The new VAT regime

Author: | Published: 1 Dec 2005
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Wolf Theiss (Bosnia and Herzegovina)

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Sarajevo

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+387 33 296 444

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+387 33 296 425

On January 1 2006, Bosnia and Herzegovina (BiH) begins implementing the new state-level Value Added Tax (VAT) Law, marking the start of a new tax regime in the country. The law establishes a single, simplified tax collection system that will apply in the whole of BiH, under which taxes will be paid into a single account at state level. At the same time, sales tax is set to disappear. The new system is the culmination of five years of investment by the international community towards a fairer, clearer and more efficient system of tax administration in BiH.

The Indirect Taxation Administration (ITA) has been established to implement the law and create tax policy at state level. It was formed by merging the separate custom administrations of the country's two entities (or territories) and the protectorate, Brcko District, creating a single administrative unit. This is a big step forward for BiH, marking genuine political progress since the war in the nineties, and signifying the country's readiness to progress towards accession to the EU.

Under previous sales tax regimes, collections were administered in each entity by the entity government and then distributed to lower levels of government. With the entry into force of the VAT Law and a new law on turnover tax, the system of collecting taxes at entity level will cease. To ease teething problems, BiH adopted a single rate of 17% for all goods and services, which applies to almost every sale of goods or services on the territory of BiH as well as imports. Depending on what happens first, the tax obligation arises from: the moment of delivery of goods or service delivery; making out an invoice; paying or partially paying for delivery before the invoice was made; raising the obligation on paying a Custom debt for import of goods; the tax period expiring for which an owner or employer of a company used the company's property for personal use or non-business activities; or making an invoice or other document for every change in tax base.

The new law provides a detailed list of turnovers and services that are exempt from taxation. The exemptions closely follow those in the EU's sixth VAT Directive. Financial services are in general exempt, including exemptions for insurance and reinsurance services, real estate turnover (except for transferring an ownership or disposal right over a new real estate), leases or sublease of residential premises on a period longer than 60 days, services related to credits, deposits, savings and bank accounts, stock and share trade and managing of investments funds. A comprehensive social programme targeting the most vulnerable groups in society is meant to be underway, but to date, little sign of real progress on this front is apparent.

The initial registration of taxpayers began on July 1 2005. In general, a turnover threshold of 50,000 Bosnian Convertible Marks (KM) applies, although all persons are obliged to pay VAT on imports and all businesses (including exempt businesses) are obliged to account for VAT on certain services received from abroad. In determining whether the threshold is met, turnover of companies and other bodies under common direct or indirect control (whether by shareholding or otherwise) will be taken into account. The registered taxpayers obtain a certificate on registration that they are obliged to display in their business premises. Only taxpayers required to be registered by law are obliged to pay VAT. All taxpayers should submit a VAT tax return for each accounting period by the tenth day of the calendar month following the end of the accounting period, and they must pay the tax for each accounting period by the deadline for filing the return.

While it is hoped that the reform will be a new tool in improving revenue collection and strengthening the BiH state, an obvious concern is that raising the tax burden relative to GDP, including the grey economy, would set back efforts to encourage growth, employment, fiscal sustainability and development. Thus, expansions in tax bases through improved tax enforcement are being met by reforming the tax regime for profit and income tax, the aim of which would be to leave the overall tax burden on the economy unchanged. In addition, if in early 2006 VAT receipts are above projections, and are assessed to remain so, the IMF has suggested such a surplus could finance reductions in labour taxation. Should revenue figures be lower than anticipated in early 2006, the state and entity governments are being urged to incorporate sizeable delayed current spending lists in their budget, rather than raise tax levels.

The introduction of the new VAT regime is an important step toward BiH's post-war political and economic maturity, but the impact of the reform on the economy as a whole bears close monitoring.

Renuka Kukanesen and Naida Custovic