Temporary Resolutions of Tax Administration for year 2017 – cause and consequences
Author: Attorney-at-Law Pavličić V. Predrag, Law Firm “VUK Tax Attorneys“
Date: 16th May 2023
Since mid-December 2022, individuals in the Republic of Serbia started receiving temporary resolutions of the Tax Administration on a mass scale, wherein tax obligations are determined for year 2017, regarding payment of personal income tax and social security contributions for income of domestic, as well as foreign citizens, that was received from abroad on their bank accounts in the Republic of Serbia. On most of envelopes containing temporary resolutions, date 14th December 2022 is printed, without any proof of receipt. Procedural unclarity that arises from delivery that was not in-hand, is determination of exact date of delivery of temporary resolutions. Crucial cause of issuing temporary resolutions is to avoid statute of limitation for determining taxes for year 2017 by expiration of year 2022. It was the main motive for Tax Administration, but such rushed actions led to evident inability to determine state of facts fully and correctly. Additionally, Tax Administration can issue within three years a final resolution that cancels the temporary resolution. Such broad manoeuvring space of Tax Administration is clear in the temporary resolutions that have been issued, which so far were rarely seen in practice until December 2022. Calculation of taxes and contributions is executed by firstly excluding non-taxable amount (RSD 384,000), taking also into account normed expenses of 50% of gross income (the “Tax Base”). In temporary resolutions, income is taxed as individual’s income from copyright and related rights and agreed remuneration for the work performed, by applying rate of 20% at the Tax Base, while contributions for pension and disability insurance are calculated by applying rate of 25%, and contributions for health insurance by applying rate of 10.3%. In accordance with the temporary resolutions, imposed tax obligations payable in 120 equal monthly instalments without penalty interest. However, this can only be applicable only on individuals, predominantly freelancers, that performed their work in Serbia, and not on individuals who performed their work abroad, which are largely encompassed by temporary resolutions. When we talk about consequences, temporary resolutions are quite template-based, and for transparency of overall tax, it is necessary to define legal criteria for determination of potential taxpayers, as well as payers of social security contributions for mandatory social insurance. Tax Administration primarily focused on domestic and foreign citizens who in 2017 received income from foreign employers on bank accounts opened in the Republic of Serbia. Although Tax Administration launched this excessive action, it is obvious that it can be applied primarily to freelancers who earn their income from a foreign employer while working on the territory of the Republic of Serbia, whereas all other individuals encompassed by temporary resolutions have become collateral damage, considering that there is an oversight related to the territory where their work was performed. Likewise, temporary resolutions of Tax Administration unjustifiably included domestic and foreign citizens who perform their work abroad, given that Serbian regulations on pension and disability insurance do not at all relate to persons who perform their work outside of the Republic of Serbia for a foreign employer, and therefore these persons are not payers of these contributions. In addition, the question arises, in the case of payment of contributions for pension and disability insurance determined by temporary resolutions, whether and in what way this will be taken into account for their retirement rights? If not, then the Tax Administration does not have legal right to collect the specified amounts determined by temporary resolutions. It is also problematic that there is a retroactive calculation of health insurance contributions for 2017, even though the majority of persons to whom temporary resolutions were issued, did not spend time in the Republic of Serbia, nor did they use the services of the health system of the Republic of Serbia in the said period. After issuing concerned temporary resolutions, the Ministry of Labour, Employment, Veteran and Social Policy issued ruling no. 011-00-18/2023-07, dated 27th January 2023 (the “Ruling”), where it took a clear and explicit position that “having regard that mentioned persons do not actually work from the territory of the Republic of Serbia, as well as that they work for a foreign employer, according to regulations of foreign country, this means that they do not meet any of the conditions on the basis of which they could be insured, there is no legal basis for these persons to be mandatory insured for pension and disability insurance in the Republic of Serbia”. This Ruling represents the first step of the State Administration in determining and defining the status of persons working abroad for a foreign employer. What is the next step of the State Administration? Will the Ministry of Finance also deal with the status of persons who worked abroad for a foreign employer and thereby obligate the Tax Administration to act in accordance with the Ruling of the said Ministry? Will the status of individuals for 2017 be to some extent applicable for the period after 2017, or their status will have to be determined anew for each year? When will citizens receive temporary resolutions for year 2018? No matter how the State Administration will act on the above-mentioned issues, they must certainly and above all perform any and all of their actions in accordance with the law, and in this regard, they would have to improve their practice comparing to the temporary resolutions for 2017, in which there was no consistent application and compliance with legal regulations to full extent.