Regional Tax Competition Intensifies in the Balkans as Bosnia’s Federation Slashes Corporate Tax Rate to 10%
According to published news reports from Bosnia-Herzegovina, the Federation has slashed its corporate rate from a high of 30% to 10%, effective January 1, 2008. The Serb Republic (RS) led the race in 2001 to reduce tax rates within Bosnia Herzegovina by reducing the corporate tax rate to 10%. The Federation’s new tax cut was in response to the Serb Republic attracting FDI, experiencing higher economic growth and lowering unemployment rolls.
During the past twelve months, tax competition has intensified in the Western Balkans with the introduction of Macedonia’s low flat tax rate of 12% implemented in 2007 - now reduced to 10%.
Montenegro’s flat tax rate of 9% for corporate and 10% for personal income tax rate along with low flat tax rates in Serbia with 10% for corporate and 14% for personal income tax; Albania’s 10% flat tax rate for corporate and personal income, and Romania and Bulgaria’s flat tax rates will apply greater pressure on non-reformers such as Croatia. The regional tax competition surge in the Balkans has attracted investors and entrepreneurs seeking emerging markets in post-communist territories with low flat tax rates.
Croatia remains the Balkan laggard with a high 20% corporate tax rate and a top marginal tax rate of 45% - the highest in the region. The complex Croatian tax code and its politicians’ resistance to implementing reforms have deterred foreign investments. Over the past few years, even Croatia’s business leaders have begun to explore the benefits of low tax rate jurisdictions by seeking investment opportunities in Bosnia-Herzegovina, Montenegro and Serbia.
“The Bosnian Federation’s newly introduced low corporate tax rate of 10% and the sweeping flat tax revolution in the region will attract foreign direct investments and create new jobs,” said Natasha Srdoc, President of Adriatic Institute for Public Policy. “Tax competition matters and regrettably, countries such as Croatia will be left out - having become well-known as the persistent laggard in the region.”