It's a bad idea for both the municipalities and the state

I am of the opinion that this income will not even produce results close to those planned, so I do not consider it adequate for financing municipalities. The amount of 20 million was determined as a flat rate, and is not based on any valid fact, tax law professor Dr. Ilija Vukčević said in an interview for "Vijesti" when asked whether the future budget revenue from the announced taxation of undeclared income can compensate for the loss of municipalities due to the introduction of tax-free part of the salary.

Last Sunday, the presidents of the municipalities had a meeting with Minister Spaić, where they made claims that the Europe Now plan and the budget for 2022 will practically lead to the bankruptcy of some municipalities, especially in the north of the country due to the reduction of income from income tax. How realistic are these claims?

The Law on Financing of Local Self-Government as an important source of revenue for municipalities foresees personal income tax through three mechanisms. The equalization fund is filled, among other things, with part of the income from the personal income tax; a part of income based on income tax is given to municipalities; and they also have the right to a personal income tax surcharge in relation to the income generated in its territory. The implementation of the Europe now plan - the introduction of a tax-free minimum wage will result in a decrease in funds in the equalization fund, as well as a smaller amount of funds transferred to municipalities. Additionally, a smaller amount of collected income tax also reduces the amount of surcharge, the basis of which is the collected amount of tax. Therefore, on all three grounds, municipalities will have a big hole in their budgets for 2022.

This problem is the result of the fact that the adoption of the Europe Plan was not followed by a public discussion and analysis of the comprehensive effects on the entire public financing system, so it is necessary to find an urgent solution to replace the missing municipal revenues. On the other hand, I believe that there is also a positive side to the mentioned problem - municipalities will finally have to get serious when it comes to the collection of real estate taxes, which many did not take into account.

At the session of the Committee on Economy, it was announced that the Ministry of Finance could redirect part of the budget receipts it expects from the taxation of unreported income in the next year to the Equalization Fund in order to compensate poor municipalities for part of the income they lose due to the introduction of the non-taxable part of earnings. Do you think that this income could compensate the municipalities for the loss?

I am of the opinion that this income will not even produce results close to those planned, so I do not consider it adequate for financing municipalities. The amount of 20 million was determined in a lump sum, and is not based on any valid fact, and the MFSS officials a few days before the adoption of the Europe plan now presented projections of the entire 40 million. I consider it questionable whether there will be this income at all in 2022, and if there is, it can only be expected in the last part of 2020, while municipalities, due to the dynamics of settling obligations, need a stable source of income that flows evenly at equal intervals.

Are there any countries where similar laws have been applied regarding the taxation of income and property for which the owners have no evidence that they acquired it legally? On what basis do you base the claim that he will not give even close results to those planned in the 2022 budget and the Europe Now plan?

This type of tax form is common in all developed tax systems and it is an income tax, not a property tax as it is often mistakenly stated. Essentially, it is about taxing the income that it is realistic to assume that a person has earned, if there is a significant difference between his reported income and the property he owns. Therefore, the basis of this form of tax is the difference between the reported income of a certain person and the property acquired in the period for which the control is carried out. It is about a corrective mechanism for taxation of incomes that were missed by the tax authorities in the previous period.

When it comes to the year 2022, even if perfect provisions were made, it is a very complicated tax form, the proof of which requires the cooperation of various state authorities, which so far has been very slow - when determining the real estate sales tax, the cooperation between the tax authority and the cadastre lasts for months. Also, it is necessary to give the obligee an adequate opportunity to provide evidence of the income in question, which allows room for the procedure to be delayed. Furthermore, the ineffective system of forced collection of taxes, especially from property, represents one of the neuralgic points of the tax system, so it will be good if the procedures that result in forced collection from real estate or ownership shares in companies are completed in 2023 as well. If we add an international dimension to this, both in terms of obtaining information and in the context of the forced sale of property abroad, the talk of any deadlines becomes frivolous. Finally, in developed tax authorities there are specialized units for the application of this tax form, while our UPC is at the very beginning.

In the long term, the situation does not look any better because the way in which this form of taxation is standardized is very bad, more precisely, it was introduced with only a few sentences, which raises numerous questions of constitutionality. The entire procedure of determination and proof is a complete unknown because it is not prescribed by law at all. It is to be assumed that procedural issues - proof, base assessment, deadlines, etc. be contained in some by-law, which represents an illegal encroachment of the Government on the competence of the Assembly, and is therefore contrary to the Constitution. Similarly, the rate of this tax form is set at the level of 80%, which raises the question of constitutionality because it is a de facto confiscation of property in an administrative procedure. This fact is contrary to the practice of constitutional courts, which prohibit taxation as a confiscatory measure or type of punishment. In addition, a system of reviewing the origin of property in civil proceedings will soon be introduced into our legal framework, which further renders such confiscatory tax rates meaningless.

Two conclusions arise from the above. The first is that the UPC will find itself in a very unenviable position because the scale is set very high in relation to how badly standardized the tax mechanism in question is and what personnel capacities it has. The second is that if a review of the constitutionality of such ill-conceived regulations is initiated, they may be invalidated by the Constitutional Court, which will result in the return of collected revenues with all interest and procedural costs.

When a public official has an offshore company, he would be under suspicion in all developed countries

The "Pandora Papers" affair showed that even the highest state officials like President Milo Đukanović have entire networks of companies and trust funds in offshore zones. What are such companies and funds for? And from the European Union, they are asking that this and similar cases be investigated in detail, to what extent is this possible, and can our prosecutor's office and similar institutions do this at all?

The most common reason for using these networks is to reduce the tax burden of the investment or the availability of data to interested parties. In principle, doing business through companies and trusts in offshore zones does not automatically mean that a person is doing something illegal. However, when it comes to public office holders, this fact in all developed countries represents a suspicion that is sufficient for the competent authorities to initiate procedures for checking these circumstances, especially if the information was not presented to the public.

The effectiveness of investigations depends above all on the availability of information from these jurisdictions, which are often unwilling to cooperate. However, in the past decade there have been positive developments in this field, such as the latest information that Switzerland is considering the possibility of automatically exchanging bank account data with our country.

Income verification can start from former officials and businessmen

Who should start checking assets? From former officials and members of their families and related persons, or transitional businessmen and to what extent is it foreseen that the tax authorities can apply these regulations in the past?

The norms on the taxation of unreported income are applied to all taxpayers, therefore it is up to the tax authorities to create an action plan and determine the target groups. Certainly, former politicians and businessmen can represent a legitimate group that would be the focus of controls.

Unfortunately, when it comes to the application of this tax form, the possibility of a retroactive effect has not been determined, so this will be another reason for its limited scope.