Silent Taxation

Jozef Israëls: The Shoemaker // Public domain

Imagine you are running a business. You have a small business or a trade, and you are doing just enough to maintain the same standard of living across challenging times. Then suddenly, without any increase in your income compared to the prices around you, the state tells you that you are already earning enough to pay more in taxes.

It may seem absurd to you, but a similar situation is experienced every year by a part of Slovak entrepreneurs. Such an event is the emergence of the obligation to register for value added tax (VAT).

When Slovakia negotiated its accession to the European Union (EU), it negotiated €35,000 as the limit of its VAT registration obligation. That was back in 2004 when due to the weak exchange rate of the Slovak koruna, the limit was acceptable.

However, the koruna significantly strengthened, and by the time of entry into the Eurozone, the limit would have risen to €49,790. Due to then-applicable VAT Directive, the limit was lowered to €35,000. But this immediately increased the number of compulsory taxpayers, so the government promptly asked the EC for the €49,790 limit. This limit has, therefore, been in force in the Slovak Republic since 1 July 2009.

This limit is still in force today, i.e. for more than 14 years without change.

And therein lies the crux of the problem. While wages in Slovakia are rising, the limit from which entrepreneurs are obliged to pay VAT remains the same. At the time the limit was raised again, the average wage in Slovakia was €744. The VAT registration limit of €49,790 was, therefore, approximately 70 times the average wage. In 2022, however, the average Slovak wage was €1,304. The VAT registration limit in 2022 was thus only about 38 times the average wage. The current high rate of inflation continues to translate into strong wage growth, which will reduce the effective registration limit even further.

In this way, the state has been artificially increasing the tax burden year after year for more than 14 years, making it more and more difficult to do business.

Consequently, the appropriate request is to raise this threshold to reflect the higher wage and price levels in the economy.

There is certainly room for an increase; for example, in Romania, the threshold was set at 300,000 Romanian lei in 2021, which translates to around €60,300 in October 2023. Italy has an even higher VAT registration limit (€65,000 in 2021), France for goods businesses (€85,800; for services businesses, the limit is set at €34,400), and Ireland (€75,000 for goods businesses; €34,400 for services businesses).

At present, a derogation from Article 395 of the VAT Directive to change the threshold still needs to be requested from the European Commission. This was the case in the Czech Republic, where on 2 November 2021, the government agreed to authorize the Ministry of Finance of the Czech Republic to apply to the EC for an increase in the threshold from the current threshold of CZK 1 million to CZK 2 million.

The Czech Republic requested an increase in the current threshold at the end of 2021 from EUR 35,000 to EUR 85,000 by December 31, 2024. The Czech Republic’s request was granted at the end of May 2022, and the new limit applies from January 1, 2023. It was estimated that this would reduce the number of VAT payers by up to 105,000.

With an average wage of EUR 1,304 in 2022 and 70 times the average wage, the new limit in Slovakia should amount to EUR 91,280. However, the EU legislation in force from January 1, 2025 does not allow for an increase in the VAT liability limit to more than €85,000. Therefore, the new government should prepare a bill to increase the limit to €85,000 in the first half of 2024.

For the sake of promoting small business, it would be advisable for the increase in the limit to take place as soon as possible. It is not only entrepreneurs themselves who would benefit from an increased limit. With lower costs, entrepreneurs would be able to afford to set lower prices for their products. Ultimately, therefore, we would all benefit from such a measure.

In their programs, three parties have increased the limit for compulsory VAT registration, namely:

  • KDH (Christian Democratic Party): “We will propose raising the threshold for compulsory VAT registration to EUR 60 thousand per year.”
  • SaS (Freedom and Solidarity): “We will increase the threshold for compulsory registration as a VAT payer to 75 thousand euros. As of 1 January 2025, we will raise this threshold to EUR 85,000.”
  • SNS (Slovak National Party): “We will propose raising the turnover limit for the obligation to register as a VAT payer to EUR 100,000.”

Therefore, we believe that the government, whatever its composition, will find support for such a proposal.

Written by Matej Bárta

Translated by Sofia Tokošová

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