January 31, 2023 - Taxation is always a hot topic in the Croatian economy. Professor PhD Fernando Pinto Hernández from Rey Juan Carlos University in Madrid with some thoughts on special taxation on energy and tobacco, in an interview in today's Jutarnji List, which is translated below in full.

We talked to a global tax expert, he says that the Croatian economy is at risk: 'You must not prolong this measure'

Decrease of taxation is important to stimulate economic growth. Equally important is the level of taxes and the tax burden, as well as the design of the tax system itself. In the field of special taxes, it is important to design a tax system that differentiates products according to their characteristics and harm to individuals, society and the environment. Such an approach is important because of the long-term social and economic effects, stated prof. PhD Fernando Pinto Hernández from Rey Juan Carlos University in Madrid, referring to special taxes on energy and tobacco.

What is your opinion on the tax policy at the EU level in the context of the energy crisis and inflation?

The problem with inflation, which partly stems from the rise in energy prices, must be accompanied by public policy decisions containing some taxes (progressive ones), such as personal income tax, and lowering others (regressive ones), such as VAT on some commodities or special taxes on consumption.

Due to the crisis, Croatia introduced a tax on extra profits for companies in 2022, regardless of whether they profited during the crisis. What do you think about such taxation and what is the situation in Spain?

I hope that these tax policy measures, which significantly increase the tax burden on companies in certain productive sectors, are temporary. In other words, they should not be prolonged for too long, as they will lead to significant efficiency losses in the Croatian economy, which is already experiencing difficulties due to both rising inflation and its recent entry into the euro area. In the case of Spain, very similar measures are being implemented and therefore the results could be the same if the fiscal policies are not very temporary.

Is it logical to significantly tax potentially harmful products such as tobacco?

It seems logical to tax those products that generate a negative externality of consumption, i.e. that cause damage to the health of others that is not reflected in market prices. However, we need to take into account the real health risk they pose in order not to over-regulate them and impose extraordinarily high taxes. In even simple terms: yes to taxing them, but the level of taxation needs to be correlated to the risk (and damage) these products produce.

What have the experiences of countries such as Sweden, Italy, and the Czech Republic shown considering they followed the principle of higher taxes for harmful products and lower taxes for less harmful alternatives?

What they have shown is that, by setting excise taxes according to the health risk posed by these products, efficient tax policy outcomes are achieved. It could be summarized as a tax policy whose slogan is that “the lower the risk, the lower the taxes”. From my point of view, these countries are an example of success in terms of taxation design.

France proved to be a negative example and what are the prerequisites for designing a good tax policy?

When taxes and public policies lack a technically based design, the desired outcome often turns out to be the opposite. In the case of France, this is exactly what has happened: in an attempt to reduce the prevalence of tobacco by raising prices, the population has opted for substitute goods of poorer quality and greater danger (e.g. illicit tobacco).

How to use taxation as a tool to stimulate growth?

Economic theory indicates that for a tax to have a positive effect on economic growth it must fulfil several premises. The first of these is to have a good technical design. The second is that it should aim to replace the efficiency loss caused by its introduction. And finally, the tax must entail the least possible loss of purchasing power for the taxpayer, as this is the only way for the taxpayer to feel free to consume, save or invest his or her money.

The fight against tax evasion and tax fraud is one of the priorities of the EU. Can this battle even be won?

It is very difficult to fight tax fraud. However, over the last ten years, the European Union and individual countries have implemented their anti-fraud policies very significantly. I would like to think that the battle can be won, but in order to do so, the tax burden and the tax effort of taxpayers must be reduced as much as possible while guaranteeing quality basic public services. This is particularly true when we think about the inefficiencies in re-distribution.

This article appeared originally in Croatian in Jutarnji List - you can read the original here.

Croatia hasn't done the best job of showcasing itself in the investment world, with investors often referring to it as the ''Bermuda Triangle'' and with the phrase ''ABC'' having come to mean ''Anything but Croatia'', things aren't looking all too bright. Things can be altered, but as the old British saying goes; mud sticks.

As Ana Blaskovic/Poslovni Dnevnik writes on the 16th of April, 2019, when compared to 2018, the share of companies that would reinvest in the Republic of Croatia dropped from 68 down to 54 percent. If they were asked to do so again today, almost half of the German companies operating here would decide against investing here again, and over sixty percent of those investors have an extremely poor economic picture of the country.

This is the result of a survey by the German-Croatian Chamber of Commerce conducted between February and April of this year among 150 of its member companies. In almost six years since joining the European Union, investors first had high expectations which quickly fell, but that was apparently somewhat expected. Following Croatia's accession to the EU, there was a period of transition in which investors were waiting anxiously and looking forward to seeing European practices come to life here, but that wasn't quite the case here.

Unlike former new member states of the EU who were given the green light to join during previous wave of the EU's enlargement, Croatia stalled, at least that is the overall impression one gets when asking members of the German Chamber of Commerce, including huge names such as Allianz, Siemens, Bauerfeind, Knauf, Müller, Spar, RWE...

"The survey is a perception, but it speaks about the overall impression of companies doing business [in Croatia], and that's that nothing important is changing,'' said Thomas Sichla, president of the Chamber. As stated, when compared with the previous year, the share of companies that would reinvest in the country dropped from 68 percent to 54 percent, which speaks volumes about perception and just how mud really does stick.

The fact that this isn't just an isolated case of pessimism, but is the contour of very worrying trends is best illustrated by the fact that eighty percent of the respondents had already previously responded to the survey.

While in Croatia almost half of investors would say "Auf Wiedersehen" to investing here again, in other countries in Central and Eastern Europe where parallel research was conducted, only one fifth of the companies who responded would say the same, so it shouldn't come as any surprise whatsoever that investments and their investors simply bypass Croatia entirely. Things aren't changing in Croatia, and if they are, it isn't fast enough at all.

Out of twenty Central and Eastern European countries, Croatia is still "relatively attractive" in eighth place on the list. Siemens' leader Medeja Lončar says that "more flexibility and speed in Croatia for a better economic and investment climate are needed", adding that Siemens will continue to invest in Croatia, depending on the business environment. If one scratches the surface, the companies that make up the German-Croatian Chamber of Commerce are almost repeating some very well-known criticisms that many have about Croatia.

At the top of that ''criticism list'' lies an insufficient fight against corruption and crime, followed by the burden of high taxes and general dissatisfaction with the tax authorities and the system despite the three waves of ''tax relief'' under Finance Minister Zdravko Marić. The top five barriers are Croatia's below par public administration and lack of legal security.

On the other hand, as a business advantage, investors pointed out the fact that operating in Croatia opens the door to the EU's single market and to infrastructure. Despite the ever-burning workforce problem that is rapidly evolving into an enormous problem of epic proportions for Croatia, employee qualifications and the quality of higher education continue to be among the main benefits in Croatia, are are productivity and employee motivation. However, in Germany the Chamber notes that the Croatian state should engage and talk much more to the private sector about the demand for labour and adapt its education system to that need.

With Croatia's continually deteriorating growth prognosis, which without reform is falling more and more, more than sixty percent of the surveyed companies find Croatia's economic environment to be very poor, and only a third claim it to be satisfactory.

Make sure to stay up to date by following our dedicated business page for more information on doing business and investment in Croatia.

Click here for the original article by Ana Blaskovic for Poslovni Dnevnik

As Novac/Veljko Ostojic writes on the 8th of April, 2019, after almost a decade of high growth rates in Croatia's domestic tourism indicators, the dominant feature of this season, at least from the market's point of view, is uncertainty. The only thing we can be sure of, however, is the rapid growth period behind us. Facing Croatia is a period of struggle for each tourist owing to extremely turbulent broadcasting markets.

Such a destiny is shared by all Mediterranean markets with the exception of Turkey, and tourism in the Mediterranean as a whole is influenced by two dominant trends.

The first concerns the general insecurity in the European Union's economy, driven by the slowdown in individual national economies, primarily in big players such as Germany and Italy. An additional element that generates general uncertainty is the potential of Brexit (should it ever happen at all), the real effects of which at this stage can't really be estimated. These movements deter people from spending too much money, which is felt by the lack of bookings and reservations. In the first two months of 2019, the annual cumulative booking from Germany to Croatia was a little less when compared to 2018, while the decline in British tourist reservations throughout the Mediterranean was much more apparent, with Brits booking their holidays in the sun in advance being 10 percent lower on average than last year.

The second trend is the return of an old tourism king, Turkey, which has been a source of discomfort and nerves for Western Mediterranean countries, especially Spain, especially with its policy of subsidised travel arrangements last season, this season, Turkey is set to continue to record high growth rates of reservations from key European emission markets.

Such is an environment that defines the prospects of Croatian tourism not only this year, but over the next few years. The Croatian Tourism Association decided to quantify the effects of these trends on the expectations of Croatian tourist companies and the results of that survey were published in the first issue of Tourism Impulse, which will be published continuously every quarter. They surveyed the fifteen of Croatia's largest tourism companies, which account for 81 percent of the country's hotel sector.

The survey has shown that Croatian travel companies are experiencing revenue declines on one hand, and rising costs, primarily regarding labour, on the other. Croatian tourist companies are expecting slower annual revenue growth by 11.4 percent when compared to last year. Without changing the business environment in which Croatian tourism operates, this will result in a reduction in profitability and of course, a reduction in investment potential. With Croatia's damning reputation among foreign investors on the world stage, this really is the last thing it needs to seek to encourage.

The rather damp expectations of some of Croatia's largest tourist companies also show a drop in profitability this year by almost five percent and, as a consequence, the reduction of investments this year by a concerning twenty percent. Over the next two years, a further decline in investment is expected at a rate of 33 percent when compared to the periods in 2018 and 2019.

Reducing investment potential in tourism has a significant impact on the long-term prospects of Croatia's tourism. It is clear to all that in the long-term, Croatia must compete exclusively with quality rather than price. Reducing prices as much as possible to compete with Turkey on a surface level will only destroy the Croatian coast and Croatia's tourism sector as a whole. This isn't an option.

To be able to really compete with quality, apart from having determination to do so, it is crucial to attract and stimulate investments, something Croatia lacks in, and rather severely.

For that, Croatia will have to make numerous significant changes to its business framework. Today, Croatia is one of the least competitive in investing in tourism in the entire Mediterranean and has the highest tax burden of them all, especially if we look at the VAT rate. Spain, France and Italy have a reduced their VAT rates to help boost tourism. Croatias VAT rate, however, is 13 percent for hotel accommodation and 25 percent for hospitality services. Only Denmark is operating anywhere close to that in the whole of Europe, and one can hardly compare Croatia to Denmark.

Tourism directly and indirectly generates nearly twenty percent of Croatia's GDP, the sector generated eleven percent of all investments in Croatia. There is a lot of discussion about the optimal structure of the economy in which tourism makes up such a big part of it, and this, like many such discussions in Croatia, is often a waste of time. In a situation where tourism is experiencing significant growth rates and becoming an increasingly important factor in the receptive Mediterranean market, such discussions are quite unnecessary.

Of course, the priority requirement for Croatia's tourism growth is to boost investment, which will continually increase the country's overall quality.

If VAT on the entire tourist service is reduced to the level of Croatia's competitive countries, tourism can attract an additional three billion euros of investment, it can increase employee salaries by twenty percent and continue to rise over the next few years, which will further stabilise budget revenues and raise the standard life in Croatia in general.

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