Slovak Law Problem: Tax Deductibility Of Expense Essay, Research Paper
Tax deductibility of expense – a problem of area in Slovak law
The Slovak Republic has been engaged in competition with surrounding countries to attract foreign investors. One aspect of the continuing competition is that many countries have lowered their corporate income tax rate. The Slovak Government reduced its corporate income tax rate to 29% effective from January 1, 2000 and it is proposed to reduce this further in future. However, this tax rate does not tell the whole story. To assess the actual tax burden one should also consider which costs are allowed as tax deductible and which costs are not. In this article we will address some of the most important issues in this area.
As a general rule, expenses spent on attaining, ensuring and maintaining taxable income in the Slovak Republic are tax deductible, unless they are specifically listed as non-tax deductible. Unfortunately, the Slovak Republic is out if line internationally in this respect as it provides for a substantial number of expenses to be specifically non-tax deductible in variance with common international practices. As examples of this we discuss the position of losses carried forward, the establishment of bad debt provisions, depreciation issues and advertising expenses.
Under current Slovak tax legislation tax losses can be carried forward for five years. However, the losses must be divided into five equal portions and then each portion (i.e. 20% of the loss) should decrease the taxable base in each of the following five years. Tax losses incurred in three consecutive years directly preceding the profit making year can be aggregated and carried forward but any further losses occurring during the company’s existence may not be carried forward.
Losses to be carried forward (portion of the loss) have to reinvest in plant and machinery in the three year period after the loss (portion of the loss) is used to reduce the taxable base of a company.
In the last three years of the five-year period the taxable base cannot be lower than SKK 150,000, regardless of the amount of losses carried forward. If the taxable base amounts to less than SKK 150,000 no losses can be carried forward at all.
Slovak tax loss rule are much more restrictive than in many countries. In many countries losses can be carried forward for longer periods and normally there is no restriction on the amount of a loss that can be carried forward into each year. Equally there is normally no reinvestment requirement.
Bad debt provisions
Another issue of concern in practice is the procedure for the creation of a bad debt provision for receivables of a Company. At present allocations to a bad debt provision are only tax deductible if the debtor is in bankruptcy, the bankruptcy procedures has already started and the company has filed, within a stated period of time, an application with the relevant Court that has acknowledged the claim. This is very formal and time consuming approach and it may well happen that, although a receivable will never be paid, the amount can never represent a tax deductible cost.
Slovak tax deprecation rules are another topic of extensive discussion with foreign investors. Assets are deprecated according to the rules of Slovak Income Tax Act in accordance with laid down rates for different categories. For example a building can be tax deprecated over 40 years. This is normal under most tax systems. However, there are several down sides of the Slovak tax deprecation rules that must be highlighted. An investor who acquires another company’s assets cannot continue with the deprecation of the assets but has to start deprecation on their acquisition price at the time of acquisition from scratch. For example, if a foreign investor acquires a thirty-year old building he must start again with the forty-year deprecation period, resulting in the fact that the actual deprecation of the building will only be seventy years rather than forty years. Only legal successor can continue with the deprecation scheme of its predecessor.
Major problems also arise in the categorization of expenses. There is a distinction in Slovak law between repair and maintenance expenditure which can be tax deducted and technical improvements which have to be capitalized and deprecated over a longer period. In practice the authorities take a broad view of technical improvements which can lead to significant deferrals of tax deductions.
The rule for taking a tax deduction when assets are disposed of for less than net book value of taken out of use are also extremely restrictive.
Under Slovak tax only direct advertisement costs are fully tax deductible. Direct advertisement costs are the costs incurred on advertisement in magazines and newspapers and commercials on radio and T.V. The majority of other advertisement costs may be considered and indirect advertisement costs. Indirect advertisement costs are only tax deducible up to 1% of the taxable base of the Company. In the case that the Company incurs a loss these costs are not tax-deductible at all.
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