Will the new tax package aid economic growth during recession?

Sead Dado Salkovic

Despite the economic growth of Montenegro over the past few years, the global economic crisis has brought about significant challenges to its economy as a whole. In an attempt to increase the efficiency of the domestic economy and react to the downturn, the Government recently adopted amendments to the tax regime for both individuals and businesses.

The reformed tax package includes, among several aspects, changes to personal income tax, corporate income tax and social insurance, and comes into full force from January 1 2010.

The most important amendment to the corporate income tax regime concerns treatment of capital gains. The revised legislation abolishes the 50% exemption on capital gains realised which applied until the end of 2009. The full amount of capital gains realised will be included in calculation of a company's taxable income taxation.

Favourable provisions previously applied to companies in the energy sector, allowing tax base deductions of the full amount paid in salary to new employees, including the contributions due by the employer, where the employment contract of such employees was concluded for an indefinite period of more than two years. These provisions were abolished under the new tax package.

Finally, the revised legislation abolishes payments of corporate income tax on a monthly-in-advance basis in order to remove a barrier to business. The revised law provides for submission of tax returns and payments of tax due by February 28 of the following year.

To change the current inefficient structure of mandatory social insurance contributions, new provisions amend current contributions from the employer and the employee. Employee's contributions to the Pension and Disability Insurance Contributions fund are increased by 3 percentage points, to 15%, while the employer's contribution is reduced by 3 percentage points, to 5.5%, maintaining the same cumulative rate of 20.5% applicable in 2009.

The health insurance contribution rate for employees is increased by two percentage points, to 8.5%, while the employer's contribution is cut by 1.2 points, to 3.8%.

The tax package imposes a more favourable treatment of resident individuals while increasing the rate of social insurance contributions payable by employees. Despite the cut in the tax rate for individuals it appears though that the tax base was increased.

From a corporate perspective, favourable provisions allowing a reduced liability for realised capital gains are also abolished to increase the taxable base of Montenegro's corporate sector.

Despite these drawbacks of this tax reform, the abolition of the payments of corporate income tax on a monthly-in-advance basis may arguably be seen as enhancing the liquidity of companies, allowing retention of profits within the organisation for an extended period.

This measure also enhances transparency while implementing a clearer and more straightforward approach to tax calculation and payment. This may promote the business climate at a time of financial distress.

Arguably, the tax package aims to increase state revenues in an attempt to stabilise the economy during a period of a financial downturn, without Montenegro turning its back on business.

Sead Dado Salkovic (sead.salkovic@eurofast.net)