The Impact of Tax Reform on the Taxation of Sole Traders and Company Shareholders

The diploma thesis briefly presents the tax system in Slovenia, taxes as fiscal revenues by type and structure, taxes in the European Union and the tax reform that began with Slovenia's independence. Within the framework of the tax reform, a detailed comparison of the taxation of sole traders and company shareholders is presented, along with the impact of the tax reform on their taxation in the years 2005, 2006 and 2007. The results of the analysis show that changes in tax legislation have caused a greater tax burden for both sole traders and company shareholders. The tax burden has increased primarily due to the abolition of investment reliefs.

Problem

The diploma thesis briefly presents the tax system in Slovenia, taxes as fiscal revenues by type and structure, taxes in the European Union and the tax reform that began with Slovenia's independence.

Solution and Method

Within the framework of the tax reform, a detailed comparison of the taxation of sole traders and company shareholders is presented, along with the impact of the tax reform on their taxation in the years 2005, 2006 and 2007. The main objectives of the tax reform are to increase the competitiveness of the Slovenian economy, restructure the economy towards greater technological sophistication and higher added value, and increase employment.

Results

The results of the analysis show that changes in tax legislation have caused a greater tax burden for both sole traders and company shareholders. The tax burden has increased primarily due to the abolition of investment reliefs. The above-average tax burden causes the Slovenian economy to move away from one of the main objectives of the tax reform, namely increasing competitiveness in domestic and global markets.

The new tax legislation has caused a greater tax burden for certain taxpayers compared to the previously applicable legislation. I have in mind primarily the taxation of income of legal entities and natural persons carrying out business activities, considering that they can no longer reduce the tax base for investments in fixed assets. As a result, the effective taxation of both increases.

The government wanted to achieve relief for taxpayers through changes in determining the tax base (by recognising the formation of provisions as an expense, by exempting certain revenues from the base, by recognising labour costs, including benefits in kind), by lowering tax rates and simultaneously abolishing investment reliefs. When the government was deciding between a high tax rate and numerous reliefs on one hand, and fewer reliefs and a lower tax rate on the other, it chose the latter. By doing so, it wanted to simplify the taxation system and eliminate the tax relief that only benefited taxpayers with a positive tax base.

Sole traders and small enterprises, on which the taxation simulation in the case under consideration is also based, are too small and financially too weak to be able to invest in research and development, so the relief for research and development will not reduce the tax burden that hinders them in the domestic market and EU markets. With the abolition of reliefs for investments in fixed assets, the tax burden on these enterprises has increased considerably, whilst at the same time their ability to adapt to market conditions has significantly decreased. Many entrepreneurs are only now, when they have submitted their tax returns for the year 2007, discovering the consequences of the tax investment reliefs abolished in 2006.

Precisely because of this, a nationwide campaign by the Chamber of Craft and Small Business of Slovenia was launched, which handed over 6,814 faxes to the Prime Minister in support of the reintroduction of investment reliefs. The issue was also addressed by the National Council in April of this year, which instructed the Ministry of Finance to examine all possibilities for the return of reliefs that enable the smallest economic entities to achieve faster development and technological progress. I assess that the consequences of the greater tax burden caused by the current tax legislation will be an ever-decreasing interest in expanding the production and service capacities of small companies and sole traders, which will not have a favourable impact on the further economic development of Slovenia.

The return of investment reliefs for small enterprises and sole traders would stimulate development and economic growth. In this way, this segment of taxpayers could also be satisfied with the tax reform. The difference in the method of taxation of sole traders and company shareholders, when a sole trader is taxed less than a company shareholder at low profit, but can also be taxed more than a company shareholder at high profit, puts the entrepreneur in doubt as to whether to operate as a sole trader or to transform into a company.

At the conclusion of the diploma thesis, I find that the choice of topic was correct. The negative effects of the abolition of tax reliefs in 2007 identified in the research work will be eliminated as early as 2008, as the government proposed in July, and the National Assembly adopted, the Act Amending the Corporate Income Tax Act (Official Gazette of the Republic of Slovenia, No. 76/2008) and the Act Amending the Personal Income Tax Act (Official Gazette of the Republic of Slovenia, No. 78/2008).

With these amendments, an investment relief of 20 per cent of investments has been reintroduced, but the amount of the tax relief is limited to a maximum of 20,000 euros, of which a maximum of 10,000 euros can be claimed in the year of investment and 10,000 euros in the year following that year. The condition for claiming the tax relief is that in the year of investment the sole trader employs at least one full-time employee and the company employs at least two full-time employees. I assess that such a solution is not appropriate from the perspective of fairness of the tax system, as the relief does not apply to sole traders who do not employ workers and companies that employ one worker.

The aforementioned relief, which applies to almost all enterprises, will have the greatest effect, due to its amount, precisely for sole traders and other micro-enterprises and small enterprises. From this follows the conclusion that the government, with the amendments to the tax legislation, has supported small business.