity
investments, [and] a fairer net wealth tax and inheritance tax”. All in all, in my
opinion, a rather bold statement about the fairness of taxes and, I believe, a
statement liable to rather strongly-worded protests from quite a few Norwegian
taxpayers.
Oddly enough, considering the tax level for individual taxpayers, the Govern-
ment, in the 2011 budget, expresses a wish to “encourage people to work”. In
order to achieve this goal, the Government is changing the tax rules to make it
more attractive for elderly people to continue to work, also when receiving pen-
sion benefits. These rules are, without doubt, the most important issue in the
2011 budget, from a tax point of view.
The previous tax limitation rules for early retirement and old-age pensioners
have been replaced by rules granting tax allowance for pension income. By way
of this allowance, the Government intends to insure individuals who only receive
the minimum pension that they will be spared from paying income tax (but not
net wealth tax) also in the future.
In order to maintain Norway’s position as (allegedly) one of the champions
among the countries fighting for a better environment, the Government contin-
ues to claim that further steps are taken to strengthen the tax system’s contribu-
tion to a “fair income distribution and to a better environment” (“green” taxes);
including to ensure revenues for common endeavours, - unemployment being
one.
The Government still claims to maintain 2004 tax level on a whole, at least for
a couple of more years, and that the changes of tax rules and/or the tax system
as a part of the yearly budget, mostly represent redistribution of the overall tax
burden, so that the rich will pay more and the poor will pay less. I dare say, we
have heard that “tune” before, and in my opinion, without any noticeable effect
for most common taxpayers. Keeping the “2004 tax rates” represents a nice
try and little more. For instance, new rules for calculating the taxable value of
houses, cabins and cottages and other real estate, as well as some other “tactical
moves” result in an increased tax burden for a lot of people and hits not only the
so called “rich”, but also a lot of “innocent bystanders”, including elderly people
that has worked hard all their life to be able to repay the loans they had to obtain
to purchase the house they are living in.
That said, I believe it is only fair to mention, in favour of the lawmakers, the
increased tax allowance and lower rates for inheritance tax enacted and put into
effect a couple of years ago. That was a step in the right direction, if only a small
one. Heirs still have to pay inheritance tax, not only on inheritance but also on
gifts they receive from individuals, which they (by law or testament) will inherit
in the future.
Looking to our “big brother” in the east, Sweden, the picture is, for some rea-
son or another, quite different. Not only were the inheritance tax and net wealth
tax abolished in Sweden some years ago, but special taxes on consumer goods
like cars, food, liquor etc., are also noticeably lower in Sweden than in Norway.
But, according to the Norwegian Government, the 2004 – 2006 tax reform
has been a success:
“By continuing the systematic changes in the tax reform within a stable tax
level, the Government is ensuring predictability in the tax system, making it at-
tractive to invest and do business in Norway. In 2010, [and 2011] the redis-
tributive aspect of the tax on net wealth will be enhanced further, environmental
taxes will be strengthened and important measures will be taken to combat tax
evasion”.
In regard to tax evasion, it is worth mentioning that Norwegian Tax Authori-
ties has since 2006, (in cooperation with the other Nordic countries), reached
agreements with a number of countries to exchange information in tax matters
in order to avoid tax evasion. Jersey, Guernsey, Isle of Man, Cayman Islands,
Bermuda, British Virgin Islands, Aruba and the Netherlands Antilles have all
signed such agreements in 2009. As for Switzerland and Luxembourg, informa-
tion exchange clauses have been included in the existing tax treaties between
these countries and the Nordic Countries. Furthermore, information exchange
agreements have been negotiated and expected to be signed in the near future be-
tween the Nordic countries and Gibraltar, Samoa, Cook Islands, Turks & Caicos
Islands, Anguilla, San Marino and Andorra.
Taxation, social security contributions and allowances: rates and

amounts
Further to the amended rules for taxation of pensioners, (see above), the fol-
lowing amendments (not exhaustive) deserve to be mentioned:
◘ VAT is introduced on purchases of electronic services from abroad when
the buyer is an individual.
◘ Tax on snuff and chewing tobacco is increased by 10%. Tax on other to-
bacco products and alcohol is increased by 5%.
◘ Gains on sale of holdings in housing cooperatives and housing companies
are no longer tax free.
◘ Municipal authorities are allowed to tax all commercial property that is not
explicitly exempt under the Property Tax Act.
The figures below show tax rates for 2010 and 2011 with the 2010 rate in
brackets.
Corporate/companies income tax

Ordinary income, incl. capital
income and capital gains (28%) 28%
Dividends distributed from a Norwegian resident (for tax purposes) limited

liability company to another Norwegian resident company or to a comparable
company resident within the European Economic Area (EEA) are normally tax
exempt under current Norwegian rules.
The same normally apply for dividends received by a shareholding company
resident (for tax purposes) in Norway distributed by another Norwegian resident
company or by a comparable company resident within the EEA.
A company not able to prove to be comparable with a Norwegian limited li-
ability company, fully and legally established according to the ordinary corporate
legislation in its country of residence and performance of genuine industrial
activity, will normally be hit by Norwegian CFC-rules (“NOKUS”), meaning the
above mentioned tax exempt rules on dividends do not apply.
Dividends received by a Norwegian resident (for tax purposes) limited li-
ability company on shareholding in a comparable company domiciled outside
the EEA are normally taxed in Norway as ordinary income, but with a right for
the receiving company under tax treaty rules or Norwegian domestic tax rules, to
deduct (“credit”) taxes withheld in the country of residence (for tax purposes)
of the distributing company.
Dividends distributed by a Norwegian resident (for tax purposes) limited
liability company to a comparable shareholding company resident outside the
EEA, is subject to withholding tax in Norway (normally 25%), unless protected
by tax treaty rules in force between the two companies’ countries of residence.
In tax treaty cases the “participation privilege” normally apply for companies,
implying reduced tax rates conditional upon a certain extent of shareholding,

normally minimum 10% of the share capital in the distributing company.
Personal income tax

Ordinary income (28%) 28%
Capital income (28%) 28%
Dividends received by a Norwegian resident (for tax purposes) individual on a

shareholding in a Norwegian resident limited liability company or as shareholder
in a comparable company resident (for tax purposes) abroad, are subject to or-
dinary income tax. Withholding tax paid to the distributing company’s country
of residence, are normally deductible in the Norwegian taxes levied on the same
income. Also, please see below under “Maximum effective marginal rates”.
Surtax on wage income and income from self-employment:

From (threshold) (NOK 456 400) NOK 471 200 (+3.2%)
Rate (9.0%) 9.0%
From (threshold) (NOK 741 700) NOK 765 800 (+3.2%)
Rate (12.0%) 12.0%
Social security contribution

Lower threshold for payment of employee’s contribution to
the National Insurance Scheme (NIS): (NOK 39 600) NOK 39 600
Wage income (7.8%) 7.8%
Income from self-employment
in the primary sector (forestry,
farming, fishing) (7.8%) 7.8%
Other income from
self-employment (11.0%) 11.0%
Pension income (3.0%) 4.7% (+1.7%)
Employer’s social security contribution

Varies, depends on the
geographical location
of the business 0.0% - 14.1%) 0.0% - 14.1%
Maximum effective marginal tax rates

Wage income, incl. employees’
contribution to NIS (47.8%) 47.8%
Self-employment,
primary sector, incl.
contribution to NIS (47.8%) 47.8%
Other self-employment,
incl. contribution to NIS (51.0%) 51.0%
Dividends and withdrawals,
including 28% corporate tax (48.2%) 48.2%
Special rules apply for calculating the basis for tax on dividends; - in some
cases also on interest income.
Pension income (43.0%) 44.7%

In some cases pension income is taxed at a maximum rate of 55%.
Allowances
- Personal allowance in Class 1 (single) is NOK 42,210 for 2010. Increased to
NOK 43,600 in 2011, i.e. + 3.2%.
- Personal allowance in Class 2 (supporting/single parent) is NOK 84,420 for
2010. Increased to NOK 87,200 in 2011, i.e. + 3.2%.
- Basic allowance in wage income. The 2010 rate, 36%, is unchanged for
2011. Lower limit is NOK 4,000 in 2010 and unchanged in 2011. Upper limit is
NOK 72,800 for 2010 and NOK 75,150 in 2011, i.e. + 3.2%.
- Basic allowance in pension income. The rate is 26.0% in 2010, proposed

unchanged in 2011. Lower limit NOK 4,000 in 2010, also unchanged for 2011.
Upper limit for 2010 is NOK 60,950 and NOK 62,950 for 2011, i.e. + 3.2%.
- The sum of basic allowance in wage income and the basic allowance in
pension income is limited upwards to the maximum basic allowance in wage
income.
- Special wage income allowance is NOK 31,800 for 2010 and unchanged for
2011. Taxpayers who only have wage income shall have the higher of the basic
allowance in wage income and the special wage income allowance.
- There are special allowances for: Disability etc., special tax allowance for
pensioners, taxpayers living in the northernmost areas of Norway (Finnmark
and Nord-Troms), seamen, fishermen, self-employed within farming/agricul-
ture, high expenses due to illness, payments to individual pension schemes, travel
between home and work site, union fees, saving schemes for young individuals
under 34 years of age, documented expenses for childminding and child care.
Tax on net wealth

Threshold, municipal tax (NOK 700,000) NOK 700,000
Rate, exceeding threshold (0.7%) 0.7%
Threshold, state tax (NOK 700,000) NOK 700,000
Rate, exceeding threshold (0.4%) 0.4%
Inheritance tax
Thresholds:
Level (1) (NOK 470,000) NOK 470,000
Level (2) (NOK 800,000) NOK 800;000
Rates:
Children/parents, level (1) (6.0%) 6.0%
Children/parents, level (2) (10.0%) 10.0%
Others, level (1) (8.0%) 8.0%
Others, level (2) (15.0%) 15.0%
Discount on non-listed shares. The discount applies to shares in non-listed

limited liability companies and shares and shares in general partnerships. The
ceiling on the amount that enjoys this discount for inheritance tax purposes is
limited to NOK 10 million for shares as mentioned.
Depreciations rates
Depreciation rates for tax purposes varies from 2% (business buildings) to
30% (office equipment etc.) per annum calculated on a declining basis and de-
pending on type of asset.
Value Added Tax (VAT)

The Ordinary rate is 25%. Reduced rate (14%) or Low rate (8%) and even
zero-rating apply in some cases.
Norwegian VAT legislation contains rules for adjusting the basis for VAT
when certain assets (real estate, for example) change ownership.
Stamp duty
Stamp duty on acquisition of real estate is 2.5% of the sales price.
Summing up
Thanks to a rather sound economy, (mainly due to oil and gas revenues) at the
time the financial crises hit, the recovery of the Norwegian economy has con-
tinued through 2010, although at a somewhat slower pace compared with 2009.
This however, must be viewed in light of the fact that the impact of the financial
crisis on the Norwegian economy was less severe than on the economies of most
of Norway’s trading partners.
The growth is expected to continue in 2011, supported by relatively low in-

terest rates, greater optimism among households, increased investment in the oil
and gas sector and increased demand from export markets.
Unemployment has increased slightly, and substantially less than expected,
over the past couple of years, a trend expected to continue in 2011.
Tax rates and bases tend to increase over time. For a given structure of the
tax system this provides increased tax revenues to the public sector. For the
years ahead, the underlying growth of the tax bases is estimated to strengthen
the budget by approx NOK 12 billion per year. This estimate takes into account
that increasing real wages implies higher average price growth for budget items
than the average price growth for the tax bases.
The spending of oil and gas revenues in 2011 is expected to equal (more or
less) the real return on the Government Pension Fund in 2012, which indicates
more room for spending some extra oil and gas revenue the next couple of
years.
Sources: Publications of Finansdepartementet (Ministry of Finance) and Statististisk

Sentralbyrå (Statistics of Norway).
Poland
Jarosław Kantorowicz
Aleksander Łaszek
FOR (Civil Development Forum Association) Associates
In 2010 Poland was still among the leaders of the economic growth. How-
ever, the Polish economy is no longer the sole “green island” of growth in EU.
The state of public finance in Poland is deteriorating. The deficit rose to 7.3% of
GDP and public debt oscillated around 55% of GDP. 2010 was a year of exten-
sive debate on taxes. Among other topics, the discussion concerned increase in
VAT rates, cost of tax preferences and administration costs (including taxes), but
also tax on banks. In 2010, Poland increased its rank in the ‘paying taxes’ category
of Doing Business report by 27 positions. It still ranks very low – 121 among 183
economies examined by Doing Business. As a consequence, Polish entrepreneurs
perceive taxes as one of the major obstacle for business.
General overview on Polish economic performance and public

finance
In 2010, Poland was not the sole “green island” of growth in Europe as it had
been one year previously. In 2009 Poland achieved economic growth of 1.7%. All
other EU countries experienced a recession. According to IMF forecasts, only 5
out of 27 EU countries had negative economic growth in 2010. Polish GDP rate
on the level of 3.4% was overtaken by Swedish and Slovakian GDP growth: 4.4%
and 4.1% of GDP respectively.
Although Poland is still among the leaders of growth, the state of public fi-
nance is alarming. According to the European Commission Autumn predictions
for 2010, the public deficit was at 7.3% of GDP. Among new member states, only
Poland • Jarolaw Kantorowitcz, Alexander Laszek 119
in Lithuania (8.4% of GDP) and Slovakia (8.2% of GDP) the deficit was greater
than in Poland in the last year. The public debt grew to 55.5% of GDP and is sup-
posed to increase to 57.2% and 59.6% of GDP in 2011 and 2012 respectively. In
the latter case it will be on the verge of exceeding the constitutional limit for debt.
According to the Polish constitution and Public Finance Act, during peacetime,
public debt should not exceed 60% of GDP. In case it does, harsh expenditure cuts
are written into both Acts to reduce debt below threshold.
Instead of cutting on public spending to reduce the general government deficit
and to minimize the risk of exceeding the constitutional threshold of 60% GDP
for gross debt, the Polish government made some minor spending cuts and de-
cided to increase basic VAT rate by 1 percentage point – from 22% to 23% - with
further temporary tax raises still possible (a decision which is widely criticized by
economic experts). Furthermore, at the end of 2010 Polish government decided
to partly undo pension reform by reducing the contributions to private pension
system by 5 percentage points from 7.3% to 2.3%. Although switching back from
a capital pension system to a pay-as-you-go system renders immediate savings for
budget, it undermines the long-term sustainability of Polish pension system. New
legislation should be held in April 2011; it is worth noting that this step should be
considered as breaching the social agreement of 1999. Growing public debt is not
caused by the costs of the private pension system itself, as was reported by some
of governmental officials. Expenditure on it (1.6% of GDP) is marginal to the
total public spending (45% of GDP). Furthermore in 1999 it was assumed that
revenues from privatization would fund the pension reform, but subsequent gov-
ernments used them for current expenditures. In 2011 the state of public finance
will constitute the biggest threat to economic growth in Poland.
The taxation system in Poland
In 2010 tax revenue in Poland constitutes nearly 91% of all budget revenue. Tax
revenue came in with approximately 72% from indirect taxes, in particular VAT
(48% of all tax income). CIT and PIT all together constitute 28% of tax revenue,
12% and 16% respectively.
From 2009, two rates were applied for PIT: 18% and 32%. CIT was flat and was
equal to 19%. In 2010, there were four rates for VAT. Base rate amounted to 22%.
The reduced VAT rates were equal to 7%, 3% and 0%. From the beginning of 2011,
new VAT rates were applied. As already mentioned, the base VAT rate was increased
by 1 percentage point, from 22 to 23%. New reduced VAT rates amount to 8% and
5%. The latter is mostly applied to food products but also to books.
Taking into account the Polish level of development, one can regard taxes in
Poland as relatively high. In 2008 the tax burden, measured by tax revenue to GDP,
was equal to 34.2%. Although the fiscal burden in Poland was lower than in the ma-
jority of EU countries with high GDP per capita, lower tax burdens in the EU-15
were recorded e.g. in Ireland (29% of GDP), Greece (32.3% of GDP) and in Spain
(33.4% of GDP).
However, when highly developed countries in EU were at the same level of
development as Poland currently is, they had lower tax burdens. For instance, in the
Netherlands in 1965 and in Germany in 1968 the fiscal burdens were lower by 2
percentage points than in Poland nowadays. The tax burden in the United Kingdom
in 1965 was lower than in today’s Poland by 4 percentage points. The largest gap of
10 percentage points was between Italy in 1970 and Poland at the present time.
Almost all new accession countries have lower fiscal burdens. In 2008 higher tax
burdens have been reported solely for the Czech Republic and Hungary, by 1.6 and
5.9 percentage points respectively. On the other hand, e.g. Estonia and Slovakia had
lower tax burdens by 2 and 5 percentage points respectively. What is more, in both
abovementioned countries GDP per capita was about 20% higher than in Poland.
Also in Latvia and Lithuania, which are at the same level of development, the tax
burdens were lower than in Poland by 4 and 5 percentage points accordingly.
As demonstrated above, against the background of the new accession states the
fiscal burden in Poland is high. This weakens competition and undermines the pros-
pects for bridging the gap to the high-developed countries. Low taxes are beneficial
for economic performance. For instance, high economic growth in Ireland in the
second half of the 90s was a result, inter alia, of public expenditure cuts. This, in
turn, gave the opportunity to permanently reduce the fiscal burden. During 1994-
2002 the fiscal burden in Ireland was lowered by 7 percentage points. The decreased
tax burden induced the increase of economic growth. Medium-term growth of
GDP during 1994-2002 accounted to on average 7% per year. Whereas GDP per
capita in Ireland was lower than in Belgium, France, Germany and the Netherlands
in 1994, just eight years later, Ireland was a leader in terms of GDP per capita.
Administration costs of the Polish tax system for companies
In 2010 The Ministry of Economy published a most comprehensive database

of all information obligations imposed on companies by Polish business law. Also
the administrative costs for companies of fulfilling each information obligation
were estimated. The total annual cost of administration for all enterprises was es-
timated at the level of PLN 77.6 billion (6.1% GDP). Nearly half of this amount
(PLN 33.7 billion) was generated due to information obligations stemming from
3 tax acts (on CIT, PIT, VAT). Furthermore the administrative costs were divided
into business as usual but also administrative burdens. The former are connected
with information obligations that the majority of companies would fulfil even
if they were not required to do so by law (e.g. the majority of firms would do
the bookkeeping for their own record, even without appropriate laws). The total
cost of information obligations in the second group (administrative burdens) was
estimated to be around PLN 37.3 billion (2.9% GDP). 60% (PLN 20.8 billion) of
this amount was due to 3 major tax acts (for further information see Table 1).
Table 1. Estimates of annual administration costs for companies of

main tax acts
Administration cost for Administration Revenue 2009

Act on companies burden for companies
bn PLN (bn €) bn PLN (bn €) bn PLN (bn €)
VAT 5.9 (1.5) 4.1 (1.1) 99.5 (26.0)
PIT 14.8 (3.9) 9.9 (2.6) 62.7 (16.3)
CIT 12.9 (3.4) 8.8 (2.3) 30.8 (8.0)
Excise 0.6 (0.2) 0.5 (0.1) 53.9 (14.0)
Source: Ministry of Finance, Ministry of Economy; the study was conducted at the end of
2009/beginning 2010, so the results can be compared with tax revenues from 2009
In the study conducted by the Ministry of Economy there were also questions
for participants regarding what changes to the current system they would pro-
pose. One of the main answers was wider usage of the internet platform instead
of paper copies when dealing with different information obligations. This general
comment is also true when it comes to tax administration, where usage of internet
is still rather marginal.
We are not aware of any dedicated study of the costs of public tax admin-
istration. It can be said, however, that with approximately 43 thousand civil ser-
vants working there, which means about 1.12 employee per 1000 citizens, Poland is
slightly below the European average (1.34 for CEE countries and 1.21 for the rest
of EU countries), which might indicate rather moderate costs.
Perception of taxes by business
Poland advanced by 27 positions in ‘paying taxes’ category examined by Do-

ing Business 2011 (DB 2011) report. Everyone should be pleased about this, if
not the fact that this was “a jump” from place 148 to 121 (DB examines 183
economies). Despite of the fact that business perceives the Polish tax system as
better than the systems from Czech Republic, Italy, Slovakia and Romania, there
is still a lot to reform to catch up with.

According to DB 2011, the entrepreneur of a limited liability companies in
Poland has to deal with 29 tax payments (Including social security contributions)
within a year. In addition, he or she devotes on average 325 hours to fill out all
forms and fulfil procedures related to paying taxes. The total tax burden, in turn,
amounted to 42% of firm’s profit. In Denmark, where the tax system is one the
most business-friendly in the EU, entrepreneurs dealt with 9 payments, devoting
on average 135 hours to filling in forms, and paid taxes equal to 22% of their
profits. The gap between Poland and Denmark in terms of ease of paying taxes
is significant (for other comparisons see Table 2.).
Table 2. Paying taxes 2011 (selected group of EU countries)
Rank Payments Time Total tax rate

(number/year) (hours/year) (% profit)
Ireland 7 9 76 26.5
Denmark 13 9 135 29.2
United Kingdom 16 8 110 37.3
Estonia 30 7 81 49.6
Sweden 39 2 122 54.6
Lithuania 44 11 175 38.7
Latvia 59 7 293 38.5
Hungary 109 14 277 53.3
Poland 121 29 325 42.3
Source: Doing Business 2011
Another interesting observation can be made while reading subsequent edi-

tions of Global Competitiveness Report. For 4 years in a row, tax regulations
were mentioned as one of the main obstacles for doing business in Poland. It can
be speculated that while the other bottlenecks are mitigated (e.g. infrastructure
gap), entrepreneurs are becoming more focused on cumbersome tax regulations.
In the latest edition inadequate supply of infrastructure, with 8.8% votes, was
overtaken by tax rates, with 10.4%.

Surveys for Global Competitiveness Reports are conducted mainly among
representatives of big companies. More balanced and larger sample can be found
in World Bank Enterprise Survey. When only one top constraint for doing busi-
ness could be chosen (votes add up to 100%), tax rates (22% votes) come first,
with tax regulations coming tenth (2.5%). However, when respondents were
asked to name major constrains (more than one, votes add up to more than
100%) the main three were: tax rates (59% of respondents), labour regulations
(27%) and tax administration (27%).
The public debate on taxation in 2010
2010 was a year of special concern on taxation in Poland. Besides debate on

VAT, much of the attention has been devoted to taxes on banks and tax prefer-
ences (that is, tax relieves, deductions etc).
The latter, as was demonstrated in the report prepared by Ministry of Finance
in co-operation with World Bank, are mostly ineffective. According to the esti-
mates, the costs of preferences are equal to PLN 66 billion (€ 17.1 billion). That
constitutes 4.9% of GDP. It is the fraction of tax revenue that the budget loses by
applying different tax exemptions and deductions. The result for Poland should be
considered as the average: Losses vary elsewhere from 0.74% of GDP in Germany
up to 12.79% in the United Kingdom.
In Poland there are 402 tax preferences on the national level and 71 tax prefer-
ences on regional level. A great deal of preferences was found in PIT (138) and
CIT (54). Preferences in these two types of taxes induced the loss of almost PLN
42 billion. The largest flow of public funds in the form of preferences was directed
primarily to support families (PLN 29 billion) and agriculture (nearly PLN 9 bil-
lion). In addition, the exemption that has the most striking impact on reducing
budget revenue was 7% VAT rate on housing construction, child allowance and
joint settlement of spouses for PIT.
The report demonstrated that preferences are wrongly directed. They do not
support the employment, philanthropy, culture, science, education or sport, which
should be of great interest. To make matters worse, some of the relieves and de-
ductions show reduced efficacy. It means that the preferences are used by different
social groups that were initially overlooked by the legislator or do not impose the
right incentives.
Next, taxes imposed on banks were widely discussed. In spite of the fact that
Polish banks did not contribute to the financial crisis and did not get support from
the state, politicians want to introduce a new tax on them. The proposals have,
however, negative influence on economic performance and the financial sector
in particular. The latter is not sufficiently developed in Poland. This can result in
lower economic growth since a modern economy needs well-functioning financial
system. The levy of a new tax will reduce the incentive to broaden the range of
activities of banks and investment funds. This will be harmful for the development
of the financial system. The tax on banks could also stop the flow of credit to the
economy and delay economic recovery.
Concluding remarks
In 2011, the main aim of Polish government will be to keep public debt below
the threshold of 55% GDP. However, due to general elections in the second half
of the year, no breakthrough reforms should be expected. Instead a mixture of
small tax raises, non-controversial expenditure cuts and some accounting tricks
should do the job. At the moment the only far reaching action of the government
is the recent attempt to undo previous pension reforms in order to save some ex-
penditures today, at the expense of the long term sustainability of public finances.
The paper contains personal opinions reflecting the views of the authors, not
the institution they represent. We would like to thank Mr. Alexander Waksman for
his language support.
Portugal
Ricardo Campelo de Magalhães
Financial Advisor at Banco Best
The State grows, the economy languishes
Every year, Portuguese tax code goes through many changes. 2010 was no
exception. And the changes were so numerous and across the board that it is
impossible to enumerate them all: from rates, to exemptions, to deductions, the
highly indebted Portuguese state grew receipts in every possible direction. Still,
the budgetary situation remains precarious, with the state needing at least a fifth
(and probably not the last) austerity package before or at the presentation of the
next budget, making it easy to predict that next year Portugal will experience a
new surge in taxes. Commission forecast of a rise in State Deficit for 2012 just
highlights this need.
Tax Policy strategy
Despite the economic crisis, Portuguese state is trying to maintain its revenue.
For that purpose, a major fiscal shock is inflicted to taxpayers: all major taxes
went up in 2010, are raised in 2011 and it is foreseeable that the same will occur
in the near future. If some measures were taken to reduce the deficit on the ex-
penditure side, the mantra remains that “we are the state, so we all need to unite
to help the state”, that is, both taxpayers and civil servants.
The following is the account of the main changes in the main taxes for 2010
and its effects in 2011.
Portugal • Ricardo Campelo de Magalhães 127
Income Tax
The State Budget for 2011 brought a whole new array of measures to increase
taxes, despite the severe reduction of the tax base, both from unemployment – at
a record level of 11% - and from a reduction in per capita income – according
to IMF, 11.75% down from the 2008 maximum and 4.27% down from 2009 (in
current USD prices).
As part of the Stability and Growth Program passed in May 2010, a new
maximum bracket applicable to taxable income exceeding €150,000 was intro-
duced, with a tax rate of 46.5%. Also, for the brackets bellow €17,979 the rate
was increased 1 percentage point and for the other brackets, 1.5%.
After the tax hikes in mid-year (that went into effect immediately, in what
some rightly considered an attack on the Principle of Certainty), several other
measures were taken to further increase tax revenue. Deductions (on education,
healthcare and housing) were intended to be severely restricted, but during nego-
tiations to approve the budget it was agreed that those restrictions would only be
imposed on the two top brackets, lowering significantly their effect on the deficit.
On the other hand, fiscal benefits are now limited (to €100 or bellow), except for
the two lower brackets.
Independent Workers were also affected and pay now a single rate of 29.6%
(from sector rates of 24.6%, 28.3% and 32%). Also, if a single company repre-
sents more than 80% of the independent worker income, the client company
owes an extra 5% in taxes. Finally, losses from independent workers and rental
income can only be deducted within the 4 following years.
Socrates was Guterres’ environment minister and for some years environ-
mental items received special tax treatment. However, with this budget, this no
longer holds. Biodiesel (6.75% of diesel) is no more exempt, leading to a 2.5
cents increase in diesel price from this tax (for a 4.5 cents total, together with
the VAT raise). Also the 30% deduction one could make with renewal energy
equipments is now substituted by fiscal benefits (which, as mentioned before, are
limited to all but for the two lower brackets, that people making less than €7,250
per year – not big consumers of those equipments). Please also note that these
benefits can only be used once every four years.
Socialist governments were always very keen on culture. However, in another
effort to raise income, literary, artistic or scientific prizes that were previously
excluded from taxes are now only exempt if they do not surpass 10 times the
minimum wage (€ 4,850). Also, subsidies to high-performing athletes and cash
prizes for sport results that were previously excluded from taxes are now only
exempt if they do not surpass 10 times the minimum wage.
Judges admitted to go on strike for the first time in Portuguese democracy.
Suffering from several pension cuts (detailed in the budgetary chapter, under the
budget cuts title), and suffering from the 10% wage cut and from the new top
bracket rate (with taxes up from 42% to 46.5% in one year), they are also the
most affected by the end of the tax exemption on housing subsidies, which in
practice almost halves them.
Numerous other changes include dependants who had undergone civic or
military service not being anymore considered as dependants for tax purposes,
the obligation to state the fiscal number of the dependants and, most signifi-
cantly, the end of banking secrecy.
In the Anti-corruption package, the government had already authorize itself
to access accounts whenever there were debts to Social Security. With the Decree
70/2010, anyone who receives social benefits like the Family Subsidy, the Unem-
ployment Social Benefit, or the Social Inclusion Subsidy must first “voluntarily,
specifically and unequivocally” allow access to any fiscal or bank information.
Finally, with the budget, even the smallest tax debt authorizes the administration
to access the accounts - both balances and transactions - of those taxpayers pres-
ent in a newly created account database at the Central Bank. Many legal advisors
consider it a violation of the Constitutional Principle of the “Private Intimacy
Reserve” (Article 26), but few obstacles remain to the complete end of any bank-
ing secrecy in Portugal.
As part of the Stability and Growth Program passed in May 2010, the rate
applicable to taxable profits over € 2 million was increased by 2.5%. Hence profit
below € 2 million are taxed at the normal rate of 25% and the part exceeding €
2million at 27.5 %
After several months of discussions about the “sovereign crisis”, the state
budget introduced several further tweaks to “make the rich pay”.
Holding companies lose their fiscal exemption on the profits of their sub-
sidiaries, except if they own more than 10% of the capital and the income had
already been subject to taxes.
The banking sector paid a very low effective tax rate: in 2009 it was 4.3% of
the profits and 18% of the taxable profits, well below the normal 25% + 1.5% of
municipal surtax; the difference between the two effective rates being the deduc-
tion of losses of owned companies and the use of several fiscal benefits. Both of
those numbers are frequently used in parliament to attack the banking sector, es-
pecially in a year the state is spending billions to try to keep BPP and BPN afloat.
Thus, special contributions were created to further penalize the banking sector:
0.01% to 0.05% on passive minus equity and 0.0001% to 0.0002% on off-balance
derivatives. Details are not known, as its implementation is to be defined within
a specific law, still not published at the moment of the printing of this yearbook
(and yes, it will have retroactive effects on 2011 taxes).
In last year’s budget (2010), after the closing of IREF’s yearbook, bonus got
an autonomous tax. The rate is 35% for general companies and 50% for banks,
if the bonus represents more than 25% of the person yearly income and its value
is above €27,500.
Regarding fiscal and banking secrecy, the fiscal administration not only may
access any account as is the case with the Personal Income Tax, but furthermore
banks are mandated to communicate any debit or credit movements on those
accounts every July, without any request.
For owners of medium or small companies, the legal spread they can fiscally
deduct from lending to their own companies was raised from 1.5 to 6 percentage
points (on top of the 12-month Euribor). This is a major way to avoid corporate
income tax for those companies, but it is also a powerful tool for the state to find
“wealth manifestations” and therefore expand the tax base.
Last but not least, benefits received could not exceed 40% of the owed taxes
in 2009; this ceiling was cut to 25% in 2010 and is now set at 10%.
Value-Added Tax
As forecasted in the previous yearbook, the rate of this tax went up during
2010. When 2010 started, the rates were 5% on the “first need” goods bracket,
12% on the intermediary bracket and 20% on the “normal” bracket. On July 1st,
the rates were increased to 6%, 13% and 21%, a measure included in the Stabil-
ity and Growth Program passed in May 2010. In 2011, the government will not
wait for July: as of January 1st, the rates increased again, this time to 6%, 13%
and 23%.
Many products were to be “upgraded” from lower brackets to the “normal”
bracket, but budget negotiations in parliament combined with pressure from
some conglomerates forced the government to apply the change only on gymna-
siums, fire related products, and flowers. During 2010, the VAT on car tax was fi-
nally abolished, but the car tax itself was raised accordingly, rendering the change
neutral. Several basic services, like energy and transportation, increased 3.5% to
4.5% in January, due to the VAT increase and the inflation expectations.
Private Solidarity Societies (mostly Christians) will no longer be able to deduct
the VAT they pay on several goods and services, like construction and car pur-
chases. The same applies to all religious confessions, except the Catholic Church
(as that would imply a violation of the Concordata with the Vatican).
Other factor to consider is the difference between the new Portuguese top
rate and the Spanish top rate: 23% vs. 18%. This difference will put further
pressure on shops near border cities and will lead shopping trips to Spain to be
a stronger trend in coming months. Madeira and Azores continue to have lower
VAT rates than continental Portugal.
Budgetary Policy
One of the main objectives of the Prime Minister is to avoid IMF interven-
tion at all costs. For that, he raised taxes, cut spending, raised extraordinary rev-
enues and sold Portuguese state debt directly to Brazil, Venezuela, East Timor
and China. The opposition claims it is because he cannot accept IMF’s scrutiny,
both related to his numerous “boys” and to some judicial matters, while the
Prime Minister claims it is a matter of national pride and of “Portugal being able
to rule itself ”. In response, the opposition demanded elections when the IMF
intervenes. As of the printing of this yearbook, the intervention has not been
made, but it is seen as inevitable.
After being elected, in November 2009, Portuguese Prime Minister Socrates
stated “the main concerns of government’s economic policy are economic re-
covery and employment, which is not compatible with a tax increase”. In Febru-
ary 2010 he added: “we will do a fiscal consolidation based on budget cuts and
not on tax increases, because that would be negative for Portuguese economy”.
In April he assured there would not be a VAT increase and that a €6,000 million
new Lisbon airport, a €2,000 million third Lisbon bridge and a €7,700 million
TGV railway system would stimulate the economy. In June he rejected a wage
cut for the state employees. In September the government still planned a railway
system with a price tag of €2,765 million.
Main Receipt Increases
As described in the Fiscal Policy, and contrary to what the Prime Minster had
promised, both Income Taxes and the VAT increased. But the government for
2010 and 2011 implemented many other increases.

Most increases were in the health care sector. To give a bit of a perspective,
when one uses health care services in Portugal, one must pay a fee: not the real
cost, but a fraction, to control over-consumption. Those fees rose across the
board. For example, vaccines to go to tropical countries were 15 cents. They are
priced at €100 now. And not only they are higher, now they are paid by more
people: unemployed, pensioners and those transported with urgency must now
also pay the bill, if their income is above the minimum wage (currently at €485).
In practice, that implies that a person transported in an ambulance needs not
only a clinical note, but also a proof of “economic insufficiency”. Finally, doc-
tors whose service to the state was smaller than the duration of their specializa-
tion studies must now pay the state some compensation.
Many incomes already taxed under Personal Income Tax but exempt from
Social Security contributions will now cease to be exempt. Also, when hiring
someone, companies must now transmit the information to the Social security
at least 24 hours before the contract is signed (24 hours after in special condi-
tions) to make sure the Social Security will stop paying the benefits related to
unemployment.
All kind of fees increased. For example, the fee paid to “unblock” your car af-
ter being taken by the police increased from 50% to 100%. Judicial fees were also
raised considerably across the board. A last example would be toll free highways.
Before October, the state paid an amount per vehicle to the private owners of
the highways, with the users paying nothing. Now, the state pays a fixed amount
and charges a toll to the users. As a result, the private owners (whose executive
president was also Guterres’ minister, like the current prime minister) receive
more – risk free -, users in less developed areas pay tolls, and the state loses more
than it was losing before, due to the (expected?) decrease in users and the remain-
ing fix payment to the private company.
Main Budget Cuts
Some measures implemented in mid-2010 will be maintained. These include

a cut in some benefits and ability to hold more than one job, admissions restric-
tions to civil servant jobs, non-renewal of workers under contract and a 25% cut
in family subsidy in the lower brackets, while eliminating it on the top Personal
Income Tax brackets.
According to the 2011 state budget, some cuts will be considerably expanded,
while many were implemented to fulfil the deficit reduction target. The most sur-
prising extension was the admission freeze, according to which now any public
administration that needs a new employee will have to recruit internally within
the state employees.
From the new measures, the most surprising was the wage cut. All state em-
ployees who receive more than €1500 per month will be subject to a wage cut,
from 3.5% to 10%, accompanied by a reduction in benefits, overtime and night
compensations and summer and Christmas subsidies. Career progressions will be
frozen, while prizes for performance will not be granted.
Table 1: Detail of wage cuts (averaging 15%)
Levels of wage per month Percentage Cut

€ 1,500 to € 2,000 3.5%
€ 2,000 to € 2,500 3.5% to 6%
€ 2,500 to € 4,200 6% to 10%
above € 4,200 10%
On the Azores islands, governed by a powerful Socialist that may succeed

Socrates in the party leadership, a special subsidy was given to state employees
in the 1500 to 2000 bracket. Seen as a slap in the face of the prime minister, the
expense passed despite doubts on constitutional grounds (equality!).
In January unions entered with several (at least 14) injunctions to stop the
wage cuts. The cuts were classified as unconstitutional on the grounds that the
private sector is not cutting accordingly (equality). Government answered with
“un-postponable public interest”, a move the unions considered as the final proof
of the illegality and unconstitutionality of the decision. It is now to the courts to
decide whether state employees can have their salary cut or not throughout 2011.
Communists and Leftists presented the issue to the Constitutional Court.
Pensions (including the lowest, at €246 per month, received by more than
400 000 persons) will be frozen. All pensions above € 1,607 were affected by the
reduction in deductions to Personal Income Tax, while the ones that exceed €
5,000 were also subjected to a new contribution of 10% on the “surplus”. Also,
one will no longer be able to receive both a pension and a state-paid wage. People
receiving the “Social Inclusion Subsidy” will experience a 20% cut. Not only the
social benefits will lose purchase power (if not nominal value), they will also be
granted to fewer beneficiaries, as the state now requires further information on
financial resources and general assets and crosses information to decide to whom
social and school support shall be given.
Health Care Services cut 5% in the budget of their cabinets and hospitals also
reduced the size of their boards, from 5 to 4. Furthermore, medicine support
decreased across the board. This decrease is total if the medicines are not subject
to medical prescription, if they were receipted in a non-electronic format, or if
the beneficiary is caught abusing the benefit (in this case, just for 2 years). The
diagnostic examinations will also be limited, but the details of such limitations
are only to be known later, especially what is meant by examination “without
benefit to the patient”. The most important health-related measure however is
the possibility open to state employees to opt-out the state health-care insurance,
ADSE, which is also likely to reduce its benefits during 2011.
Education services cut 17% of its central services budget and 20% of their
managers. Adjunct directors were also cut and most wage supplement cuts (from
€ 600 to € 750 it went to € 200 to € 750). Teachers no longer receive extras
for night work after 20 o’clock, but after 22, like other state employees. The
high school curriculum no more includes “Project Subject”, and “Accompanied
Study” was reduced to the students who need it most (to compensate, the gov-
ernment decided that students will not be failed during mandatory education).
Also, private schools now receive 30% less funds (as all households pay taxes,
whether their kids go to private or public school, all have the right to education,
therefore the state pays many private schools a subsidy per student). The plan to
close state-run schools in rural areas (known as “grouping”) will continue and
an undisclosed reduction in the number of teachers is also included (Portugal
is 3rd in number of teachers per thousand students, only behind Lithuania and
Greece). Regarding higher education, 4000 students will lose their scholarship.
Madeira and Azores will experience a transfer cut. The PIDDAC program
will suffer a cut equivalent to 0.2% of GDP. Police cars cannot go on patrol lon-
ger than 80 kilometres from their police stations (in Braganza; distances seem to
differ according to districts). 50 of the 13 740 “Public Institutes” will also be cut
(though it was pointed that many were already non-existent!).
Main Extraordinary Measures
With bond rates growing to unbearable levels, the main focus on the short
run was to convince old political allies to buy directly Portuguese debt. Socrates
started with Brazilian President Lula da Silva, continued with oil-rich East Timor,
finished 2010 with the rulers of Portuguese former colony of Macau, China and
started 2011 with a trip to Qatar. Numbers were not made public, but are cer-
tainly in the billions.
Angola also agreed to pay most of its debts to Portuguese companies in July,
at the time valued at € 2,000 million. Venezuela also agreed to help buying com-
puters and using Portuguese shipyards in October, an agreement estimated at €
1,500 million. Venezuela had already agreed to buy 2500 mass-produced houses,
an agreement valued at € 685 million. The first Libyan Portuguese Expo in Feb-
ruary, ongoing agreements with Petrobras (Brazil), Sonangol (Angola) and ENI
(Italy) and several other agreements are key to supply Portugal with oil for years
to come. Finally, Portuguese “Cash for Clunkers” ended in December 2010, lead-
ing to lower state expenses and less expected car sales for 2011 (with this distor-
tion, in 2010 were sold 38.8% more cars than in 2009).
On 30 December 2010 was published the decree by which the pension fund
of Portugal Telecom - the previously state-owned telecommunication operator
- was transferred to the state, along with € 2,700 million (a fund whose deficit
increased from 59 to 1,530 million during 2009). Privatizations were referred on
the SGP, and they will include 17 companies, including the mail service and the
recently bailed out BPN (although no bidder was found for the latter in a first
attempt). For the years 2010 to 2013, the expected incomes are respectively 1200,
1870, 1580 and 1350 million Euros – in a total of € 6 billion, almost enough to
pay 2011 government-estimated interest on “public” debt.
Several infrastructure projects were postponed, including Oporto’s under-
ground second phase (marked at 1200 Million). Also postponed was the bill on
the bailout of BPN, marked at € 5,500 million. Early in 2011, the state has in-
jected € 500 million, but most of the debt will be passed to societies created for
that purpose and its cost to future budgets. With all the previously described
effort to cut the deficit by € 4,500 million in 2011, it would be political suicide to
reveal the true cost of the bailout at once, like Ireland did.
To convince the people something is being done, the government agreed to
the creation of 2 new Commissions: the Public Finance Council and the Tech-
nical Commission for the Private-Public Partnerships. Their precise roles and
composition are still to be defined by a government decree, although they were
the outcome of a negociation with the main opposition party during the budget
negotiations. From what was made public, the stated purpose of the first is to
comment on budget and macroeconomic scenarios put forward by political par-
ties, while the second must comment on the Private-Public Partnerships. These
partnerships are an instrument used by the last governments to build very ex-
pensive infrastructure investments (like hospitals and toll free highways) while
postponing the cost for future decades, evaluated by a former Portuguese Court
of Auditors judge as € 50 billion, or 2/3 of the total state receipts last year.
Another promise to appease concerns regarding the debt is a ceiling on debt
growth. From 2010 to 2013, the debt growth of the non-financial state-owned
companies cannot be higher than 7%, 6%, 5% and 4% respectively. But after
seeing what happened to the agreement to raise the minimum pension or the
minimum wage (the state postponed its promise arguing “force majeure”), and
the 2010 track record (according to 2011 budget, 6 of 19 companies saw their
debt growing between 7.4% to 798.6%), and considering the lack of sanctions,
one must doubt its usefulness.
The state continues to use off-budget institutes to minimize its deficit.
Final Remarks
Political parties can now register fines on them or their leaders as expenses.
This way, as with any expenses, they are paid back by the state to the parties as
subventions.
Portuguese Court of Auditors in a recent December 2010 official report on
2009 State Accounting stated that it “violated the principles and budget rules
of ‘annuality’, unity and universality”, accusing the government of accounting
juggling and creativity. Such bold words are not usually used to characterize the
behaviour of the one that nominates the president of that institution, namely the
Prime Minister.
Portuguese stock index ended the year 2010 with a lost near € 6,300 million
(almost 10%), despite the 7.3% of GDP deficit that, according to the govern-
ment, was to stimulate the economy.
According to the budget, the country still spends more on education than in
interest on the “public” debt (6541 vs 6326 million Euro), but it already spends
more on the “public” debt than in Defense, Security (Police) and Justice com-
bined (6326 vs 5678 million Euro). And, in January 2011, the country paid on
short-term (6-month) debt 6 times what it paid in January 2010 (3.686% vs
0.592%). If the ECB stop buying Portuguese debt (and it bought more than a
billion in 2010), the previous mentioned value may skyrocket. In fact, after the
first bond emission in 2011 the estimate of the interest on the debt to be paid in
2011 was increased to € 7,134 million. The 808 difference will absorb all the wage
cuts the state is still trying to impose.
According to the organic classification, the amount available to the Finance
Minister increased 20.1% from 2010 to 2011, while Work and Solidarity experi-
enced a 12.6% decrease, Defense a 11.9% decrease, Education a 11.1% decrease,
Justice a 10% decrease and Foreign Affairs a 9.6% decrease.
Combining all the 200 measures taken in 2010 by the government, the ex-
penses will decrease from 124.05% of the receipts to 111.27%. What draconian
measures will the government further impose before actually starting to pay some
of the mounting debt? When will the government wake up from the Utopian
dream of the perfect Social State to the reality of a possible Social Model? The
two last elected Prime Ministers fled (Guterres to United Nations High Commis-
sioner for Refugees and President of the Socialist International, Barroso to the
Presidency of the European Commission), but the policies remained basically
the same. One can only hope things will be different when Socrates decides to
do the same.
On the short run, Horta Osório points to exports, privatizations and a more
flexible labor market as solutions. Zero base budgeting, privatization of health-
care institutions, Swedish school model, Danish Labor Laws, Hong Kong’ regu-
latory environment, Spanish VAT levels, and Barroso’s promised fiscal shock
(slashing taxes) would all be welcome, but are very unlikely.
Useful links:
1. Portuguese Investment Agency – State Agency: http://www.portugalglobal.pt

2. Portuguese Data - Independent Database
https://www.pordata.pt/azap_runtime/?n=1&LanguageId=2
3. External Debt (click “Portugal”) – ECB data
http://dsbb.imf.org/Pages/SDDS/ExternalDebt.aspx
4. Portuguese Society for Innovation - Private Company: http://www.spi.pt/
en.index
Slovakia
Radovan Ďurana
INESS, Bratislava
The election year 2010 brought the center-right parties into government. The
change in the governing coalition quickly translated into changes in economic
and tax policies. Similarly to other center-right European governments, the Slo-
vak government attempts to attack the inherited budget deficit, tackling both the
revenues and the expenditures. Despite its right-wing orientation and election
pledges, the new coalition government decided to moderately increase the tax
and contributions burden. However, it must be noted that this increase mirrors
the planned reduction in government expenditure. The greater emphasis was
placed on broadening the bases than on changes in rates.
Year 2010 in Review
The election in the mid-year resulted in the absence of significant changes in

tax policy (see Box below). Facing the approaching election, the incumbent gov-
ernment attempted to maintain the status quo in the first half of the year. The
second half of the year was marked by the new government’s un-preparedness to
interfere in the tax system. The expansionary fiscal policy of the outgoing gov-
ernment resulted in a budget deficit of 7.9% of GDP in 2009. The passivity of
the government in the following year left the budget deficit virtually unchanged,
when it reached the value of 7.8 percent of GDP despite the growth in GDP.
As a result, the public debt rose from €21.3 billion in 2009 by approximately one
third to €27.4 billion (or 43.8 % of GDP in relative terms) in 2010.
In 2010 a year-to-year growth in tax and contribution revenue was 1.8%. The
total revenue equalled 27.3% of GDP (mandatory contribution to the second
Slovakia • Radovan Ďurana 141
pillar not included). Taking into account the 4.1% growth in GDP and 3.4%
growth in average nominal wage, the budget revenue growth seems rather low.
This was mostly due to high unemployment, weak domestic consumption and
fast export growth, the later translating into tax income growth only with lag.
2010 changes in tax policy
The only relatively significant change of tax rate has been the lowering of
fuel tax on diesel by 23.5% to €368 per 1000 litres. Prior to this move, this rate
was the second highest in the EU. The government gave in to professional driv-
ers at strike in January, who were highly disappointed from high costs of just
installed satellite road toll system. Lower fuel tax should compensate them for
high toll costs and at the same time attract the transit carriers to tank in Slovakia.
According to current estimates of Ministry of Finance, lower tax rate draw the
demand from abroad and led to 14,5% growth of diesel consumption in 2010.
Nevertheless, this growth was not strong enough to cover total dropout of tax
revenues resulting from lower rate (not surprisingly for a demand with very low
price elasticity).
Outlook 2011
Changes in the tax policy are expected to increase the tax revenue - includ-
ing contributions - by € 0.5 billion (out of which € 0.3 billion are tax revenues
without contributions). This equals 2.5% of the overall tax plus contributions
revenues in 2010. Considering the additional effect of the economic growth, av-
erage wage growth and a modest consumption growth, the overall tax plus con-
tributions revenue are expected to increase by 11.3% in 2011 compared to 2010,
reaching the pre-crisis levels of 2008. Nevertheless, despite growing revenues the
deficit is expected to reach 4.9% of GDP. This will increase the public debt to €
30.7 billion, or 46% of GDP.
The adopted changes in tax legislation touch upon all sorts of taxes and con-
tributions. In general, the main emphasis was on the abolition of tax exemptions
and harmonization of rules for the calculation of taxable income. These mea-
sures should enable the introduction of unified tax and contributions account-
ing. Individual changes affect many groups of taxpayers but from the viewpoint
of the overall tax revenues, no single significant change is taking place, except
for the VAT rate (see below). The fact that tax changes lead to a reduction in
exemptions may decrease their fiscal impact. However, the reality at the end of
the year will show how many of the affected taxpayers have modified their tax
status or move into the shadow economy, that is, whether the planned increase
in tax revenues obtains.
The adopted changes affected income tax, contributions and consumption
tax. The most significant was the change in the VAT rate, which is discussed in
more detail. Changes in other taxes and contributions are discussed after VAT.
VAT
The rule of the so-called flat tax-rate of 19% for corporate and personal
income and VAT became a symbol of a successful tax reform of 2003, which
brought to Slovakia many new investments, as well as fast-growing tax revenues.
The rule was violated for the first time in 2007, when the tax rate was lowered to
10% for books, medical drugs and medical devices. As the sales of these prod-
ucts are not high, the public did not perceive the change in the 19% tax rate as
significant. Paradoxically, it was the new government, whose main representatives
were behind the original tax reform, which increased the flat tax rate to 20%. Law
limits the rate increase to the period during which the budget deficit remains
above 3% of GDP, as indicated by Eurostat. The government refused to discuss
the possibility of increasing the rate only for a year. At the same time, it refused
to discuss the abolition of the 10% tax rate (it abolished only the little used 6%
rate used for sale of domestically-produced agricultural products), which would
not generate the same revenue (approximately 60%) but would remove the un-
reasonable tax preference enjoyed by some products. The government opted for
a simpler solution, which reduces the pressure to increase the efficiency of the
public expenditure by increasing the tax revenues. The changes in tax rates are
expected to increase budget revenues by € 185 million (approximately 2% of tax
revenues).
Changes in taxes and contributions besides VAT
Adopted changes of the income tax code should increase the tax revenues by
€ 78.3 mil. in 2011 and € 142 million in 2012, as most of the measures will apply
to tax returns for 2011. Individuals will bear half of the burden, Personal income
tax revenues should grow by 18.5% due to planned decrease of basic allowance
for taxpayer to € 3559.3 (it was temporarily increased to € 4025.7 during the cri-
sis. Other important changes:
◘ Basic allowance for taxpayer can be applied only for “active” income (em-
ployment, entrepreneurship). Capital income will be excluded and taxed by full
tax rate.
◘ Capital savings and life insurance will not decrease the tax base anymore.
Consumption taxes
Following the EU requirements, tobacco taxes are being raised. New tax from
sale of emission quotas will be applied at rate 80%. In fact it is kind of income
tax, and it will be applied mostly on revenues from sale of not consumed quo-
tas, which previous government allocated among selected companies for free.
Expected tax revenues are € 75 million. The preferential tax regime for heating
fuels consumed by households has been terminated. In 2011, additional changes
resulting from further elimination of exemptions should be adopted with poten-
tial tax revenues increase by € 135 million.
Health Contributions
Elimination of exemptions resulting in broader base should increase govern-
ment’s revenues from health contributions by € 51.8 million in 2011 and € 80
million in 2012. Higher contribution rates will apply to voluntarily unemployed
persons. Individuals have to include their revenues from dividends and rent in-
come into their contribution base first in 2011. The contribution rate for divi-
dends will be 10% (other income 14%), dividends below € 329 will not be subject
of contributions. Expected related growth of revenues is € 14 million.
Social Contributions
Amendments to social contributions code will broaden the group of contri-
butions payers to include statutory representatives of businesses. Hence, mem-
bers of the managerial team of a company, who are not officially employees but
represent the company, will have from now on to pay contributions. This is an
important amendments due to the fact that, in Slovakia, employees were often
cheating the tax system by setting up ltd company in order to pay only income
tax, no contributions - now the government tries to rip off their fruits. Also the
base for contributions will be broaden (e.g. severance pay). Together with other
small changes, the revenues should increase by € 133 million in 2011.
Expected changes in the tax policy in 2011
The new government committed itself to the simplification of the contri-

butions system, introduction of the Contributions bonus (see Box below) and
the fiscal council. At the same time, the government continues its program of
unifying the collection of taxes, customs and contributions, which are collected
by three independent institutions at present. It is therefore probable that year
2011 will witness technical changes in tax and contributions system. However,
these changes will not have a direct impact on tax and contributions burden of
employees. At the same time, it is reasonable to expect that the broadening of
taxable income will lead to an increased tax burden for selected groups of labor
force. The fiscal council is expected to provide an impartial and regular audit of
the budget balance and evaluate the long-term impact of the budget on the state
property. A constitution law on the maximum public debt is planned as well.
The simplification of the contributions system requires introduction of the
“super-gross” wage (superhrubá mzda in Slovak). This means that the employer
will not be obliged to pay social and health contributions for the employee any-
more. The payer of the contributions will be only the employee, in whose name
the employer transfers the contributions. Thus, the wage will express the total
labor cost. This is in stark contrast to the current state when the employee does
not “see” contribution paid by the employer. The introduction of the super-
gross wage will have no direct impact on the contribution burden of employees
but it increases the transparency of the financial relationship between the citizen
and the state.
The simplification of the contributions system is conditional also on the duty
to pay contributions from all types of income. This condition applies in particu-
lar to income from the so-called “dohoda”, which is a specific flexible type of
employment contact without the trial period and with a limited period of notice.
The law limits the number of working hours and other conditions, under which
an employee may enter this type of contract. The shortness of these contracts
was the main reason why these contracts were not subject to contributions pay-
ment. In this case the government underestimated the motivation of citizens to
minimize their tax burden and exploit the benefits of this type of contract. In
2010 more than 800 000 people (40% of labor force) entered into this contract
(approximately 430 000 had also a full-time job). Such a development necessarily
leads to a decrease in contribution revenues. The government therefore plans to
introduce the mandatory payment of contributions also for this type of contract.
This will lead to a modest increase in the overall tax burden despite no changes
in the tax rates. The government also faces a complicated problem of how to in-
crease the contribution revenue without lowering the net income of low-income
groups, who are often employed under this contract. The political impact of this
solution can significantly affect the popular acceptance of the reform.
There is a wide discussion about the taxable income for the calculation of
health contributions. In an attempt to abolish all types of exemptions, the gov-
ernment decided to require payment of contributions also on income from capi-
tal. Since the beginning of the year, the contributions are paid also on dividends
(lowered tax rate of 10%) and on rental income (health contribution on income
from interest was not introduced because of political reasons and high adminis-
trative requirements). This will negatively affect the behaviour of capital inves-
tors. This type of contribution is contrary to the very foundation of the health
contribution. In Slovakia there is a health insurance system but once the income
from capital is included, the contribution de facto changes to a general tax pay-
ment with a single contribution feature – existence of maximum payment. In
this context, the Ministry of Finance proposed to abolish the health contribution
and move the burden to higher VAT and income tax rate.
Conclusion
In an attempt to decrease the budget deficit in 2010 and 2011, the govern-
ment decided to broaden the base of the taxable income, maintain the existing
income tax rate and moderately increase the consumption tax. The government
does not attack the high budget deficit inherited from the previous government
by strict fiscal tightening but rather relies on economic growth and higher tax
revenues. It is expected that in 2011 and the following years there will be techni-
cal modifications in tax and contributions system. These, however, will have no
impact on the size of the rates. Although 2011 will witness a modest increase in
the tax burden, the overall tax burden will remain low compared to other coun-
tries. The main problem will be the persistent high contribution burden of labor,
which complicates the job creation and is one of the main reasons behind the
high unemployment rate.
Romania • Radu Nechita 147
Romania
Radu NECHITA, PhD
Faculty of European Studies, University “Babes-Bolyai”, Cluj-Napoca,
Romania
In 2010, Romanian authorities set new standards of fiscal instability, amend-

ing the Fiscal Code by emergency ordinances more than a dozen times. The most
visible measure was the increase in VAT from 19% to 24%, decided on June 26th
for July 1st. In this environment of uncertainty, it is remarkable that tax rates for
personal and corporate income remained constant, at 16%. Social contributions
rates did not change either, remaining among the highest in Europe, between
44.5% and 55.7%, depending on work conditions. However, the tax base was
extended in different ways. The destructive minimum corporate income tax –
introduced in 2009 and responsible for thousands of business closures – was
abolished on October 1st. There was no significant measure of reducing admin-
istrative burden for taxpayers. For 2011, there are some good news (the reintro-
duction of the option between 16% corporate income tax and 3% turnover tax
for micro-enterprises) and some nice promises (the replacement of five monthly
fiscal and social statements by only one).
Taxes
Personal Income Tax

The 16% flat tax on personal income (introduced in 2005) survived another
year, despite the crisis and repeated attacks from Social-Democratic Party and so-
called independent analysts. This is remarkable in a period characterized by fiscal
instability and increases of many other taxes. Personal allowances (applicable
only for salaries) remained unchanged. They increase with the number of family
members and decrease with gross salary’s level according to the same formula
presented in 2009 edition of IREF taxation report.
The most controversial debate concerned taxation of personal income other
than salaries, like income from intellectual property (such as copyright income).
Tax allowances for these contracts were 40% of gross income. Moreover, these
incomes were exempted from social security contributions, which in Romania are
at a very high level (see below for details). As a consequence, employees and em-
ployers substituted intellectual property contracts for labour contracts, as a tax
avoidance mechanism. Beside artists, writers and journalists, many other liberal
professions benefited from the lighter taxation of intellectual property rights.
Government reduced by Emergency Ordinance (58/2010) the amount of tax
allowances from 40% to 20% of gross income, increasing therefore the effective
tax rate. (Moreover, income from intellectual property rights became subject to
social security contributions, as explained below). The modification, decided on
26th June 2010, became effective on July 1st 2010. Initially, it increased also the
administrative burden for taxpayers earning this type of income, by the obliga-
tion to submit personally his/her fiscal statement. Facing queues and protests
from VIPs with high media coverage, government transferred the obligation to
file fiscal statements from the employee to the employer.

In 2010, corporate income tax remained at the same level (16%) for the fifth
consecutive year, which represents one of the��
rare instance of stability in the Ro-
manian fiscal system��
of Romanian fiscal stability. This rate concerns undistrib-
uted profits. Dividends distributed to individual stockholders are subject to the
personal income tax (16%). Under certain conditions, dividends paid to another
EU company are exempt from this supplementary taxation.
In 2009, government introduced a minimum corporate income tax that had

to be paid even by enterprises incurring losses. The minimum corporate income
tax was about €500 and increased with the level of 2008 turnover, up to € 10,000.
This measure, supposed to reduce tax evasion, increased dramatically the number
of business closures. It represented also a barrier to entry with strong dissuasive
effects on entrepreneurial activity. The minimum corporate income tax was abol-
ished on 31 October 2010, as planed when it was introduced.
Despite keeping some of its promises, government maintains uncertainty on
corporate income taxation in 2011. For example, government officials declared
publicly their intention to introduce a better-targeted version of minimum cor-
porate income tax for industries prone to tax evasion. But by the end of 2010, no
detail on this topic was available.
Since 2001, micro-enterprises (less than 9 employees and less than € 100,000
turnover) could opt for turnover taxation as an alternative to profit taxation. The
tax rate changed almost every year, its level fluctuating between 1.5% and 3%.
Employers make an extensive use of micro-enterprises as tax-avoidance device
by incorporating highly paid employees. Authorities amended the Fiscal Code in
order to close the loophole, with a limited success because other tax-avoidance
devices were adapted to the same purpose. In 2010, the turnover tax option was
eliminated (all companies paid the standard 16% corporate income tax) but it has
been made available again for 2011, at a level of 3%. The rumours concerning
the reintroduction of turnover tax option started almost immediately after its
suppression, but an official decision was taken only end December 2010.
Capital gains are taxed in general at 16%. Gains from transfers of listed shares
held more than one year benefited from a preferential taxation (1%) until 30 June
2010, but after 1 July they are submitted to the general regime.
Value Added Tax

Facing a drop in fiscal revenues and confronted with its incapacity to reduce
public spending, on 26 June 2010, Romanian government decided to increase
VAT from 19% to 24%, starting 1 July 2010. This 25% increase in one of the
most important taxes, up to a level very close to the maximum allowed by EU
treatises came after recurrent official declarations that excluded such possibility.
Beside its explicit and obvious monetary fiscal burden, it generated an incalcu-
lable administrative burden on businesses for two reasons. First, it was an unan-
ticipated change that occurred during the fiscal year. Second, the aforementioned
administrative burden was magnified by the absurdly short period of time left
for businesses to comply with new regulations. For example, all cash registers in
Romania had to have their software modified in a couple of days by just a few
authorized companies.
There are also two reduced rates and a limited list of exemptions. The highest
one (9%) concerns cultural services, books, newspapers, medicines, hotel accom-
modation, dental and medical services. The lower rate (5%) was introduced in
2009 and maintained in 2010 for new houses and apartments, as a social and anti-
crisis policy. The exemptions are those listed in VAT European Directive.
End June, the Government modified by emergency ordinance some of the
rules concerning the enterprises involved in intra-community trade and the en-
terprises involved in production or trade with excisable products and duty free-
shops. The ordinance increased opportunity costs for businesses (it eliminated
the possibility of excise suspension in the case of goods’ transportation between
two fiscal warehouses; it increased or required new warranties for some opera-
tions involving excisable goods etc.) The ordinance increased the administrative
burden because enterprises involved in intra-community trade must be registered
in the Register of Intra-community Operators, created on 1 August 2010. En-
terprises had to provide many documents in order to register, even if most of
them were delivered by public authorities. The ordinance increased legal risks for
entrepreneurs and employees via higher fiscal fines, joint fiscal liability, etc.
Enterprises can make an application for VAT refund. The normal processing
term for the application is 45 days. After this delay, the firm is entitled to claim
late payment interest. On 1 July 1 2010, the interest rate was reduced from 0.1%
to 0.05% per day of delay.
As a consequence of the increase in VAT rate (by 26%), the correspond-
ing collected revenues increased with about 10%. Obviously, this represents an
equivalent drop in available resources from the private sector.
Excises
Excise duties on energy, tobacco and alcohol continued to increase in 2010, in

order to achieve conformity with EU regulation, usually in advance relatively to
deadlines established in pre-accession agreements. Excises remain inferior to EU
minima level. Government modifies them in a rather unpredictable way.
For example, excises on cigarettes for 2010 were established in 2009, but they
were modified many times. The last modification took place 30 December 2009,
when the minimum excise was set at € 67.34 for 1000 cigarettes for the whole year
2010. However, on 28 June 2010, the minimum excise was increased at € 71.04 for
1000 cigarettes, starting with 1 July 2010. This is a supplementary step towards the
target of € 90 for 1000 cigarettes, set for 31 December 31 2017 by the agreements
with the European Union.
Excises on gasoline and diesel gas increased in 2010 up to €452 /t and, respec-
tively, €347 /t. The upward trend will continue in 2011, the scheduled levels being
€ 467 /t and, respectively, € 358 /t.
Social contributions
Romanian legislation maintains the conventional but flawed distinction be-

tween employers’ and employees’ social contributions. Table 1 outlines the recent
evolution of social contribution rates. There are no modifications expected for
2011. The tax base is usually the gross wage, including bonuses and all work-
related income. As remarked also by World Bank’s Doing Business Report, Ro-
manian social contributions remain among the highest in EU, in strong contrast
with social benefits. This explains the low social acceptance of these contribu-
tions and the efforts made by employers and employees to avoid them.
Table 1: Recent evolution of social contributions rates in Romania
2008 2009 2009**** 2010 2011 2011

Type of Fiscal Febru-
contribution liability Janu- Febru-
Dec January ary
ary ary-Dec
-Dec.
Employ- 9,5 9,5 10,5 10,5 10,5 10,5
ee** (2%) (2%) (2%) (2.5%) (3%) (3%)
Pension* 18 18,5 20,8 20,8 20,8 20,8
Employer 23 23,5 25,8 25,8 25,8 25,8
28 28,5 30,8 30,8 30,8 30,8
Employee 5,5 5,5 5,5 5,5 5,5 5,5
Health
Employer 5,2 5,2 5,2 5,2 5,2 5,2
Unemploy- Employee 0,5 0,5 0,5 0,5 0,5 0,5
ment Employer 0,5 0,5 0,5 0,5 0,5 0,5
Risk and 0,15- 0,15- 0,15- 0,15-
Employer 0,4-2 0,15-0,85
accidents 0,85 0,85 0,85 0,85
Labour 0,25- 0,25- 0,25- 0,25-
Employer 0,25-0,75 0
inspection 0,75 0,75 0,75 0,75
Salaries’
guarantee 0,25 0,25 0,25 0,25 0,25 0,25
fund
Sick leave
and indem- 0,85 0,85 0,85 0,85 0,85 0,85
nities
40,95- 41,20- 44,50- 44,50- 44,50- 44,25-
43,05 42,40 45,70 45,70 45,70 44,95
Total*** 45,95- 46,20- 49,50- 49,50- 49,50- 49,25-

48,05 47,40 50,70 50,70 50,70 49,95
50,95- 51,20- 54,50- 54,50- 54,50- 54,25-
53,05 52,40 55,70, 55,70 55,70 54,95
* Employer’s contributions are for “normal”, “uncommon” and, respectively, “spe-

cial” conditions of work.
** Since 2008, employee’s pension contribution (9.5% or 10.5%) is split between the
first pillar (“pay-as-you-go”, public) and the second pillar (capitalization, privately admin-
istrated) of the pension system. The value in brackets represents the contribution to the
second pillar in the case of eligible employees.
*** The tax base differs slightly from some contributions and changed over time,
but in most cases, it is gross salaries (payroll) or very close to it. Therefore, the total is
not always rigorously precise but represents a useful approximation. Source: Romanian
legislation
**** On 2 February 2009, government announced an increase – effective immedi-
ately – in pension contributions from 27.5% in December to 31.3% (10.5% employees’
contribution to 1st and 2nd pillar + 20.8% employers’ contribution). Government lim-
ited the contribution to the second pillar at 2%, although it was scheduled to increase at
2.5% in 2009, according to Pensions’ law.
The tax rates for social contributions were not modified in 2010, but the au-
thorities increased the tax base. For example, in the case of intellectual property
rights, deductions were reduced, which increased the level of taxable income.
Pension contributions represent the major component of social contribu-
tions. Other contributions are for health care, unemployment insurance, risk and
accidents, labour inspection, salaries’ guarantee fund and for sick leave and in-
demnities.
For eligible employees, the 10.5% employee’s mandatory contribution to the
pension system is split between the public pension fund (first pillar, “pay-as-you
go”, 8%) and the privately owned and administered pension funds (second pillar,
capitalization, 2.5%). This transfer of contributions from first pillar to second
pillar is supposed to increase by 0.5%, up to a contribution of 6% to the second
pillar in 2016. In 2010 Romanian authorities intended to delay further the sched-
uled increase of the contributions to the second pillar of the pension system,
a measure already taken in 2009. Facing protests, authorities decided in March
2010 to allow the increase from 2% to 2.5%. However, a couple of months later,
they proposed a decrease to 2% for the second half of 2010. Of course, this
debate generated uncertainty. Eventually, the contribution remained at 2.5% for
2010 and is set at 3% for 2011. This is still 0.5% less than the level scheduled by
the original version of the private pensions law of 2008.
There has been no major change officially announced for 2011 concerning
social contributions rates. On 30 December 30 2010, Emergency Ordinance 123
suppressed the contribution to the Labour Territorial Inspectorate (0.25% or
0.75% of gross salary), starting February 2011. Public pension fund, health in-
surance and unemployment funds are facing huge deficits (covered from state
budget). The Constitutional Court invalidated government’s strategy of reducing
pension benefits; therefore the options available are the following:
◘ Erosion of benefits via inflation, which increased significantly in 2010, at
7.73% (From November 2009 to November 2010), more than twice the inflation
target announced by the central bank, 3.5%;
◘ Erosion of benefits via taxation of pensions or other direct cuts. For ex-
ample, Romanian Government decided to lower the ceiling of pensions submit-
ted to health insurance contributions from 1000 Lei (€ 233) to 740 Lei (€ 172), a
level still higher than minimum wage. The maternity leave will be reduced from
a maximum of two years to one year, but the bonus of 500 Lei (€ 116) for going
back to work earlier will be maintained;
◘ Increasing the legal retiring age at 63 years for women and 65 years for men
(already decided end of 2010) and discouraging early retirement by stricter condi-
tions and enforcement (some symbolic measures were announced);
◘ Reducing social spending by clarifying the multitude of social programs, by
a better targeting and by reducing the frauds (officially estimated at 25%, after the
verification of about half of beneficiaries of the minimum income);
◘ Further increasing of public debt. This strategy was already overused re-
cently and would not be wise to rely on it, except as a way to finance the transi-
tion from a PAYG pension system towards a Chilean-style capitalization system.
However, it is unlikely that Romanian authorities – regardless of their political
affiliation – would adopt this approach.
Local taxes
Revenues for local budgets are mainly transfers from national budget. Trans-
fers’ amounts are calculated as a percentage of locally collected corporate income
tax, personal income tax and VAT. Besides these “entitlements”, national author-
ities can decide supplementary transfers, allegedly based on national solidarity
and/or national strategy criteria, but the beneficiaries are usually municipalities
run by mayors from the same political party (coalition) as the government. Taxes
on real estate (land and buildings) and on vehicles (different for individuals and
companies) are another important financing source of local authorities. The fis-
cal value of buildings increased starting with 1 January 2010.
Local taxes for real estate and vehicles cannot be considered wealth taxes.
However, for individuals, the “normal” real estate taxes were increased by 15%,
50%, 75%, 100% for, respectively the first, second, third, and fourth building
owned, other than the main residence. Since 1 July 2010, owners of more than
one building had their “normal” real estate tax increased for the first (65%),
second (150%), third and more (300%) houses (apartments, buildings), aside the
main residence.
Quasi-taxes and other administrative fiscal burden
Quasi-taxes and administrative burden represent one of the most important

barriers against economic growth in Romania (see previous reports). Even those
who are actually responsible for it, public authorities, publicly acknowledge this
problem. Their promises to reduce the number of so-called “self-financed agen-
cies” weren’t followed by significant effects. Similarly, regrouping them reduced
the number of taxes and quasi-taxes – which is a step in the right direction – but
the resulted new tax was often superior to the total amount of the correspond-
ing cumulated taxes. Therefore, the budgetary income generated by quasi-taxes
increased in 2010 by 21.4% compared to 2009. They are contributing with about
12% to the total budgetary income, more than corporate income tax or personal
income tax.
The good news for 2011 is so far just a promise. The Finance minister an-
nounced that businesses will be required to make only one social and fiscal state-
ment per month, replacing the five monthly statements they must file and submit
in physical AND electronic format (the latter one, on a floppy disk. Not on USB
storage device, or on a DVD or CD…). The administrative burden is still high

because all data must be reloaded every month for all the employees, even if
there are no changes. Maybe an improved version of the software will correct
this.
Of course, businesses have already the possibility to submit exclusively elec-
tronic forms, but only if they buy an electronic signature certificate from one of
the only TWO authorized companies to sell them. They are expensive and valid
only one year, which means that this opportunity is beyond the reach of small
businesses. After 30 June 2011, all businesses will have to submit their fiscal state-
ments in electronic form.
Another promise is the possibility for any taxpayer to make online all the
necessary payments. Actually, the Ministry of Communication and Information
Society announced that the system is 100% operational, but until most important
public administrations are connected, the respective webpage (www.ghiseul.ro)
will not be very useful.
Selected references
Law 19/2000 on public pensions system and other social security rights, Monitorul
Oficial, No 140, April 1st, (With all its modifications).
Law 346/2002 on labor accidents and professional diseases insurances, Monitorul
Oficial, No 454, June 27th, (With all its modifications).
Law 399/2006 on the approval of the Emergency Ordinance 158/2005 concerning
sick leave and health insurance indemnities, Monitorul Oficial, No 372, April 28th, (With
all its modifications).
Law 53/2003 on the Labor Code, Monitorul Oficial, No 72, February 5th, (With all
its modifications).
Law 571/2003 on the Fiscal Code, Monitorul Oficial, No 927, December 23rd, (With
all its modifications).
Law 76/2002 on unemployment insurance, Monitorul Oficial, No 103, February 6th,
(With all its modifications).
Law 95/2006 on the reform of healthcare, Monitorul Oficial, No 372, April 28th,
(With all its modifications).
Spain • Ángel Martín Oro 157
Spain
Ángel Martín Oro
Instituto Juan de Mariana, Madrid
The financial and economic crisis in Europe has brought about a series of
severe interdependent problems. The fragile health of public finances has been
one of the most worrying issues, especially in countries like Greece, Ireland,
Portugal and Spain, because of soaring public deficits and a growing cost of sov-
ereign debt. Now, fiscal consolidation measures have been approved, although
they seem to be far too timid, and serious problems remain.
An overview of the Spain’s case
Spain has been one of the most badly hit European countries in the down-
turn. The decade before 2007 was one of fast economic growth, relatively huge
increases in employment, low unemployment rate (according to Spanish stan-
dards), buoyant tax revenues and government spending, and balanced public
finances. But, as in many other countries, this was mostly based on an unsus-
tainable credit-induced boom that fuelled the Spanish housing bubble and over-
expanded other sectors of the economy.
The bust that followed revealed the sad truth of the economic structure of
Spain: an economy heavily dependent on the housing and construction sector,
with very low productivity and competitiveness, and an extremely deficient and
rigid labour market unable to face severe crisis. It should be noted that the Span-
ish unemployment rate is the highest in the European Union, above 20%.
Moreover, it revealed a high structural public deficit, a reality that was previ-
ously hidden by the effects of the unsustainable boom period. The sharp dete-
rioration of public finances, caused by increasing expenditures and decreasing
revenues in a very similar proportion, is illustrated in the following chart.
Public deficit of the Spain’s economy, 2004-2009 (% GDP)
Tax revenues evolution
In terms of the tax-to-GDP ratio, the Spain’s figure has fallen without paral-
lel in any of the European countries, due to a dramatic decrease in tax revenues
–not to a significant reduction of tax rates. While the tax-to-GDP ratio barely fell
from 45.3% in 2007 to 44.4% in 2009 in the EU-15, in Spain it plummeted from
41.1% to 34.7%. (Source: Eurostat. “Government Finance Statistics”).
This fall has been led by the Corporate Income Tax and the Value Added Tax
-- this reflects the severity of the economic downturn. Particularly, the soaring
unemployment rate (going from 8% in 2007 to almost 21% at the end of 2010,
while the EU average remains at 10%) and the serious difficulties of small and
medium enterprises are the two key factors that may explain the fall in revenues.
The deficient regulation of the Spanish labour market, among other things, may
be seen as partially responsible for this.
Fiscal consolidation: Expenditure cuts
As a consequence of the weaknesses of the Spanish economy mentioned

above, international capital markets have been increasingly reluctant to trust
Spanish government debt, pushing its risk premium over German debt (which
is considered the benchmark) to record levels. The first dramatic episode took
place in May 2010, when financial markets’ fear over Spain’s sovereign solvency
risk was at its highest. The lack of credibility of the Spanish government was
being highlighted by the financial markets after he had denied, first the existence
and then the severity of the crisis (when it was more than evident), and after hav-
ing opted for an expansionary fiscal policy during 2008 and 2009.
Pressured by the financial mark ets, political leaders and international organi-
zations such as the IMF, Mr. Zapatero’s Socialist government proposed a pack-
age of fiscal consolidation measures in May. Together with previous cuts, these
austerity measures mainly consisted of civil service salary cuts and a reduction of
the supply of new public sector jobs, public investment cuts, pension payments
freeze, and other current expenditures cuts. The savings estimated from these
cuts would amount to a total of € 20,000 between 2010 and 2011 (about 1% of
GDP each year).
However, these austerity measures were not enough. Confidence did not re-
turn, and even deteriorated in the context of the European debt crisis, particular-
ly the Irish bailout process by the Euro members, and the lack of any meaningful
recovery in the Spanish recession.
Thus, in November and December, the government launched a new package
of austerity measures. On the expenditures side, it consisted of abolishing an
extraordinary unemployment transfer for those without the conventional unem-
ployment benefits, and a series of partial privatizations (e.g. Air Traffic manage-
ment). Moreover, a pension reform has been proposed by the Socialist party,
which will effectively cut pension payments by extending the retirement age from
65 to 67 and the period used to calculate pension payments from 15 years to 20
or 25. (Nowadays, only the Social Security contributions of the last 15 years of a
work-life are taken into account to calculate the amount of an individual’s pen-
sion).
Tax policy measures
As shown above, tax revenues declined sharply in the last years, as a conse-
quence of the burst of the bubble and the severe recession that followed. The
recent tax policy measures have had two main goals: stimulate economic activity
and employment (especially in the first part of the crisis until 2010), and reduce
the public deficit (especially after 2010). Let us analyze these according to the tax
figure.
Personal income tax (PIT) – Impuesto sobre la Renta de las Personas

Físicas (IRPF)
The PIT taxes labour income and capital gains, although the first contributes
to about 90% of the total. Since the last reforms taken by the government in
September 2010, income is taxed according to the following brackets: 24%, 28%,
37%, 43%, and two new brackets of 44% from €120,000 to €175,000, and 45%
beyond that amount. This latest reform was presented as a tax increase against
the “rich”, with the argument that the burden of the fiscal consolidation had to
be imposed on the rich as well as on the low and middle-classes (who, it was said
by the Left, were suffering from the previous spending cuts of May). But, as was
explicitly recognized by the government, this change wasn’t going to increase
revenues in any meaningful way. Which tend to prove that is was more an ideo-
logical signal sent to left-wing government’s supporters, such as the Unions.
In addition to this reform, throughout 2008 and 2009 several transitory meas-
ures were taken to deal with the effects of the economic crisis, in the form of tax
credits –the most relevant being the one granted to working and self-employed
taxpayers of €400 during 2008 and 2009, social security rebates and deadlines of
payments to specific categories of workers. Other additional measures were the
abolition in 2011 of a childbirth allowance of €2,500 that had been introduced in
2007, and the removal of a tax deduction for housing acquisitions for taxpayers
whose tax base is more than €24,170 since January 2011.
Regarding savings income and capital gains, since 2010 they are taxed at a
progressive rate of 19% and 21% for income above € 6,000.
Corporate income tax (CIT) – Impuesto de Sociedades (IS)

Spain suffers from a higher than average CIT. Despite decreasing the general
tax rate from 35% to 32.5% in 2007 and to 30% in 2008 (with a lower rate of
25% for small and medium enterprises, and a higher rate for hydrocarbon related
companies), this drop was far lower than in the EU-16 (as measured by the arith-
metic average). Particularly remarkable are the cases of Germany and Ireland;
two countries that decreased their CIT considerably, as shown in the following
table.
Tax on corporate income
2000 2010 Difference 2000-2010

EU16 34.9 25.7 - 9.2

Germany 51.6 29.8 - 21.8

Ireland 24.0 12.5 - 11.5

Spain 35.0 30.0 - 5.0

Source: Eurostat. Taxation trends in the European Union, 2010
In the context of the crisis, some measures have been applied to alleviate
the fiscal burden on small and medium enterprises. For instance, CIT rate for
small companies that maintain or increase their workforce has been temporarily
decreased by 5 percentage points for the years 2009-2011. Additionally, more
recently, the government announced a tax reduction for small and medium en-
terprises (SMEs). On the one hand, the tax base will be increased for companies
which pay the reduced CIT rate, so that now turnover up to €300,000 (instead of
€120,000) will pay 25%. On the other hand, the concept of small and medium
enterprises subject to the reduced rate is extended. Also, businesses will not be
legally forced to pay fees to the Chamber of Commerce any more.
Nevertheless, given the size structure of SMEs in Spain (most of them are
micro-enterprises), it is estimated that only about 3% of the total SMEs will
benefit from this measure.
Value added tax – Impuesto sobre el Valor Añadido (IVA) - and excise
duties
Perhaps the most important tax reform has been the increase in the Value
Added Tax (VAT) since July 2010. The standard rate rose from 16% to 18%,
and the reduced rate from 7% to 8%, while the super reduced stayed constant at
4%. Yet, Spain still has one of the lowest VAT rates and consumption taxes as a
percentage of GDP of the European Union.
Minor additional changes in the VAT have included the application of re-
duced rates for repairs and refurbishing of own dwelling, presumably in an at-
tempt of the government to encourage depressed housing activity.
Furthermore, tax rates for tobacco and hydrocarbons have been increased,
first in June 2009, and then again in December 2010 for tobacco.
Doubts over fiscal consolidation measures
In spite of all these fiscal consolidation policies, there are important doubts
over the ability of the Spanish government in its globality (the central, state and
local governments) to fulfil its deficit target of 3% in 2013. Firstly, the projec-
tions of GDP growth and employment (and consequently unemployment ben-
efits and tax revenues) contained in the 2011 Budget Plan seem to be far too
optimistic. Secondly, 2011 may be a year of problems in the Spanish banking sec-
tor, especially in its semi-public branch, the so-called Cajas de Ahorro, because
of its high exposure to the construction sector. This might be a temptation for
the government to bail-out troubled institutions. Thirdly, additional turbulences
in Spanish debt markets (which should not be discarded at all) might mean higher
costs of debt, a factor that may destabilize public finances even further. Besides,
given the deficiently designed fiscal federal system, it is hard to control state and
local governments’ public spending, which is aggravated by their lack of trans-
parency and accountability.
Additional tax hikes?
Given these doubts, some are calling for additional tax hikes. The govern-
ment has been defending this from time to time, creating uncertainty over the
tax regime. Their argument has been often based on the thesis that 1) taxes are
much lower in Spain than in our neighbour European countries, and that 2) taxes
are too low to maintain –or improve- the current government-run social safety
net and the level of public infrastructures. While it is true that the fiscal pressure
(as measured by the tax-to-GDP ratio) is considerably lower in Spain, we believe
this thesis is biased and misleading.
To show this, the Instituto Juan de Mariana has published a detailed report
called “The fallacy of low taxes in Spain: A comparative study of taxation” (27 De-
cember 2010). Basically, the argument of the supporters of tax hikes creates con-
fusion between tax revenues to GDP (which is low mainly because of the very high
unemployment rate and low productivity) and the actual tax burden that Spanish
citizens and businesses have to bear. The reality is that, for homogeneous levels of
income, the idea that Spain has low taxes cannot be sustained. Thus, the individuals
of a rich country with a 50 percent fiscal pressure are not affected equally as the
individuals of a poor country with the same fiscal pressure.
Other measures, such as an indicator of the tax and administrative burden

on medium-sized companies (elaborated by the Doing Business project of the
World Bank), or a disaggregated analysis of the different tax figures, reinforce
our conclusion. (For more details, see “The fallacy of low taxes in Spain: A com-
parative study of taxation”, www.irefeurope.org, 15 February 2010)
Our assessment
In addition to the arguments presented above, we think that a substantial tax

increase is a wrong-headed policy because of two main reasons. Firstly, it might
put an additional drag on the economic recovery process, which is being already
quite difficult on its own. By reducing the disposable income of economic agents,
it would hinder the adjustment of their financial positions after the excessive in-
debtedness of the boom era, a necessary condition for a healthy recovery.
Secondly, it might be used as a boost for a bigger and more burdensome pub-
lic sector in the longer term. This would not be a welcome outcome for us, given
the costs on society and the loss of competitiveness it would generate.
Rather than raising taxes, the Spanish economy urgently needs to lay the in-
stitutional foundations of a healthy market economy by introducing structural
reforms to solve structural problems. There are many areas that need ambitious
reform, but the following are the most remarkable ones in the context of our
study:
The extremely rigid and inefficient labour market should be largely liberalized
in order to cut the cost of hiring and make labour relations more flexible.
The heavy administrative and bureaucratic burden that entrepreneurs face
should be drastically reduced, to provide them with a more attractive environ-
ment for their wealth-creating activities. These two measures are essential if we
want to create employment.

The expenditures of the public sector as a whole –which has to adjust its
financial position as well- should be cut in a considerable amount, through the
elimination of inefficient public spending programs and subsidies, or the ratio-
nalization of the inefficient and extremely expensive federal government sys-
tem.
Sweden
Anders Ydstedt,
Partner at Captus, Malmö
Lower taxes but higher tax revenues
In 2006 Sweden got a new centre-right government. This government has

made major tax reductions during the last four years, mainly as earned income
tax credits (a tax credit for certain people who work and have low wages that
reduces the amount of tax owed and in some cases gives you a refund). The total
taxes as percentage of GDP has decreased from 48.8 to 45.2. During that period
the yearly amount of tax revenues has increased with over SEK 80 billion (€ 9
billion). Sweden is an example that shows that lower tax levels can give more tax
revenues.
In September 2010 Sweden had a general election and the centre-right gov-
ernment was re-elected for another 4-year period. A successful, extremely con-
servative fiscal policy was considered as an important reason for the re-election
of the centre-right government. Sweden was hit by a financial crisis in the early
1990s and has since then made measures to keep the budget targets and even
reach a budget surplus.
Tax policy: an important issue in the general elections in 2010
Tax policy was a major subject during the election campaigns in 2010. The
objective of the earned income tax credits, that the centre-right government in-
troduced during 2006-2010, was to make it more profitable for people to work
than live on allowances. Senior citizens were not included in this tax scheme and
the socialist opposition made this an important issue in the political debate. The
Switzerland • Pierre Bressard 167
socialists called the earned income tax credit “a tax on senior citizens” because
senior citizens did not get this tax reduction. As a result, all political parties made
it their highest priority to promise lower taxes for senior citizens.
The socialists also wanted to reintroduce a wealth tax on capital over SEK 1.5
million (€ 170,000). The Swedish wealth tax was abolished as late as 2007. After
the general election the many socialists have pointed out that their proposals on
fiscal policy, such as reintroducing a wealth tax, partly explain their defeat. Today
it seems like the idea to reintroduce a wealth tax is a dead issue in Sweden.
Due to extremely high total tax wedges for individuals (the difference between
what employers pay out in wages and social security charges and what employees
take home after tax and social security deductions), cleaning services and house
maintenance has been small sectors with few regular businesses, although there
have been many illegal house maintenance workers.
The centre-right government introduced a scheme with tax deductions for
cleaning services and house maintenance where 50 percent of the total cost is
deductible up to SEK 50,000 (€ 6,000) per person and year. This has been seen
as a success, especially for house maintenance services, with many new jobs and a
total of SEK 14 billion (€ 1.6 billion) paid in subsidies during 2010. Critics argue
that the tax deduction has made it possible to increase prices for services.
For taxes on businesses there has been few initiatives during the last four
years. In the election campaigns both the centre-right government and the social-
ists promised to introduce a lower VAT on restaurants. Today the VAT level on
restaurants is 25 percent and after the election the re-elected centre-right govern-
ment has decided to start a state committee that will investigate the effects of a
12 percent VAT on restaurants.
The government has also appointed a state committee that will look into the
taxation on businesses. This committee will evaluate the corporate tax and the
tax level on capital income. It will also find solutions to make it more tax favour-
able to use equity than debt to finance business investments. The moderate party,
which is the biggest party in centre-right government, has preferred to lower the
corporate tax level. In 2009 they lowered the corporate tax level from 28 to 26.3
percent. The socialist party is also in favour of lowering corporate tax levels.
Both the moderate party and the socialist party consider lower corporate taxes a
competitive advantage, which will attract businesses to Sweden.
Taxation of capital income has not been of political interest, except for the
inheritance tax and the wealth tax, which were abolished in 2004 and 2007 re-
spectively. Perhaps will the new committee on taxation on businesses change this
situation? High tax on capital income is probably one reason why successful
Swedish entrepreneurs such as Niklas Zennström (Skype) and Ingvar Kamprad
(IKEA) have placed the ownership of their businesses in other countries (Lux-
emburg and Netherlands).
Sweden has highly progressive taxes on personal income
Sweden now has the highest marginal tax rate on income since Denmark
lowered their top marginal tax rate in 2009. The government has lowered in-
come taxes quite substantially with an earned income tax credit but they have not
lowered the top level of marginal tax. The level of the earned income tax credit
depends on the total income. It is constructed to give the highest tax credit for
lower income levels. The earned income tax credit makes it more worthwhile for
people outside the labour market to work, but it is also extremely complicated
to calculate.
The earned income tax credit, or in-work tax credit as the government prefer
to call it, was introduced in 2007. Three more steps have followed in 2008, 2009
and 2010. The moderate party talks about introducing at least two more steps
in this scheme of earned income tax credits. At least one of the other parties in
the centre-right government is not as happy about this and they propose a lower
top marginal tax rate. When the centre-right government was elected in 2006,
they promised to lower the top marginal tax rate but it is likely that there will be a
compromise where the bracket for the highest marginal tax rate will be changed
so that fewer will pay the highest marginal tax.

The personal income taxes start with local taxes, which are decided on a local
level. The local taxes are in average 32 percent, from 29.08 to 34.70 percent. In
2011 only 20 out of 290 municipalities will change their tax level. Some munici-
palities will raise the level and some will lower it.
Above an annual income of SEK 395,600 (€ 44,000), working Swedes have to
pay state tax, which is 20 percent. Retired citizens start to pay state tax from an
annual income of SEK 418,200 (€ 47,000). This difference is probably a result
of the debate about the earned income tax credit, which until now have not given
the same tax cuts to senior citizens. Senior citizens were as mentioned above an
important factor in the general election.
The top marginal tax level is a state tax of 5 percent. This tax starts at an an-
nual income of SEK 560,904 (€ 63,000) for working citizens. The tax bracket for
this top level has been raised from SEK 545,196 (€ 61,000). In total this makes
the top marginal tax rate 20 plus 5 plus the local tax, which varies from 29.08 to
34.70 percent.
This is unfortunately not the whole truth. Employers have to pay taxes and
mandatory social charges on wages. In total they are minimum 31.42 percent
and are divided into e.g. charges for retirement costs, healthcare costs and labour
market activities. Most of these charges can be seen as taxes. If we include em-
ployers’ taxes on wages the total top marginal tax rate in Sweden is 70 percent.
The earned income tax credit system has made it extremely complicated for
individuals to calculate how much tax they will have to pay. For an annual income
of SEK 180,000 (€ 20,000) the average tax paid is 20.7 percent, for an annual
income of SEK 300,000 (€ 34,000) the average tax paid is 24,5 percent and for
an annual income of SEK 420000 (€ 47000) the average tax paid is 28.1 percent.
The Swedish income tax system has been so complicated that the most reliable
source of information is a privately owned an operated website (www.jobbskat-
teavdrag.se). At this website it is possible to calculate the actual tax level. Most
Swedes has got substantially lower taxes due to the earned income tax credit sys-
tem but public polls shows that many Swedes don’t recognize this. A poll made
by Statistics Sweden in 2009 showed that only 40 percent of all Swedes knew
about the earned income tax credits. Among unemployed, those who should be
targeted by this policy, the knowledge about the earned income tax credits was
even lower.
A budget with a surplus target
Sweden has an extremely conservative fiscal and budget policy. In the early
1990s Sweden was hit by a financial crisis and after that a surplus target for the
budget was introduced. The surplus target requires public finances to show a
surplus of 1 per cent of GDP on average over a business cycle.
In the fiscal plan for 2011 the government says: ”The goal of economic poli-
cy is to create the highest possible sustainable welfare by means of high sustain-
able growth, high sustainable employment, welfare that benefits everyone and
macroeconomic stability.”
In the general election this cautious budgetary and fiscal policy gave the
Swedish language a new expression. Instead of talking about election promise,
Swedish politicians started to talk about “reform ambitions”. A “reform ambi-
tion” will be realized as soon as there is room for the reform in the state budget.
From 2009 to 2010 the public debt has actually decreased from 41.7 to 39.1
percent of GDP.
In the fiscal plan for 2011 the government predicts, “…some further room
for reform is expected to arise for 2012–2014. The estimate is, however, subject
to considerable uncertainty. Further reforms can therefore only be implemented
if the estimate does not change when the uncertainty declines over time.”
During the financial crisis Sweden has had a deficit of 1.2 percent of GDP
in 2009 and 1.3 percent in 2010. The fiscal plan from the government forecasts
a deficit of 0.4 percent in 2011 and from 2012 there will be a surplus again. In
Sweden most critics argue, not against the deficit, but quite opposite they say that
Sweden should invest more in infrastructure and education during the financial
crisis to make Swedish industry more competitive and promote future growth.
In the fiscal budget for 2011 total tax revenues will be SEK 1,531 billion (€172
billion) but political reforms amounts only to SEK 13 billion (€1.5 billion).
The forecast for GDP is that it will rise with 3.7 percent in 2011. In 2010 it
increased with 4.8 percent. The unemployment was above 8 percent in 2010 and
the forecast is that it will be above 8 percent also in 2011.
The system with twofold punishment for tax crimes is challenged
The Swedish tax system has special sanctions for tax crimes. The Swedish tax
authorities can sentence a taxpayer to pay a penalty tax, usually 20 or 40 percent
extra tax. Tax crimes are also a part of the regular judiciary system and the of-
fender can thus also be sentenced with a fine or in severe cases to jail. Sweden
has twofold punishment for tax crimes.
A ”tax crime” can be a mistake as simple as a typing error on a tax form.
This twofold punishment is not in conformity with judgements by the European
Court of Justice. Recent judgments in Swedish courts have challenged the two-
fold punishment in the tax system.
The trend towards higher energy and environmental taxes was

stopped in 2010?
Sweden was the first country in the world to introduce a tax on carbon di-
oxide emissions in 1991. Despite strong public protests all political parties have
been in favour of higher taxes on energy and emissions since the 1990s. Total
tax revenues on energy, carbon dioxide and sulphur dioxide exceeded SEK 65
billion (€ 7.3 billion) in 2009, about 5 percent of total tax revenues. In 2011 the
energy tax on diesel fuel was raised with SEK 0.50 (€ 0.06) per liter but a majority
of politicians rejected further proposals for higher taxes on emissions. Proposals
for higher taxes on energy and environment from the socialist opposition have
been seen as one of the reasons for their defeat in the general election in 2010.
The centre-right government has been very clear about not introducing higher
taxes on environment for the future four years. Perhaps, the trend towards higher
energy and environmental taxes was stopped in 2010?
Switzerland
Pierre Bessard
Liberales Institute, Zurich and
Institut Constant de Rebecque, Lausanne
Switzerland’s issues with the European Union regarding certain cantonal cor-
porate tax regimes and savings taxation continued to impact policy in 2010. The
Swiss government adopted an ordinance for the application of OECD standards
for exchanging information in individual cases of tax evasion concerning non-
resident clients of Swiss banks. Internally, Swiss voters rejected a proposal to
impose minimal tax rates across cantons for high income or wealth. The Swiss
government also improved rules for financing companies.
Ongoing differences with the European Union
Cantonal corporate tax regimes
In December 2010 Council of the European Union adopted a report on EU

relations with European Free Trade Association countries, where it reiterates
its concerns regarding certain Swiss cantonal corporate tax regimes, which in
its view create “an unacceptable distortion of competition” on the basis of the
1972 Swiss-EU Free Trade Agreement. Although Swiss and EU officials have
been engaged in a “dialogue” for some time, the positions have not evolved. The
EU considers that Switzerland has been procrastinating over the issue for the last
four years in a “wait and see” approach.
The latest EU report is unlikely to impress the Swiss government, however.
Besides the EU’s numerous internal problems, the Swiss government has repeat-
edly found the EU complaint baseless, as the special tax regimes apply according
to specific criteria to holding and auxiliary corporate structures with practically

no operations in Switzerland. These structures carry out financing, research and
development and other headquarters services for their groups abroad. There
is no discrimination between Swiss and non-Swiss companies. The difference
arises from the different rates applicable on revenues from Swiss and non-Swiss
sources. As the latter are taxed at very low rates which may reach 2% depending
on the extent of operations in Switzerland, many corporations have relocated
their headquarters in recent years.
The Swiss central government has no authority over cantonal tax systems.
With regard to what the EU calls “harmful business tax practices”, the European
Council hopes to pressurize Switzerland into applying the principles and criteria
of the EU Code of Conduct on business taxation adopted in 1997. The Swiss
economy strongly opposes such a move. Observers expect that Switzerland might
give in eventually with a solution that would decrease corporate taxation for all
types of companies. Some cantons have signalled that they might adapt their tax
systems in that they would lower tax rates for revenues from Swiss sources and
apply the same rates to all types of corporations.
Savings taxation
Concerning the taxation of savings of EU residents’ deposits in Switzerland,

the European Council has welcomed the readiness of Switzerland to consider
an extension of the scope of the savings taxation agreement, once the EU has
finalized its work on the revision of the savings taxation directive. The withhold-
ing tax agreement for savings income between Switzerland and the EU has been
operational since 2005 with tax revenues in excess of CHF 535 million in 2009,
to the benefit mostly of the Italian, German and French governments.
Switzerland adamantly refuses to adopt an automatic exchange of informa-
tion, the EU’s official policy, in order to preserve the financial privacy of banking
clients. Brussels is expected to take up the automatic exchange of information
issue, which also concerns Austria and Luxemburg, in 2017.

The Swiss government has put forward as a lasting alternative the implemen-
tation of a tax at source for all revenues of non-resident clients of Swiss banks.
This proposal, which emerged from the banking sector itself as a way to preserve
banking secrecy, is controversial, as it would extend the Swiss banks’ role as tax-
collecting entities. However, its appeal for heavily indebted governments has led
to progress for this plan in 2010, although the EU remains sceptical towards a
solution that goes against its efforts to centralize and standardize policy across
the continent. Two member states, Germany and Britain, bypassed Brussels and
signed bilateral agreements with Switzerland on this issue after exploratory talks
conducted by a joint working group. According to the agreements, negotiations
will take place between these two states and the Swiss government to “further
intensify cooperation in financial and tax matters” and to “strengthen long-term
legal security for market participants”. Eventually this should lead to improved
market access for Swiss banks directly from Switzerland in European domestic
markets.
The agreements seek a “fair and lasting” solution in the interests of both sides.
German and British taxpayers should not be deterred from holding a bank ac-
count in Switzerland. In future, however, the possible risk of tax evasion should
not impact on the investment decisions of taxpayers from those countries. Dur-
ing the exploratory talks, the parties also agreed on a solution which respects
the protection of bank client privacy. Consequently, the automatic exchange of
information will no longer be an issue in relations between the two contracting
states and Switzerland. Further, the solution will apply after the entry into force
of the agreement to be negotiated (no retroactive effect). The solution, the details
of which are to be clarified during the negotiations, covers the following points
in particular: the regularization of past untaxed existing assets; the introduction
of a final withholding tax for the future on investment income (at a rate to be
negotiated). After the tax has been paid the tax obligation towards the country
of domicile will have been fulfilled. Extended administrative assistance has been
agreed in order to prevent any possibility of circumventing the withholding tax.

This envisages that the German and British authorities can submit a request for
administrative assistance which states the name of the client, but not necessarily
the name of the bank. Nevertheless, the number of requests that can be submit-
ted is limited and must be well founded. “Fishing expeditions” are not possible.
Finally, the package includes measures to decriminalize banks and their staff.
Exchange of information according to OECD standards
In 2010, the Federal Council adopted an administrative ordinance that gov-

erns the implementation of administrative assistance provisions in new or revised
double taxation agreements (DTAs) in accordance with the OECD standards.
The Ordinance on the Provision of Administrative Assistance in Accordance
with DTAs rules the requirements for providing and implementing administra-
tive assistance to third countries. If state authorities submit a request on the basis
of a DTA concluded with Switzerland, the Federal Tax Administration will con-
duct a preliminary examination. The prerequisite for the request is that it is in line
with the principle of good faith. Requests for administrative assistance will be re-
jected if they are based on information which was obtained or forwarded due to
actions which are punishable under Swiss law. In clear language, this means that
the Swiss authorities will not cooperate on the basis of stolen data from banks.
Other core requirements mentioned in the ordinance are detailed informa-
tion to clearly identify the person concerned and the holder of the information,
in general the bank. Switzerland will not provide administrative assistance in the
case of fishing expeditions, either. The procedural rights of those concerned will
also remain fully safeguarded. Those concerned may file an appeal with the Fed-
eral Administrative Court. A law is under preparation to replace the ordinance.
In March 2009, the Federal Council had taken the decision to adopt the
standards set out in Article 26 of the OECD Model Convention with respect
to international administrative assistance in tax matters. Switzerland has since
negotiated new DTAs or correspondingly revised DTAs with over two dozen
states. According to the new rules Switzerland’s principle of double criminality
no longer applies to non-residents as regards tax subtraction (or tax evasion, not
a penal, but an administrative offence in Switzerland, as opposed to tax fraud,
which involves the forging of documents).
Rejection of minimal tax rates by 58.5% of voters
In November 2010 a majority of voters turned down a proposal by the Social

Democratic party to impose minimal tax rates across cantons for residents with
income over 250,000 Swiss francs or wealth over 2 million francs. Nationally
58.5% of voters rejected the plan, with a record majority of opponents of 79.9%
in the canton of Nidwalden, one of the country’s most competitive and wealthi-
est cantons. Only four cantons out of 26 approved the proposal, which would
have needed a double majority of voters and cantons to pass.
The federal system of Switzerland is viewed as the secret to the country’s
ongoing economic success and worldwide competitiveness. Contrary to many
countries where taxes are collected centrally and distributed to regional or local
jurisdictions adding layers of bureaucracy and inefficiency, Swiss taxes are levied
at three levels: the approximately 2500 communes, the 26 cantons and the Con-
federation.
Although the Confederation has gained weight since its creation in 1848, two
thirds of taxes are still levied at cantonal and local levels. The diversity between
cantons is substantial: taxes can vary by a multiple of three within the country
depending on the location. Only federal taxes are the same for the entire country.
Rules, rates, and systems vary enormously among cantons despite formal har-
monization to facilitate comparison. The tax burden not only varies for income
or wealth, but also on levies such as the car tax or the dog tax, which depend
on the canton or the municipality. Most cantons have also abolished inheritance
tax for direct heirs. The canton of Schwyz does not have inheritance tax at all.
Taxes within a canton can also vary substantially depending on the commune of
residence. Voters play a central role in the tax system. The introduction of a new
tax necessarily requires the approval of voters.
In order to limit the diversity and competition in the Swiss tax system the
Social Democratic Party wanted to impose a minimal rate of 22% for income
over CHF 250,000 and a rate of 5 per mil for wealth over CHF 2 million. Some
cantons apply rates that are as much as twice lower those thresholds.
The government combated the measure as “dangerous” and “pointless”.
First, the proposal would have made some cantons less competitive as a business
or residential location; second it would have reduced public sector efficiency and
encouraged the dilapidation of tax funds. The government also viewed the exist-
ing mechanisms as sufficient to prevent any perceived abuse.
Amendments to Withholding Tax and Stamp Duty Directives
The Swiss Federal Council passed a change in the Swiss withholding tax and
stamp duty directives. The reform implies a liberalization of the current practice,
as inter-company loans are basically no longer considered as bonds or bond-like
instruments in the sense of the withholding tax and stamp duty law.
The amendment is beneficial in particular for domestic and non-domestic
groups centralizing their cash management activities in Switzerland and seeking
to take advantage of the favourable tax environment. Based on the new wording
of the directives, loans between group companies no longer qualify as bonds or
bond-like instruments regardless of the loan conditions. Group companies in the
context of the law are companies whose financial statements are fully consoli-
dated in the group accounts according to recognized accounting standards.
United Kingdom • Tony Curzon Price 179
United Kingdom
Tony Curzon Price
Editor-in-Chief, openDemocracy
May 2010: the scene for fiscal panic
In April 2010, one month before a general election in the UK, Moody’s, the
credit rating agency, cut Greece’s sovereign debt rating; 10 year government
bonds reached 12.5% and two-year bonds reached 10.1%. The UK electorate
delivered no overall majority in the May 6th election, and, during the coalition
negotiations, the pound Sterling fell even against the weakened Euro. More than
enough to worry whoever would be the incoming finance minister (chancellor):
ratings agency ready to downgrade sovereigns whom they did not think would
be able to exercise fiscal prudence; a risk of a currency crisis, dangerous when at
least 20% of government borrowing the year before had relied on savings from
other countries. Here was the nightmare for an incoming government: lenders
doubt its willingness to maintain the value of the currency, to avoid inflating
the debt away, or worry that exposure to domestic financial institutions – whose
liabilities were a staggering 389% of GDP, with UK banks highly exposed to
Irish banks – would lead other lenders to reconsider their investments in UK
sovereign debt.
The risk was that the story would play out with borrowing costs rising; if
monetary policy remained lax, inflation through devaluation would be the result.
Interest costs to the private sector would rise, GDP shrink and the budget deficit
and borrowing requirements rise even further. This is the debt death-spiral which
Ireland still finds itself in and which the (politically independent) governor of
the Bank of England warned the main party leaders was the immediate risk that
Britain faced.
One of the first acts of the incoming Conservative/Liberal coalition was to

announce an emergency budget for June and a goal to balance the budget over
the course of the Parliament. The immediate crisis of loss of faith in Sterling
was averted. The program of tax rises and spending cuts implied has dominated
fiscal discussions for 2010 in the UK. The over-arching impression has been of a
single-minded focus on raising revenue and cutting spending where it was politi-
cally possible. The small-scale details of fiscal policy, usually so important in non-
critical times, have been subsumed in the larger and more immediate problem of
maintaining a reputation as a trustworthy debtor.
When I wrote last year’s round-up of UK fiscal news for this publication, I
offered the hope that whoever would win the election would be better placed
than anyone has been for a long time to overhaul the system. The electorate
would know that change and difficulty were needed, and there was the possibility
of proposing a deal: “We need to increase taxes overall, but let us lower taxes on
what we consider good and raise them on bads...” Unfortunately, that opportu-
nity was sacrificed in the heat of managing a crisis.
Why the hole?
The Office of Budget Responsibility (OBR, a new institution set up to offer

impartial forecasts of the economy and of impacts of fiscal policy) estimates that
budget balance will require a combination of permanent tax rises and spending
cuts equal to 6% of GDP, of £86 billion (€ 101.3 billion).
This permanent tightening is needed despite the fact that GDP is forecast
to return to pre-crisis levels by 2012. The reason for two thirds of the required
tightening is that the Treasury has revised downwards its estimate of the growth
potential for the economy. The previous government had assumed – and adjust-
ed to – a much higher average growth rate than now seems reasonable. There-
fore, a “structural” deficit of about 4% of GDP has opened up. The additional
2% of GDP come from having to reduce the cyclical spending increases of the
past 3 years and to accommodate for the much reduced revenue from the once
lucrative financial sector.
The UK government intends to restore balance by 2014 and it has announced
that it will continue to reduce government spending into 2015 (the year an elec-
tion is expected) in order to deliver tax cuts. The tightening will be gradual and
will be composed of 26% tax rises and 74% spending cuts. Table 1 below sum-
marises the balance of measures planned to return to budget balance.
Table 1: Measures to reduce deficit (£bn)

2010 2011 2012 2013 2014 2015
Investment -1.8 -2 -2.1 -2.1 -2.2 -2.5
Current
-3.5 -7.7 -14.2 -19.9 -29.8 -42
spending
Benefits -0.4 -2 -4.7 -8.2 -11 -20.5
Debt interest 0 0.8 -1 -1.8 -3 -4.5
Other -3.1 -5.6 -9.5 -11.7 -15.7 -24
Net tax -2.8 -6.2 -6.9 -8.5 -8.2 -8
Tax increases -3 -14.6 -17.2 -20.2 -20.8 -22
Tax reductions 0.2 8.4 10.3 11.7 12.6 14
Total -8.1 -15.9 -23.2 -30.5 -40.2 -52.5
Fiscal Philosophies
There has been a fashion for finance ministers offering stability and predict-
ability of fiscal policy. The thought is clear: whatever the content of policy, it is
only made worse by being unexpected and by not being able to figure as an input
into other economic agents’ plans. Gordon Brown, as Chancellor in the previous
Labour administration, had instituted a rule that current spending should balance
the budget over the economic cycle. Sensible-sounding, this rule turned out to be
highly manipulable: first, capital spending was excluded; second, “the economic
cycle” ended up being a highly subjective concept. In many ways, it appears that
the period 1997-2007 was one long period of boom, of growth beyond the
growth rate of the economic potential of the economy. But the administration
never saw it that way and therefore never built up reserves for the bad times.
The new Chancellor, George Osborne, has therefore announced a new set of
rules that he will stick to:
Rule 1: balanced structural current budget by end of forecast horizon (cur-
rently 5 years)
Rule 2: debt as a share of GDP falling by end of forecast horizon
The advantage of the first rule is that it does not depend on the subjective
identification of the economic cycle. The trouble with it is that it encourages the
Chancellor to put pain into the future and to claim that he is honoring a prudent
program. As the moment for pain arrives, the forecasting horizon is pushed out
again and the balanced budget always comes manana.
The second rule is unlikely to be a constraint if the first rule is met. And if
rule 1 is met while rule 2 is not, the implication is a severe contraction in GDP –
one so severe that one does not expect rules like this to be adhered to.
The two rules now make no distinction between current spending and capital
spending. This reflects the current administration’s desire to reduce the role of
the state. As a strict matter of economic rationale, one would probably prefer to
maintain a distinction between current and capital spend: a large and necessary
public good investment, say in railway infrastructure, is properly speaking an
investment and may have a pay-back over twenty or fifty years; it ought not to be
a block on the investment that it would lead to a violation of the government’s
short term balanced budget constraint.
Tax changes
The tax changes announced and planned are mostly revenue raising measures
that have little regard for incentives. Table 2 summarises the mix of measures.
Table 2 : Tax measures, £ bn (+ve is revenue raised)

2010 2011 2012 2013 2014 2015
VAT 2.9 12.1 12.5 13 13.5 14
Bank Levy 0 1.2 2.3 2.5 2.5 2.5
Reduction in capital spending
0 0 1 1.9 1.8 2
allowance
Reduction in tax free investment
0 0 0.1 1.2 1 1
allowance
Capital gains tax 0 0.7 0.8 0.9 0.9 1
Corporation tax 0 -0.4 -1.2 -2.1 -2.7 -3.5
Small companies’ corporation
0 -0.1 -1 -1.3 -1.4 -1.5
tax
Employers’ national insurance
0 -3.1 -3.2 -3.5 -3.7 -4
contributions
Income tax increase in tax-free
0 -3.5 -3.7 -3.8 -3.9 -4
allowance
Net tax increase 2.90 6.90 7.60 8.80 8.00 7.50
Sources: http://www.ifs.org.uk/budgets/budgetjune2010/tetlow.pdf
The VAT tax rise is relatively simple, VAT had been reduced in an emergency,
temporary measure from 17.5% to 15% in 2008 as a rapid way to inject demand
into the economy. In June, the Chancellor announced an increase to 20% for
January 2011. The UK VAT scheme has many exemptions for goods considered
to be necessities and thus has some progressive characteristics in it. Many food-
stuffs, children’s clothes, equipment for disabled people, books, gas and electric-
ity for the home are all 0% or 5% rated. As a simple tax with some unavoidable
progressive elements, it seems like a good tax. Critics argue that its progressive
elements are very inefficient: why should everyone be exempt from tax on these
necessities?
The Bank Levy is a new tax on banks’ non-tier 1 capital. It hits larger banks
more than smaller ones, and riskier banks more than less risky ones. The tax rate
is of 0.04% from 1 January 2011 and 0.07% from 2012. The structure is very
similar to that proposed by the IMF as a “Financial Stability Contribution” - an
insurance scheme for lender of last resort services. It is obviously welcome as a

revenue-raising opportunity.
“Capital allowances” allow the cost of assets to be written off against tax. It
is a complicated tax, with many special regimes. Cutting the rate at which capital
costs can be offset against tax is thought to induce large behavioural changes, and
investment will probably be affected. At a time when it is hoped that investment
activity will replace the demand that government spending reductions are bring-
ing about, this seems like an odd choice for revenue raising. From the point of
view of revenue raising, however, it has the advantage that much of the activity
it taxes - investment - occurred before the tax was raised. That part induces no
behavioural change.
Capital gains tax has been increased from 20% to 28% for higher rate taxpay-
ers. It has long been known that most very high-earners, especially in the finan-
cial services, know how to turn a bonus - taxed at 50% - into a capital gain, taxed
at a much lower rate. The goal of bringing capital gains taxes and income taxes
closer together to avoid this wasteful avoidance activity seems sensible. Entrepre-
neurs can now earn a capital gain on their own business of £5m (up from £2m)
that is free from capital gains tax. There is a blanket £10,100 per person annual
exemption on capital gains.
Corporation tax will be cut from 28% to 24% over 3 years, and small compa-
nies corporation tax rate will be cut from 21% to 20%. These measures will be
offset to a degree by reductions in plant and machinery depreciation allowances
and tax-free investment allowances.
National Insurance Contributions (NICs) – a payroll tax that purportedly re-
flects the “insurance” aspect of employment-related welfare provision, like pen-
sions, parental leave, unemployment benefit etc – has had a layer of complexity
added to an already very complex tax. New companies outside the South East of
England now pay no NICs on their first 10 hires for the next 3 years. It is a hor-
ribly complicated tax, expensive to administer and does not even contribute to a
funded benefits system. It should be reformed and simplified.
The personal income tax threshold has been raised from £9,000 to £10,000.
This reduces the average tax rate of the low paid substantially and is intended to
make low-pay work more attractive. It was a condition of the Liberal Democratic
Party entering the government as junior coalition partner. However, the thresh-
old at which the 40% income tax rate is paid has been reduced from £45,000 to
£40,000. This will bring an additional 750,000 people into the higher tax band.
The Institute of Fiscal Studies summarises the impact of income tax changes as
follows:
“On average, the incentive for the vast majority of workers to earn a little
more will be slightly weakened as a result of these reforms. Some workers
will see their marginal effective tax rates increase more substantially as a result
of these changes – the number of individuals paying the higher 40% rate of
income tax will increase by 750,000.”
Spending cuts
The tax increases described above account for only about one quarter of
the fiscal tightening that is planned for the next 5 years. The rest comes from
expenditure cuts, broadly divided into cuts in benefits and cuts in departmental
expenditures.
Cuts to welfare spending by the end of the planning horizon
The government welfare budget of about £200 billion is to be cut by about

£20 billion. This will be achieved through a broad program of cuts in entitle-
ments, with some preference for increased use of means tested benefits (that is, it
is tested whether an individual or family is eligible for the benefit). The difficulty,
as always, with means testing is that this raises effective incremental tax rates
and worsens “poverty traps”. It also tends to make benefit administration more
complicated. The general fiscal position has been deemed more important than
incentive effects in many of the reforms.
Index benefits against the Consumer Price Index, not Retail Price Index
Saves £5.8bn
Reduce benefits and tax credits for families with children
Saves £5.7 bn
Replace housing benefit with locally administered transfer
Saves £1.8bn
Reform of benefit for those too ill to work
Saves £3.1bn
Cut council tax benefit
Saves £0.5bn
Institute overall benefits cap
Saves £0.3 bn
Other measures: £3.3 bn
TOTAL CUTS £20.5bn
Cuts to departmental expenditures
Non-welfare departmental spending on goods and services will be the largest

contributor to the fiscal tightening.
Table 3. Departmental Spending, 2011-2014, % change

International development 34.2
Climate change 16.2
Work and pensions 1.4
Health service 0.3
Defence -7.3
Education -10.8
Transport -14.6
Culture, media, sport -21.1
Home office -25.2
Justice -25.3
CLG Local government -26.8
Business, innovation and skills -28.5
Environment, food and rural affairs -30.9
Communities and local government -67.6
Table 3 shows which departments have done well and which badly. There is
substantial growth in the overseas development budget - a priority of the Prime
Minister’s. A political commitment was made to maintaining the budget of the
very popular national health service. Energy and climate change, a very young
department (it was once in Business, innovation and skills) that needs to accom-
modate Britain’s aging nuclear power stations, commitments on climate change
and decline in North Sea oil and gas production, sees its budget expanded.
The remaining departments all see very substantial cuts, with broad policy
priorities reflected in the relative magnitudes. These cuts, however, are motivated
almost entirely by the fiscal constraint. The precise way in which they will be cut,
with what impact on services and incentives, is yet to be determined.
Conclusion
When the second-highest ranking finance minister occupied the offices va-
cated by his Labour predecessor after the May election, there was apparently a
note on the empty desk saying “Sorry. There’s no money left. We spent it all.”
That about sums up the politically un-enviable position that the coalition
finds itself in. Tax and spending policy has been utterly dominated by the fear
of investors deserting UK sovereign debt. The program that the coalition has
outlined is very tough: there has never in the peacetime history of the country
been such a rapid or large reduction in government spending.
Will the coalition actually implement these draconian plans? There are rea-
sons to thinks they might not:
◘ if the downturn proves more resilient than expected, there will be great
pressure to relent on spending cuts and revert to demand support policies
◘ if the economy recovers particularly vigorously, the government will be
tempted to be less harsh on some of its natural political constituencies
◘ if the Liberal Democrats find that coalition government is not helping
them to get re-elected, they will be tempted to end the coalition and vote on
measures on a much more case-by-case basis
Indeed, the cases under which the government does not follow through on
its plans seems to cover almost all likely future scenarios. We should therefore
consider that much of the value of these budgetary announcements may be the
appearance of a willingness to be tough, rather than toughness itself. Time, of
course, will tell.
Country Profiles
Austria 2010
Public finances
2009 2010 Change
Year
Public Debt 67.1% 70% 2.9 GDP points
Public Deficit 3.5% 4.8% 1.4 GDP points
Consolidated Tax Not available Not available -
revenues
Tax rates and bases

Personal Below €10 000 €10 000 - €25 €25 000 - €51 Above €51
Income 000 000 000
0% 36.5% 43.21% 50%
Tax unchanged unchanged unchanged unchanged
25%
Capital introduced in 2011, previously identical to marginal tax rate,
Gains capital gains were tax free after one year
20%
10% reduced rate (food, books, newspapers)
VAT
12% reduced rate (vine purchased directly at a vinery)
All Rates unchanged
Corporate 25%
income unchanged
Excise Tax on tobacco increased in 2011
taxes Flight tax introduced in 2011
Wealth No wealth tax
taxes
Macroeconomic data
1.6%
GDP growth (-3.9% en 2009)
Average net annual €18 333
income
4.1%
Unemployment (4.8% in 2009)
Belgium 2010
Public finances
2009 2010 Change
Year
Public Debt € 321.39 billion € 341.93 billion 6.39%
Public Deficit 5.9% GDP 4.8% GDP -1.1%
Consolidated € 89.99 billion € 91.11 billion +6%
Tax revenues
Tax rates and bases

Above
Below €7900 - €11240
Personal €18730 -€34330 €34330
€7,900 €11240 -€18730
Income 0% 40% 45% 50%
Tax 30%
un- un- un- un-
unchanged
changed changed changed changed
Capital
Gains 33% or 16,5 % if the property falls within the terms of taxability
21 %, 12 %, 6%
VAT Unchanged (since 1 January 2010 the VAT rate in the catering sector is
12%)
Bellow €25
Cor- €90 000 - € 322
000 €25 000 - €90 000 Above €322 500
porate 500
income 24.25%
31% 34.5% 33%
Increase in excise duty on diesel CN codes,
Excise
change of the tax system for manufactured tobacco, modification of the
taxes
excise system for soft drinks and coffee
Wealth
No wealth tax
taxes
Macroeconomic data
1.6%
GDP growth
(-2.7% in 2009)
Average income (GDP
€ 31 365
per capita)
8.7%
Unemployment
(7.7% in 2009)
The establishment of the conciliation service tax, operational
Best change in since June 1st 2010, aims to assist the taxpayer find “
2010 arrangement possibilities rather than go to trial “, said
Minister of Finances.
Article 307, § 1 CIR/92 which provides an obligation to

Worst change in
report payments to persons resident in one of the states
2010
appearing on the list of tax heavens (law of dec. 23th 2009)
Bulgaria 2010
Public finances
Year 2009 2010 Change
BGN 10 080 mil-
BGN 11 349 million
lion
Public Debt € 5 803 million
€ 5 154 million + 12.6%
15.3% of GDP
15.7% of GDP
Public Deficit 2.9% of GDP 3.8% of GDP +0.9%%
BGN 25 022 mil-
BGN 23 932 million
Consolidated lion
€ 12 236 million -4.4%
Tax revenues € 12 793 million
34.10% of GDP -1.8 GDP points
35.9%
Tax rates and bases

Personal In-
10% (Unchanged)
come Tax
Capital Gains 10% (Unchanged)
VAT 20% (Unchanged)

Corporate in- 10% (Unchanged)
come
Increased for kerosene, electricity for industrial purposes, ciga-
Excise taxes
rettes, tobacco, fuels
Wealth taxes No wealth tax

Macroeconomic data
0%
GDP
(-5% in 2009)
€ 4 800
GDP per capita
(€ 4 650 in 2009)
8.3%
Unemployment
(6.8% in 2009)
Despite the excessive deficit and the revision of the budget, the
Best change in major taxes – VAT, Corporate and Personal income tax – were
2010 not touched. Thus, the 10% corporate tax and the 10% income
tax are still the lowest in EU.
The partial nationalization of the private professional pension
funds – the idea was to transfer the money from the early
retirement accounts in private funds to a newly set-up state
Worst change in “early retirement” fund. At the end, the government transferred
2010 the money of those that will retire in the next 3 years into the
National Social Security Institute – thus, not establishing a new
state “early retirement” fund and not shutting down the private
professional funds.
Croatia
Public finances
Public Debt 35.4% of GDP 38,2% of GDP 2.8 GDP points
Public Deficit 2,9% of GDP 4,2% of GDP 1.3 GDP points
Consolidated Tax
34,% of GDP 33,1% of GDP -0.9 GDP points
revenues
Tax rates and bases

HRK 43,201-
Below HRK 108,001- Over HRK
Personal 108,000
HRK 43,200 302,400 302,400
Income (€ 5 825.3 –
(€5 825) (€14 561.4- (€40 778.6)
Tax €14 566)
€40 778.6)
15% 25% 35% 45%
Capital 20% for companies
Gains 15%-35% for individuals
23% standard rate

VAT 10% and 0% Reduced rates
Unchanged
Corporate 20%
income Certain small companies pay lower rate
Excise
Unchanged
taxes
Wealth
No wealth tax
taxes
Macroeconomic data
-1.5%
GDP
(-5.8% in 2009)
HRK 52,267.65
Average income
(€7 048)
(GDP per capita)
9.5%
Unemployment
(9.2% in 2009)
Keeping of the promise to repeal the special crisis tax

Best change in 2010
on incomes
Worst change in 2010 -
Czech Republic
Public finances
CZK 1 451 billion (€59
35.5% of GDP
Public Debt 209 million) 13.1 %
€ 52 351 million
39.3 % of GDP
CZK 195 billion
6.6% of GDP
Public Deficit (€7 955 million) -7.3 %
€8 582million
5.3 % of GDP
CZK 1049.8 billion
Consolidated
(€42.8 billion) +4 %
Tax revenues €41.153
28.4 % of GDP
Tax rates and bases
Personal 15 % from “super-gross” wage = standard gross wage +
Income health and social insurance contributions paid by the employer
Tax Unchanged
Capital
All earned income from capital is taxed the same as regular income
Gains
20 % (19% in 2009)
VAT
10% reduced rate(9% in 2009)
Corporate 19%
income 20% in 2009
increased: tax on fuels +1 CZK/l (+0.04 €); tax on alcohol approx.
+5 CZK on 0.5 l of 40% liquor; tax on beer approx. +0.5 CZK on
Excise
0.5 l of beer; tax on cigarettes +0.04 CZK per piece; tax on tobacco
taxes
+60 CZK/kg
Wealth None, just a property tax (land + real estate)

taxes
Macroeconomic data
GDP 2% (-4.1% in 2009)

Average income per
23 324 CZK (933 €)
month
Unemployment 8.3% (Change from 6.7% in 2009)
58 bil. CZK. By this amount should be government

Best change in 2010
expenditure in 2011 lower compared to the previous plan.
4 %. By this amount rose the consolidated tax revenues of
Worst change in 2010
the general government in 2010 compared to 2009.
Denmark
Public Finances
DKK688.1bln DKK752.8bln
Public Debt +9.4%
€92.3bln €101.0 bln
DKK 46.5bln DKK62.6bln
Public Deficit +34.6%
€6.2bln €8.4bln
Consolidated Tax DKK798.9bln DKK836.3bln
+4.7%
revenues €107.2 bln €112.2bln
Tax rates and bases

Above
Below DKK 46,630/ DKK 320,000/
Personal DKK
DKK 46,630 DKK 320,000 DKK 423,800
Income 423,800
(€6,260) (€6,260/€42,930) (€42,930/€56,860)
Tax (€56,860)
8% 40.9% 42.3% 56.1%
unchanged decreased decreased decreased
Above
DKK
Net positive capi- Above DKK 40,000 and
Net negative tal income below 40,000 and with with total
Income capital income DKK 40,000 total income below income
From (€5,370) DKK 389,900 above
Capital DKK
389,900
Deductible
against local
37.3% 37.3% 52.2%
taxes (33.6%)
decreased decreased decreased
unchanged
Income Above DKK 48,300
Below DKK 48,300 (€6,480)
from (€6,480)
28% 42%
Shares unchanged decreased
25%
VAT Rate unchanged, but the small number of exemptions has been further
reduced
Cor-
porate 25% (unchanged)
income
Excise
Some increases in 2010
tax
Wealth
No wealth tax but property is taxed
tax
Macroeconomic data
GDP 2% (-4.7%)
Average income DKK 256,090 (€34,360)
Unemployment 4.2% (3.6% in 2009)
The lowering of the top marginal income tax from 63% percent to
Best change
56.1%
tax reform plus other tax changes – despite the existing “tax
Worst change
freeze” – will in the long run increase the tax burden by some
in 2010
DKK 24 bn./year (€ 3.2 bn.)
France
Public finances
€ 1510.7 billion +5.3 GDP
Public Debt €1 618 billion
points
+0.2 GDP
Public Deficit 7.5% of GDP 7.7% of GDP
points
Consolidated Tax € 802,6 billion
€ 786,4 billion +2%
revenues
Tax rates and bases

From From From
Personal Bellow €5 963 to €11 896 to €26 420 to Above
Income €5 963 €11 896 €26 420 €70 830 €70 830
41%
Tax
0% 5.5% 14% 30% (40% in
2009)
Capital 31.3% tax on dividends (increase 1.2%)
Gains 29.3% on real estate gains (increase 1.2%)
19.6% regular rate

VAT 5.5% and 2.1% reduced rates
33.1/3 %
15% reduced rate
Excise
unchanged
taxes
Wealth
Yes
taxes
Macroeconomic data
1.5%
GDP (-2.6% in 2009)
Average income
(GDP per capita) € 29 167
9.8%
Best change in Talks about abolishing the wealth tax

2010
Worst change in Creation of new taxes in an already overly complex fiscal
2010 system. Moving away from a flat tax approach.
Germany
Public finances
2009 2010 Change
Year
73,4% of GDP 75,5% of 2.1 GDP points
Public Debt
GDP
Public Deficit 3% of GDP 4% of GDP 1 GDP point
Consolidated Tax Not available Not available -
revenues
Tax rates and bases

<€8005 €8005 Between Between € €250730<
€8005 and 52882 and
Per- €52882 €250730
sonal 0% 14% concave 42% 45%
Income Unchan- Un- increasing Un- Unchanged
Tax ged changed schedule changed
Unchan-
ged
25%
Capital
Unchanged
Gains
19% regular rate
7% reduced rate
VAT Unchanged
Cor- 29.83%
porate Unchanged
income
Slight increase in tobacco taxes in 2011; major increase in energy prices
Excise
expected due to increased subsidies for “green” energy, which are fi-
taxes
nanced though an increased fee on energy use.
Wealth No net wealth tax, only property taxes on housing and land
taxes
Macroeconomic data
3.3%
GDP growth (-4.7% in 2009)
Average income (GDP per 30450
capita) (Change from 2009: +3.54%
7.1%
No major changes for the better in tax policy, but the finance
Best change in minister’s signals that he indeed intends to honor the debt
2010 brake are encouraging.
Worst change in Increase in energy prices due to another round of increases in
2010 aggregate subsidies for “green” energy.
Italy
Public finances
2009 2010 Change
Year
€1 763 559 million €1 842 269 million +4.46%
Public Debt
116,0% of GDP 118,5% of GDP +2.5 GDP points
5,3% of GDP 3,9 % of GDP -1.4 GDP
Public Deficit
points
Consolidated 42.8% of GDP 43.3% of GDP +0.5 GDP points
Tax revenues
Tax rates and bases

€15.001 - €28.001 €55.001
0 - €15.000 €28.000 - -€75.000 Above
Income
€55.000 €75,000
From
23% 27% 38% 41% 43%
Labour
Unchan- Unchan- Unchan- Un- Un-
ged ged ged changed changed
Dividendes: 27% ; Interests: 12,5%/27% ; Royalties: 15%
Capital (forthcoming change)
Gains
20% regular rate
10% and 4% reduced rates
VAT Unchanged
Cor- 27,5%
porate Unchanged
income
Excise Unchanged
taxes
taxes
Macroeconomic data
1.1%
GDP -5.1% in 2009
Average income Not available

(GDP per capita)
8.4%
Unemployment 7.8% in 2009
Lithuania
Public finances
2009 2010 Change
Year
24632 million Litas 34436 million Litas + 7-8 %
Public Debt
29.5 36-37% of GDP
Public Deficit 7.2% 8.2% -1%
LTL 27 018 million
Consolidated Tax
€7 831 million Not disclosed -
revenues
32.9%
Tax rates and bases

15%
Personal Unchanged
Income
15%
Capital Gains Unchanged
21% regular rate
9% reduced rate
VAT Unchanged
15%
Corporate
(from 20% in 2009)
income
Introduction of a tax on electricity
Excise taxes
Wealth taxes no
Macroeconomic data
1.3%
GDP growth - 14.8% in 2009
Average salary (before 2081 Litas (603 Euros)
taxes)
18%
Unemployment 13.7% in 2009
Corporate income tax decreased from 20 to 15%

(although it was increased from 15 to 20% by the same
Best change in 2010
government just a year before..).
new rules for taxing income-in-kind. Private use of
company or other automobiles became taxed, but
Worst change in 2010 companies still cannot deduct VAT of purchased
automobiles.
Luxembourg
Public finances
2009 2010 Change
Year
5.6 billion € 7.6 billion € +35.7%
Public Debt
0.7% of GDP 2.2% of GDP +1.5 GDP
Public Deficit points
Consolidated Tax € 10.47 billion €10.85 billion +3.5%
revenues
Tax rates and bases
Bellow € 11,265 € 11.265 to € 41.793 Over € 41.793

Personal
Income Tax 0% Progressive tax rates
Unchanged from 8% to 38% 39%
Unchanged
28.8%
Capital Gains Increased
VAT tax rates amount 15% (normal VAT tax rate), 12%
VAT (intermediary VAT rate), 6% (reduced rate) or 3% (super reduced
rate).
28.8%.
Corporate
Increased
income
Unchanged
Excise taxes
Wealth tax has been abolished for individual tax payers but remains
Wealth taxes applicable to companies only at a rate of 0.5%.
Macroeconomic data
3%
GDP growth -4.1% in 2009
Average income (GDP per € 74.644,07

capita)
5.8%
Unemployment 6% in 2009
Best change in -
2010
The increase is provided of the marginal tax rate for personal
income tax to 39% to which is added a “crisis contribution”
at the rate of 0.8% in 2011. A special minimum income of €
Worst change
1.500 tax is introduced for financial participation companies
in 2010
(SOPARFI’s) whose activities are excluding commercial
transactions.
Netherlands
Public finances
2009 2010 Change
Year
€ 342 billion € 381 billion 11.4%
Public Debt
60% of GDP 66,2% of GDP +6.2 GDP points
Public Deficit 5,3% 5,8% 0.5%%
Consolidated Tax € 209 611 million € 214 006 million +2.1%
revenues 38,1% 37,9% -0.2 GDP points
Tax rates and bases
Below €18.628 €18.629 – €33.436 €33.437 – Above
Personal €55.694
Income 33,00% 41,95% 42% 52%
Tax Decrease of unchanged unchanged unchanged
0.45%
Capital gains are taxed at regular income tax and corporate income tax
Capital rates like in previous years
Gains
19%
6% reduced rate (food products, books, medicines, art, antiques, entry
VAT
to museums, zoos, theatres and sports) )
All Rates unchanged
Profits up to €200.000 Profits exceeding €200.000
Corporate
20% 25%
income
unchanged 0.5% decrease
Excise unchanged
taxes
Formally no wealth tax
Wealth individuals have to report their net wealth in Box III of the income
taxes tax on an annual basis. The net wealth is supposed to have generated a
fictitious return of 4% which is taxed at an income tax rate of 30%.
Macroeconomic data
1.8%
GDP growth (-3.9% in 2009)
€32.500
Average income
4.2%
The best change was consideration to come to a fully new

Best change in income tax regime in 2012 which might involve a flat tax in the
2010 income tax. Currently the Ministry of Finance is studying on this
issue to a report early 2011.
Worst change in -
2010
Norway
Tax rates and bases
28%
Surtax on wage income and income from self-employment:

Personal
Income NOK 456 400 - NOK NOK 741 700-NOK 765 800
Tax 471 200
9% 12%
(brackets increased by (brackets increased by 3.2%)
3.2%)
25%, 14%, 8%, 0%

VAT
Corporate 28%
income
Excise Increased for tobacco
taxes
Above NOK 700,000
Wealth
taxes 0.7% municipal tax + 0.4% state tax
Macroeconomic data
GDP growth 1.7%

Average income (GDP Change from 2009
per capita)
3.5%
Unemployment
Poland
Public finances
2009 2010 Change
Year
Public Debt € 166 7 million € 207 7 million +24.6 %
Public Deficit 7.3% 7.3% Unchanged
Consolidated Tax € 99 million € 119 9 million +21.1%
revenues
Tax rates and bases

Bellow Above 85 528 PLN
Personal 85 528 PLN (€21.522,76)
Income Tax (€21.522,76)
18% minus 14 839.02 PLN (€3.734) plus 18% of the
556.02 PLN (€140) amount above 85 528 PLN
19%
Capital
Unchanged
Gains
23%, 8%, 5%
VAT (previously 22%, 7%, 3%)
Corporate 19%
income Unchanged
Increased for cigarettes
Excise taxes
Wealth no
taxes
Macroeconomic data
3.4%
GDP (1.7% in 2009)
Average income (GDP per € 9 300
capita)
9.8%
Increase in transparency of taxation system: reports on

Best change in 2010 tax preferences and administration costs (including taxes)
Increase in VAT (from 22% to 23%)

Portugal
Public finances
2009 2010 Change
Year
76.1 % 82.1 % + 6 GDP points
Public Debt
€ 127 568 million €140 459million +10.1%
-9.3 % -7.3 % -20.11%
Public Deficit
€15 701 million €12 544 million
Consolidated Tax € 65 298million € 71 859million +10.05%
revenues 38.9 % of GDP 41.6 % of GDP
Macroeconomic data
GDP 1.1% (-2.6% in 2009)
Average income (GDP €15 738
per capita)
Unemployment 10.7% (9.6% in 2009)
More than 200 measures to control the deficit

Best change in 2010
Several dozen millions spent on studies for various
infratsructures when it was obvious the billions were not
there to build those infrastructures
(*) half of the gain multiplied by the applicable individual income tax rate 25% for
non-resident
Tax rates and bases
Below €4 989- €7 410 - €7 410 - €42 €42 259 €61 244 €66 045 Above € 153
Per- €4 989 €7 410 €18 375 259 - €61 244 - €66 045 - € 153 300 300
sonal 11,5%
Income 14% 24.5% 38% 43.5% 43.5%
(10.5% 46.5%
Tax (13% in (23.5% in (36.5% (42% in (42% in
in ( 42% in 2009)
2009) 2009) in 2009) 2009) 2009)
2009)
Bond Price
Capital Bond Income Stock Dividends Stock Price Gains Non-Residents:
Gains
Gains 21.5% 21.5% 21.5% 21.5%
(*)
(20 in 2009) (0% in 2009) (0% in 2009) (10% in2009)
Portugal Madeira & Azores
VAT 23%, 13%, 6% 16%, 9%, 4%
(20%, 12% 5% in 2009 (14%, 8%, 4% in 2009)
Cor-
25% for residents (Unchanged)
porate
Companies with a taxable profit above €2 mil pay in 2011 an extra 2.5% on that “surplus”
income
Excise
Increase of circulation tax
taxes
Wealth
Yes, for real property
taxes
Romania
Public finances
2009 2010 Change
Year
Public Debt 29,99 GDP points 35,66 GDP points 18.91%
Public Deficit 7,2 GDP points 5.23 GDP points -27.36%
Consolidated Tax 31 GDP points 29,4 GDP points -5.16%
revenues
Tax rates and bases

Personal 16%
Income Unchanged
Tax
16%
Capital Unchanged
Gains
Normal rate 24%,(19% in 2009)
Reduced rate 9%, unchanged
VAT Special rate 5%, unchanged
16%
Unchanged
Excise Increase for gasoline (3.32%) , diesel gas (3.17%) and cigarettes excises
taxes (5.49%).
Wealth No Wealth tax but real estate taxes increased
taxes
Macroeconomic data
-1.9%
GDP
(-7.1% in 2009)
Average income -
(GDP per capita)
7.2%
Best change in 2010 Abolition of minimum corporate income tax

VAT increase from 19% to 24%
Slovakia 2010
Public finances
Public Debt 22,6% 28,9% +27,9 GDP points
Public Deficit -5% -5,1% +2,2 GDP points
Consolidated Tax 17,7% 18,1% 0.4 GDP points
revenues
Tax rates and bases

Personal 19%
Incom unchanged
e Tax
Capital 19%
Gains
19% (20% in 2011)
VAT 10% reduced rate (medicaments, books, medical devices for patients)
6% for home-made agroproducts cancelled in 2011
Corporate 19%
income unchanged
Tax on tobacco increased in 2011
Excise Fuel Tax on diesel decreased by 23,5%
taxes Special 80% tax on proceedings and holding surplus emission quotas
applied in 2011 and 2012
taxes
Macroeconomic data 2010

65,9 bln. €
GDP 4% Change from 2009
Average monthly 769 €
salary 3,2 %Change from 2009
14,4%
Unemployment 19% Change from 2009
Best change in 2010 Fuel tax on diesel decreased by 23,5%

28% growth of public debt
Spain
Public finances
2009 2010 Change
Year
Public Debt €560,682 million €684,309 million 22%
Public Deficit -11.1% of GDP -9.2% -1.9 GDP points
Consolidated Tax €332.882 million €347.225 million 4.3%
revenues
Tax rates and bases

Per- €0 – €17 €33 €53 407-€120 €120 000- Above
sonal €17 707 007 000 €175 000 €175 000
In- 707 – €33 –€ 53 Increased In-
come 007 407 creased
Tax 24% 28% 37% 43% 44% 45%
Capi- Bellow €6 000 Above €6 000
tal 19% 21%
Gains Increased Increased
18% regular rate and reduced rates of 4% and 8%
VAT
(Increased from 16%, 4% and 7% in 2009)
Cor-
30% (regular rate)
porate
25% for small enterprises
in-
35% for companies related to hydrocarbon (oil, gas…) activities
come
Ex-
cise Increased for tobacco, gasoline
taxes
No wealth tax (since 2008, 100% rebate)
Macroeconomic data
-0.3%
GDP (-3.7% in 2009)
GDP per capita 22.810€
(current market prices)
20.7%
Unemployment (18% in 2009)
The lack of substantial tax hikes, beyond the VAT and
capital gains tax raise, to lead the fiscal consolidation
Best change in 2010 process.
Tax reductions for small and medium enterprises in the
CIT
New brackets in the PIT for workers who earn more than
120,000 € / year
VAT rate and other taxes on consumption were increased
Worst change in 2010 to alleviate budgetary problems. Although this is not
indeed a good measure, it may be less bad than other tax
hikes, e.g. in CIT.
Sweden
Public finances
2009 2010 Change
Year
1295 billions SEK 1288 billions SEK +0.69%
Public Debt (€145 billons) (€144 billions) -2.6 GDP points
41,7% of GDP 39,1% of GDP
37 billions SEK (€ 41 billions SEK (€
4,1 billions) 4,6 billions) +12.19%
Public Deficit
(1,2% of GDP) (1,3% of GDP) +0.1 GDP points
1435 billions SEK 1488 billions SEK
Consolidated
(€160 billions) (€166 billions) +3.75%
Tax revenues
(46,2% of GDP) (45,2% of GDP) -1 GDP point
Tax rates and bases

Bellow Above Above SEK Above
SEK 12 500 SEK 12 500 395600 SEK 560904
(€ 1 408) (€ 1 408) (€44 000) (€
Personal 63000)
Income Local tax 51,55% 56,55%.
Tax 0% from 29,08 to (the local tax + (local
34.70 % 20% state tax) tax+25 % state
taxes)
Capital 30 (20 for some privately owned companies)

Gains (Unchanged)
25, 12 or 6% (Unchanged)
VAT
Corporate 26,3% (Unchanged)
income
Excise Tax on diesel fuel has been raised with SEK 0,50 (€ 0,06) per liter.
taxes
Wealth no
taxes
Macroeconomic data
4.4%
GDP (-5.1% in 2009)
Average income SEK 316 000 (€ 35 600)
(GDP per capita) SEK 302 000 (€ 34 000) in 2009
8.2%
The proposal on reintroducing a wealth tax is not on the

Best change in 2010
agenda any more.
Sweden still has worlds’ highest top marginal tax rate,
above 70%.
Switzerland
Public finances
2009 2010 Change
Year
CHF 208 billion CHF 211 billion +1.49%
Public Debt € 160.8 billion € 163.2 billion -0.6 GDP points
38.8% 38.2%
Public Deficit +0.4% -0.9% -1.3 GDP points
Consolidated Tax CHF 197 billion CHF 191 billion -3.1%
revenues € 152.4 billion € 147.7 billion
Tax rates and bases
Personal 21.7% (average, depending on canton)

Income Tax Unchanged
Capital Gains No tax

7.6%
VAT
Unchanged
Corporate 18.8%(average, depending on canton)

income (21.2% in 2009)
Excise taxes Unchanged

0.02% (average, depending on canton)
Wealth taxes
Unchanged
Macroeconomic data
GDP 2.7%
(-1.6% in 2009)
Average income (GDP € 49.450
per capita) € 48.150 in 2009
3.6%
Unemployment Unchanged
no change in cantonal sovereignty over tax rates

Best change in 2010
none this year
United Kingdom
Public finances
2009 2010 Change
Year
Public Debt £708 billion
1
£863 billion 21.89%
Public Deficit £105 billion £104 billion -0.95%
Consolidated Tax £520 billion £548 billion 5.38%

revenues
Tax rates and bases
£ 37 401 - £ Above
0 - £ 2 440 0 – £ 37 400
Personal 150 000 £150,000
Income 10% (starting 50%
Tax rate for (Additional
20% (basic 40% (higher
savings only) rate)
rate) rate)
S Increased
Capital 18%-28%depending on income

Gains (18% in 2009)
20%
VAT
(15% in 2009)
Corporate 28%
income Unchanged
Excise
2-10% increases on various items - alcohol, cigarettes, fuel
taxes
Wealth
no
taxes
Macroeconomic data
1.7%
GDP
(-4.9%)
Average income (GDP
Not available
per capita)
7.9%
Unemployment
7.5% in 2009
Increase in VAT from 17.5% to 20% while keeping

Best change in 2010
exemption structure intact
The huge expenditure and national borrowing to save

Worst change in 2010 the finance sector, allowing none of the debt holders
to lose any money
Published by IREF or in collaboration with IREF
2010, Taxation in Europe 2010, IREF

2009, Futur des retraites et retraites du futur: La transition, Jacques Garello et
Georges Lane, vol. 3, Librairie de l’Université, Aix-en-Provence.
2009, Taxation in Europe 2009, IREF
2009, La flat tax : La révolution fiscale, Robert E. Hall et Alvin Rabuschka, Edi-
tions du Cri
2009, Planète bleue en péril vert, Václav Klaus, Librairie de l’Université, Aix-en-
Provence.
2008, Taxation in Europe 2008, IREF, www.irefeurope.org
2008, Futur des retraites et retraites du futur: La capitalisation, Jacques Garello,
Georges Lane, vol. 2, Librairie de l’Université, Aix-en-Provence.
2008, Futur des retraites et retraites du futur: Le futur de la répartition, Jacques Garel-
lo and Georges Lane, vol. 1, Librairie de l’Université, Aix-en-Provencev.
2007, Taxing Wealth—What For?, IREF Monographs, www.irefeurope.org
2006, Taxation and Justice, IREF Monographs, www.irefeurope.org
2005, Public Debt, Public Spending and Economic Growth, IREF Monographs,
www.irefeurope.org
2004, Taxation and Economic Growth, IREF’s Monographs, www.irefeurope.
org
2003, « La décentralisation fiscale », Numéro spécial du Journal des Econo-
mistes et des Etudes Humaines, vol. XIII, n°4.
IREF
10 Rue Pierre d’Aspelt, L-1142 Luxembourg

RCS F 140
35, Avenue Mac-Mahon 75017 Paris
http://www.irefeurope.org

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IREF Yearbook Taxation 2011

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Taxation in Europe 2011

The yearly report on the evolution of European tax systems

a publication from the

Edited by Pierre Garello

IREF is a private institute founded in 2002 by representatives of the civil so-

In order to achieve its goals, IREF relies on a network of specialists. Today, a

Besides its Yearbook on Taxation in Europe, IREF is editing books, reports,

a publication from the

Edited by Pierre Garello

Main findings for 2010

Balancing between constraints rather than reforming

Once again, IREF’s yearbook on taxation confirms that in Europe, including

Some of the most original and diverging moves

Many lost opportunities

2006 2007 2008 2009 2010 2011

Source: Statistik Austria (2010, 2011 estimates)

A long-awaited coalition budget

Child Support and tuition fees

Capital Gains Tax

The „Bankenabgabe“ is a Bank Tax with estimated revenues of €500 million

Taxes on one pack of cigarettes will rise by 15 to 25 cents yielding € 100-

A flight tax of €8 for continental flights with European destinations and a of

The Belgian paradox

Fight against tax fraud and banking secrecy

Tax deduction for equity capital

There are three objectives behind this deduction scheme.

• Second, the new measure offers an attractive alternative for “coordination

Nevertheless, few modifications occurred: a few explanations concerning the

Personal Income tax

As in 2009, the year was poor in interesting measures. No fundamental modi-

Green tax legislation

Direct Taxation (Corporate Tax & Income Tax)

Indirect Taxation (VAT & Excise Duties)

services regardless of whether they are a part of a tourist package or bought

Social Security Contributions

for unemployment, the healthcare contributions were increased.

Social Security Contributions in Bulgaria (% of the gross wage)

Total Employer Employee Employer Employee

Pension 17.80% 7.10% 5.70% 2.80% 2.20%

Local Taxes and Issues

A delayed economic recovery

Table 1. Croatia: changes in the personal income tax applying to

Tax rates Income brackets Tax rates Income brackets

Table 2. Croatia: tax rates schedule applying on income from capi-

Tax schedule applying Tax schedule applying

Income from interest 35% 40%

in 2010, up from the 2.9% of the previous year.

Table 3. Structure and recent evolution of tax revenue in Croatia

“PIGS” effect and the deficit

Revenues and expenditures in 2010

selling price of electricity lower. A welcomed side-effect would be approximately

Public sector and the debt

Reform and other plans

tion agreement sketched a roadmap of proposed longer-term goals they want to

In a fight against structural deficit the Czech government prepared in 2010

tional Bank, the ministry of finance builds on overoptimistic prediction of the

Lowest marginal tax since 1970

Lower tax on capital income

capital income (excluding income from shares/stocks which is taxed separately).

gains from shares were taxed at 28 percent up to a total of DKK 48,300 (€

Improved tax regime for foreign researchers and experts

Broader tax base

percent labour market contribution (consequently, payments from pensions are