We are continuing with the implementation of fiscal consolidation measures while reducing the financial risks of large investment projects to the smallest possible extent
In this interview, the Montenegrin Minister of Finance, Darko Radunović talks about the country’s fight against the shadow economy, tobacco excise, new laws, state budget and investments.
The government has announced an offensive against the shadow economy. What effects do you expect to see this year?
– The shadow economy is a pest that attacks not only of our economy but also the economies of the neighbouring countries, as well as many countries that are more developed and better regulated. As you said yourself, the Government of Montenegro has announced an offensive against the shadow economy through a series of activities. The Government’s work programme for 2019 stipulates drafting of a “Report on activities to combat the shadow economy with a proposal for measures to combat the shadow economy” which was discussed at the recent government session, at which the participants gave suggestions for its improvement, which is related to the concrete activities that have to be implemented in practice. A special government commission has been formed that deals with this issue and comprises all relevant system institutions. As a result, we had a series of concrete activities in practice like the seizure of goods and preventing illicit trade. Furthermore, the Tax Administration Reform and electronic fiscalization projects are at the core of reform activities which aim is reducing the effects of the shadow economy. The increase in the minimum wage, on one side, and as a counter-measure for reducing the burden that employers have in relation to paying salary tax and contributions, is an additional measure for a segment of the labour market that should be an incentive for a legalizing business in this field. Growth trends are also recorded in the tobacco industry, labour market, employee registration, tourism revenue, business registration, accommodation…
Did the shadow economy subside somewhat and did budget revenue increase after the tobacco excise was reinstated?
– As a result of the redefined excise policy, implemented in September 2018, changes were made to the so-called “excise calendar” for cigarettes in a way specific excise duties for cigarettes were reduced while the proportional excise rate was kept at the same level, that is 32% of the retail price of cigarettes. The same excise duty will be applied in 2019. The Excise Law also stipulates the dynamics of gradually increasing the specific excise and reducing the proportional excise for the period from 2020 to 2025, in order to continue with the harmonization of excise calendars in accordance with EU standards. In the period January-May 2019, the revenue from excise duties on tobacco and tobacco-based products amounted to EUR 14.6 million, which is slightly lower than in the same period of the previous year, but it is important to note that this drop was just slightly lower compared to the same period last year, and that, in May, we recorded a 0.5 million EUR or 15% increase compared to the same month of the previous year. Taking into account that in the January-May period of this year, the sale of tobacco products grew by about 36% and that, in the same period, a strong increase in cigarette imports of 59.5% was recorded, the recovery of the tobacco products market is evident, which is, again, a result of the redefined excise policy. Accordingly, we expect the revenue from excise to grow in the upcoming period, as seen in the number of excise stamps, ordered by the entities that pay excise to the Customs Administration. In terms of the share that the shadow economy has in cigarette traffic, the Ministry of Finance monitors the quantities of excise stamps ordered by excise payers, as well as data on cigarette imports. Also, all relevant institutions and the Shadow Economy are continually working on reducing the shadow economy’s share in the tobacco market.
This year, amendments to the VAT Law, the Personal Income Tax, and the Corporate Tax are all planned. Are there going to be substantial changes in terms of reducing tax rates or new taxes will be introduced?
– The Government of Montenegro has devised the Draft Law on Changes and Amendments to the Personal Income Tax Law which stipulates that income from sporting activities, copyright and related rights, patents and trademarks, and the income generated by independent culture experts are not subject to the personal income tax. This young, promising, top athletes are encouraged to continue developing in sports, while artists with the best creative references have special treatment. The defined legal solutions do not create new obligations for taxpayers, but rather a detailed regulation of revenues and expenditures of the separate types of income, which have been subject to taxation under the current law. Also, the 2019 work programme of the Montenegrin government envisages amendments to the Corporate Tax Law for the third quarter of the current year. The proposed amendments will improve the existing legal solutions regarding the definition of related parties, the methods needed to determine the prices that are out of reach, so to speak, deadlines for filing tax returns, and the deadlines for keeping and submitting the necessary documentation on transfer prices in order to justify the listed transactions. The amendments also define the provisions regarding the prevention of capitalization reduction, that is, the limitation of the recognition of expenses incurred on the basis of loan interest rates and the related costs, i.e. the loan in a certain amount of the value of the taxpayer’s capital. The aim of the amendments to the Value Added Tax Law is to establish an equitable and non-discriminatory system of taxing the revenue from services rendered in hotel facilities and partly harmonize it with the European Union directives regulating this area. The proposal is to equalize the VAT rate in taxing the revenue from hotel products and services, regardless of the category they belong to and the region in which they are located. We expect that the implementation of the proposed norm will contribute to boosting the competitiveness of the tourism economy as a whole, as well as to the reduction of the shadow economy, which will consequently have a positive impact on tourism revenues and the overall budget revenue.
What do you think of the results of reprogramming and payment of tax debt? How satisfied are you with the tax discipline in the country and what could improve it?
– Bearing in mind that the previous results of the implementation of this legal solution generated over EUR 50 million in collected tax arrears, we are quite satisfied, and considering the fact that the timeframe for payment of the reprogrammed debt is set at 5 years, the final results can be determined at the end of the five-year period. At this point, the rate of collection of the reprogrammed tax debt is 72%, and for a number of taxpayers, there is evidently a delay in settling both the reprogrammed and current obligations. We have issued over 1,500 official decisions that have abolished the reprogramming option for taxpayers who did not comply with the provisions of the aforementioned regulation, and some of these related to blacklisted taxpayers. The taxpayers who have been removed
from the reprogramming option have to pay the entire tax debt at once. We are continuously implementing all available collection measures, including the initiation of bankruptcy, which has been applied in the case of 386 taxpayers so far, owning a total of EUR 21 million, in order to collect the entire debt. The widening of the tax base and the increase in the level of compliance with tax regulations are the primary goals of the Tax Administration, and in this sense, our activities are aimed at encouraging voluntary fulfilment of tax obligations, on the one hand, and sanctioning irregular operations, on the other. It should be noted that the inspection procedures are preceded by a risk analysis in order to increase the efficiency of the inspection work and direct the available inspection resources to those activities and segments related to taxpayers who are at the greatest risk for non-compliance with tax regulations, and relaxing the control of taxpayers who regularly pay their taxes. In 2018, the tax inspectors carried out 2,600 full controls, as well as 11,767 checks, on the basis of which misdemeanour warrants were issued in the total value of over EUR 1 million and additional tax liabilities in the amount of almost EUR 50 million were determined. The Tax Administration’s success in increasing tax discipline can be seen from the data showing an increase in the collection of tax revenues by EUR 117 million compared to 2017. With the exception of value-added tax, there have been no significant changes in tax rates for years and there has been continuous growth of the number of newly registered taxpayers, whose tax base is expanding continuously.
What activities are you planning to carry out in order to maintain a stable credit rating and obtaining a better credit rating in the future?
– Montenegro’s credit rating is B1 with a positive outlook (Moody’s) and B+ with a stable outlook (Standard & Poor’s). In order to improve our credit rating, we need to continue with structural reforms to strengthen our competitive position, as well as continue implementing development projects in tourism and energy. At the same time, we are continuing with the implementation of fiscal consolidation measures, while minimizing the fiscal risks of large investment projects.
How much support does Montenegro expect from the World Bank and in which areas?
– The total amount of withdrawn funds on the basis of loans granted by the World Bank for export financing amounted to EUR 464.3 million. They relate to projects in education, health care, energy efficiency, environmental protection, agriculture, etc. One of the important projects, financed from the World Bank credit line and implemented by the Ministry of Finance and the Tax Administration, is the “Tax Administration Reform Project”, which aims to introduce electronic fiscalization and a new electronic revenue collection system. In accordance with the limits that Montenegro has in terms of loans granted by the World Bank, in the upcoming period, we will also apply for development loans. In 2018, Montenegro received the Development Policy Guarantee from the World Bank, which we used to borrow from commercial banks to refinance debt. We are currently working on implementing earlier activities in order to be given another guarantee.
What has the budget revenue inflow been so far this year?
– In the first half of 2019, the budget revenue inflow exceeded our plans and has gone up relative to the same period last year. In the January-June 2019 period, the budget revenue amounted to EUR 824 million which, compared to the same period last year is a 7.9% increase, or EUR 60.1 million. Compared to the six-month plan, revenues are higher by EUR 20.7 million or 2.6%. Collection in all budget revenue categories has surpassed our plan, while excise revenues are slightly below the projections, but have increased compared to the same period last year, which was also helped by the recovery of the tobacco market.
How can Serbia and Montenegro cooperate even better?
– In terms of economic cooperation, which is at a significant level, there is room for improvement. Montenegro and Serbia, along with five other countries in Southeast Europe, are the signatories of the Central European Free Trade Agreement (CEFTA). Trading in goods with Serbia is at a high level, and Serbia is one of Montenegro’s most important external trade partners. We are also working on improving trading in services in the development of the regional economic space of the Western Balkan countries. This means that, apart from the provision of tourist services and significant participation of tourist services in the overall cooperation, we will promote the movement of other services in accordance with the CEFTA agreement. Also, in the context of regional cooperation, infrastructure integration, in particular, the construction of road and energy infrastructure, as well as the process of digital integration, all play a very important role. The Bar-Boljare motorway is one of the most important projects that link Montenegro to the Serbian border and to the European corridors. Montenegro expects that the feasibility study related to the construction of the remaining motorway sections stretching to the border with Serbia to have been completed by the end of 2020, and that the study will contribute to the finding ways of financing the construction of other motorway segments in Montenegro with the lowest possible fiscal risk. The construction of the Požega-Boljare motorway segment in the Republic of Serbia is important for the further infrastructural connection between not only Montenegro and Serbia, but also the region as a whole.