Long announced “retail chain tax” is taking its final shape in Slovakia. The law passed the first round of voting in the parliament and is awaiting the second voting in November. The government’s intention is to lower the market power of large international retail chains. Unfortunately, the alleged problems are mostly made-up. Instead, this tax may end up raising the food prices and wrecking havoc in Slovak retail.

Similar taxes in Hungary and Poland hit the wall of EU state aid and competitiveness rules and had to be largely amended. However, this did not discourage Slovak government from expanding their deep entrenched anti-retailer rhetoric (which so far materialized in draconic fines for even minor hygiene mismanagement, absurd regulation on contract freedom for food retailers, or limitations on opening hours) and proposing a new tax on retail.

Retail Chain Tax Law

Despite being part of the official program of the government, which was created in 2016, the law was submitted by a group of six members of parliament from the coalition Slovak National Party. This circumvented the standard legislative procedure of government laws (which includes extensive public consultations and impact assessment) and is completely at odds with the official governmental strategy Better Regulation, which was created a year ago.

The law proposes a 2,5% turnover tax on any retail, with several conditions: presence in at least 2 counties (out of 79), minimum 10% share of food items on the total turnover, legal, personal, or administrative (joint marketing, or procurement activities) connection between the branches.

All of these retailers are eligible for the tax, those with turnover less than EUR 200,000 per quarter are exempt from paying the tax (but still have to report it).

False Accusations

Officials, headed by the Ministry of Agriculture, have been accusing the large retail chains of dominating the retail market, reaching “massive profits” and destructing Slovak agriculture and food industry.

These accusations are only verbal, with no official analysis supporting them. INESS sonducted several inquiries on the role of large retailers in Slovakia and found these accusations largely untrue.

We compared financial results (profit margin, EBITDA margin, gross margin, ROI, ROA) of 5 large international retailers to the financial results of a) large food producers; b) 50 largest companies; c) Slovak economy as a whole. We found that these retailers underperform in almost all mentioned indicators.

The demise of Carrefour and Hypernova chains in Slovakia stands as the silent witness to the fact, that retail business does not provide a “golden mine” opportunity in Slovakia.

Additionally, the accusations of large tax avoidance by international retailers are unsupported. We found that international retailers paid tax more than 4-times higher per EUR 1 of turnover, than the average of 25 Slovak cooperative retail chains.

Scaring the Big Ones, Hammering the Small Ones

The current setting of the Slovk law will hit approximately 90-95% of food retail in Slovakia, since the barriers are set extremely low and even the small shops are members of virtual alliances (which the law considers as chains).

Also, food producers with retail shops (meat producers, bakers, etc.) will be hit, and so will shops, where food is a secondary item (chemists for example), but reaching at least 10%.

There are only limited number of ways how the entrepreneurs can absorb the new tax:

1. Lowering profits. However, if the law was applied in 2017, 39 out of 41 analyzed retailers would end up with loss. Profit margins are often well below the 2,5% tax rate and large majority would not be able to absorb the tax.

2. Cutting expenses on employees. It will be very difficult with the current competitive job market, however, it may hit low-skilled labor force in poor regions, where the retail chains are important employers.

3. Pressing suppliers for lower prices. However, the law was created in the first place to support suppliers! So this effect will be totally counterproductive.

4. Rising food prices. The tax will hit the whole turnover (including electronics, clothes, chemistry etc., which are sold by the retailers), however, retailers will have to focus on raising the food prices, since their competitors in other sectors (shops with electronics, or clothing) will otherwise have competitive advantage. Food prices are currently outperforming general inflation in Slovakia, nearing 5% annual growth.

The tax will also carry substantial administrative costs, since it will require at least one additional layer of calculations (food vs. non-food items), and quarterly reporting. The tax will prohibit entry and expansion of new entrants on the food retail market.

Ironically, the new entrants tend to be “farmer” retailers, focusing on local quality production. This means the law may backfire on the agricultural sector at the end.