The Government of the Republic of Croatia has prepared amendments to the Law on Value Added Tax, which introduce the mechanism of the so-called “floating VAT” that would be calculated on oil derivatives. This measure is designed as an additional tool to defend economic activity and protect citizens’ living standards in conditions of unpredictable market changes, especially in light of the conflict in the Middle East. The key innovation in the new Law is the granting of authority to the Government to temporarily adjust the tax rate on energy products subject to excise duties by decree, without parliamentary procedure.
Price up – tax down
According to current European directives, the general rate of VAT (which also applies to fuel) in Croatia is 25%, and it is determined by the Law, which must be voted by the Parliament. With the introduction of the new instrument, however, the Government will have the legal space to lower that rate to the minimum allowed 15%. Minister of Finance Tomislav Ćorić points out that this ensures the necessary flexibility of the tax policy, which is the ultimate measure to preserve stability in the event of an escalation of global energy crises.
The intervention through the “floating VAT” was conceived as a short-term measure that would be activated only in extraordinary circumstances of strong oil shocks. According to the announcements, the decision to change the rate would be made at the level of the Government’s decree, probably on a biweekly basis, following the rhythm of previous fuel price corrections. The goal is to prevent the sudden rise in crude oil prices on world markets from completely burdening end consumers and the economy – so in case of an increase in the base price, there may be a reduced VAT rate to compensate for it (note – bookkeepers across the country will surely be delighted about it…).
Expected effects of the measure
Financial analyzes indicate that a reduction in VAT for each percentage point means almost EUR 40 million less revenue for the state budget on an annual level. In the case of a maximum reduction of ten percentage points, the budget loss would amount to around EUR 380 million. The measure is in accordance with European rules, which state that the tax for oil and oil derivatives can be a minimum of 15%.
Although economic analysts warn that the long-term solution lies in the energy transition and lower consumption, the “floating VAT” is recognized as a powerful political and economic instrument for quick reaction. Stopping the growth of fuel prices has a direct impact on the transport sector, which suffers the biggest losses during crises, but also on the entire supply chain of food and services.
In principle, the parliamentary opposition welcomes the reduction of the VAT rate, if there will be a need for it, but they also point out that with this the Parliament practically gives bianco the power of the Government to set tax rates on its own, that is, to marginalize Parliament in decision-making. “Our changes concern one form of tax and that in very limited special circumstances, and that is why we believe that they are in accordance with the Constitution,” the minister asserted. Special circumstances, he says, are regulated by the general tax law. The adoption of these changes in the Croatian Parliament is expected at the end of April.