On Monday, the 25th of October 2021, the National Assembly continued its discussion on the proposed amendment to the Personal Income Tax Act, which also brings an increase in the general tax relief for income from capital. The coalition is satisfied with the amendment, but the opposition is concerned about the sustainability of public finances, and the Tax Foundation data from the International Tax Competitiveness Index for the year 2021 ranks Slovenia in 25th place on the Organisation for Economic Cooperation and Development (OECD) European scale. There are a total of 37 countries on the scale, and Slovenia is in the group of those less competitive. The government wants this to change, also with the help of the adoption of an amendment to the Personal Income Tax Act.
The National Assembly will decide on the suitability of the proposed amendment to the Personal Income Tax Act on the 26th of October 2021. Minister of Finance Andrej Šircelj pointed out that by increasing the general relief, the income necessary for normal living conditions will no longer be taxed. According to Šircelj, “this is a moral and ethical question of whether the state taxes the income that is necessary for survival.”
The Tax Foundation highlighted several weaknesses in the Slovenian tax system. The most problematic is the fact that the Slovenian network of tax agreements covers only 59 countries. However, the below-average tax treatment of real estate investments, compared to the OECD, is also problematic. The advantages that Slovenia has can be counted on the fingers of one hand. What should be highlighted is the 19 percent corporate tax rate, which is lower than the OECD average. Likewise, the 22 percent VAT is present at every step. The good thing about this is that it is present at every step, but not that it amounts to 22 percent. It could be lower.
Under the new proposal, the general income tax relief for 2025 would increase from the current 3,500 euros to 7,500 euros. Those with a minimum wage, as well as those who earn three times the average, would still benefit from this, Slovenian Press Agency reports. According to Šircelj, by 2025, people are expected to have between 640 and 1320 euros more. “The point is that people’s net incomes will increase,” he said. Other innovations include the tax relief of rental income, a reduction in personal income tax on interest income, dividends, and profits, from the current 17.5 to 15 percent, and a senior’s relief of 1,500 euros for those over 70 years of age. The SDS, NSi and SMC parties are in favour of these changes.
More money to the people, less to the municipalities and the state
MP Marko Pogačnik presented the position of the SDS parliamentary group: “At the 26th regular session of the National Assembly, deputies discussed the proposal for the Act amending the Personal Income Tax Act.” The main reasons for the proposed amendments to the Personal Income Tax Act are to help the economy and the population recover from the covid-19 pandemic and to relieve them of administrative burdens. Namely, in Slovenia, the tax gap has been gradually increasing since 2013 onwards, both for the population and the economy. The burdening of salaries with taxes and contributions in Slovenia is one of the highest in the European Union and even in the world. This is especially true for jobs of higher and highly qualified staff with salaries that are average or slightly higher than the average.
High taxes result in higher unemployment
Due to such a high tax burden, the Slovenian economy is less competitive and less productive, as it cannot allocate enough money for research and development, which are the foundation of the economic growth and prosperity of every country. “The high taxes and contributions, of course, also have an impact on higher unemployment. Studies by the Organisation for Economic Cooperation and Development show that a higher tax burden of labour income is problematic in at least two respects: the first is the pressure on labour costs and the deteriorating international competitiveness of companies and thus the country; the other is the risk of a growing grey economy.”
A higher tax burden of income affects the income received by the worker and, therefore, significantly affects his ability to consume or save this income. Gross wages include social contributions paid by the worker, while net wages are calculated after deducting these contributions and all amounts owed to the state, such as personal income tax. In Slovenia, the state taxes about 60 percent of a person’s net salary for a worker who only claims the general tax relief, in the form of contributions and taxes, of the minimum wage, while this percentage amounts to about 80 percent for the average wage. In the case of the salary being twice as big as the average, the state takes away the amount equal to the worker’s entire net salary.
Families with children who struggle to get from month to month will benefit from lower taxes
“For salaries that are twice the average salary, this percentage grows even more progressively. And what does the amendment to the Personal Income Tax Act, which was sent to the National Assembly by the Government of the Republic of Slovenia, bring?” The change will not tax the following incomes: the survivor’s pension under the Pension and Disability Insurance Act, payments for preschool children, pupils, high school and university students, and school funds. Changes are also coming in the area of benefits for electric passenger cars. From 2022, the tax on bonus earnings for vehicles that are also put into private use of employees will amount to zero. Until now, the tax base has included 0.3 percent of the purchase value of an electric vehicle, up to the value of 60 thousand euros.
Payment for business performance and taxation of bonuses for business performance has been changed in the new Personal Income Tax Act in the sense that there are fewer limits and fewer conditions. This will be most felt by those employees who have an average monthly salary higher than the average salary in Slovenia. Up to this amount, personal income tax will not be taxed. Entrepreneurs will receive the same treatment in terms of tax relief after the amendment of the law as the legal entities.
Tax incentives for investments in the digital and green transition
“Employment tax breaks extend to the employment of people in the so-called deficit professions. The amount of the break for these cases is 45 percent of the person’s salary for the first 24 months of employment.” Tax incentives for investments in the digital and green transition are also being introduced. The new relief included in the amendment of the Personal Income Tax Act will enable a further reduction of the tax base if entrepreneurs invest in cloud computing, artificial intelligence, and environmentally friendly technologies.
The tax relief for donations will be increased from 0.3 percent of taxable income to 1 percent, and at the same time, 0.2 percent of donations paid for sports purposes are added to the additional reliefs.
Income from renting out property will have as many as two changes. The first change is the matter of reducing standardised expenses from 15 percent to ten percent, and at the same time, the tax rate is significantly reduced from 27 to 15 percent. The landlord will be able to decide whether the income will be included in the annual income tax calculation or if he or she will pay a one-time tax.
Capital gains will no longer be taxed after 15 years. “So far, we have had a 20-year period. Under the new Personal Income Tax Act, the general tax relief for residents will increase gradually, from 3,500 euros to 7,500 euros over the years, allocated in the following way: in 2022 – 4,500 euros, in 2023 – 5,500 euros, in 2024 – 6,500 euros and in 2025 – 7,500 euros.”
Special benefits for retirees and students are also planned
The amendment also provides for a new senior’s relief. According to the new Personal Income Tax Act amendment, a special relief will be granted to persons over the age of 70, in the amount of 7,500 euros. Special relief will also be made for those who have the status of a pupil or student and earn income from temporary or occasional work. The relief will amount to a fixed amount of 3,500 euros and will not increase in the coming years. The personal income tax scale will also change with the Personal Income Tax 2; namely, the tax rate in the last highest class will be changed from 50 percent to 45 percent for the tax base of over 72 thousand euros.
And now, to compare this with the salaries themselves. If the monthly salary amounts to 2 thousand euros gross, the current net salary would be 1,300 euros net. According to the new general relief and change, the net salary is expected to increase by 22 euros per month in 2022, and in 2025, the monthly salary will increase to approximately 86 euros, which represents more than a thousand euros more per year in the pockets of the employees. The fact that the tax burden in Slovenia is really high is best illustrated by migrant workers in Austria. “It is clear that this is not a case of double taxation, but that due to higher taxes in Slovenia, migrant workers have to pay higher personal income tax.”
Workers’ net salaries will be higher
With this amendment to the Personal Income Tax Act, the change will also be obvious to migrant workers, who will no longer have to pay such high amounts. With the tax relief of income from work, the net wages of workers will also increase. At the same time, the competitiveness of the Slovenian economy will increase, unemployment will decrease, and the size of the grey economy will also decrease. “In the Slovenian Democratic Party, we believe that the tax burdens in Slovenia are too high, which is also shown by research and comparative data with other European Union countries.”
One of the key problems in the competitiveness of the Slovenian economy is the excessive tax burden on wages. And that would change significantly with this change in the Personal Income Tax Act. “According to the Slovenian Democratic Party, the amendment to the Personal Income Tax Act means a shift for both employees and employers. In the Slovenian Democratic Party, we expect to convince you in the continuation of this debate to support the proposed amendment to the Personal Income Tax Act and thus enable workers in Slovenia to receive higher wages, but not at the expense of additional burdens on the economy, but at the expense of reducing the tax burdens.”
Ivan Šokić
