Project description

Title: Supporting the reform of the Serbian tax system
Commissioned by: German Federal Ministry for Economic Cooperation and Development (BMZ)
Country: Republic of Serbia
Lead executing agency: Ministry of Finance of the Republic of Serbia
Overall term: 2002 to 2011

Context

The new Government which came into office in Serbia in mid-2008 is intensifying the implementation of economic and financial reform policies which are essential for the country’s alignment with the EU. As before, the main financial policy objectives are to reduce the budget deficit by means of stringent spending cuts, a simultaneous increase in government revenue from the proceeds of further privatisation, and higher tax receipts, thus giving the Serbian Government greater scope for action. In this way, Serbia aims, among other things, to establish the financial basis for implementation of the Poverty Reduction Strategy Paper approved by key lenders such as the World Bank and the International Monetary Fund (IMF).

With the introduction of value-added tax (VAT) on 1 January 2005, the partial updating of procedural law, and various activities that focus on training and modernisation, initial steps have been taken to bring Serbia’s tax system into line with European Union standards. However, Serbia has yet to complete the transition from an authoritarian, bureaucratic model of governance and administration towards an understanding of the tax administration’s role as a service provider that is oriented towards citizens’ needs.

Objective

Tax collection in Serbia is fairer, more efficient and more responsive to citizens, and aligned with EU standards.

Approach

As a key element of the project, international experts advise the Serbian executive on a variety of topics. In parallel, indirect support is provided for companies, as taxpayers and partners of the tax administration, through public relations activities, further training for tax officials, and the development of tax consultancy as an occupational profile with its own professional representative body.

With a view to supporting the establishment of new regulatory frameworks, the main project components are as follows: policy advice for the Government in the form of expert analyses; the development of draft legislation; the organisation of relevant expert meetings; and, as required, the establishment of working groups comprising representatives of the administration, business community and parliamentarians (Finance Committee).

In order to provide practical and technical support for work processes, a particular priority is to offer information and training for managers and experts, including the development of thematic guidelines and individual advice. In addition, organisational consultancy services are provided for the tax authorities in order to improve the efficiency of their structures.

Public relations activities as a means of providing information to taxpayers are extremely important when introducing new taxes or reforming existing ones. Organisational and technical advice on the development of a professional representative body for tax consultants helps to improve transparency and awareness of the rights and responsibilities of taxpayers, especially the corporate sector.

Results achieved so far

The tax authorities and the Ministry of Finance are utilising the services provided within the project framework to establish a market-oriented tax system for Serbia that is responsive to citizens’ needs and complies with EU standards.

Increased transparency in tax legislation and procedures, better controls and enhanced compliance by businesses as a result of the PR activities are enabling Serbia to harness its tax potential more fully, with realistic tax estimates increasing the stability and predictability of government finance systems. If the reform course is maintained, this will give the Government greater scope to fund much-needed social expenditure (e.g. more funds will be available for poverty reduction) and public investment in infrastructure.

With a growth-oriented tax system that is aligned to international standards and which has a broad assessment basis and avoids tax privileges and special arrangements, tax law will be more transparent and predictable for national and international investors. As investors rely on a stable legal environment, this will increase their willingness to invest in Serbia. This in turn will create jobs, enabling income poverty to be reduced via market processes. The increased alignment of Serbian law with international standards will support Serbia’s integration into the EU as a community of values, strengthen civil society, and have a stabilising effect.

The project mainly focuses on supporting the executing agencies. Sustainable improvements in administrative enforcement will not only benefit taxpayers; they will also ease the burden on senior managers and enable them to perform their role more effectively. Tax officials are therefore participating in training in order to enhance their professional skills and give the younger generation of staff the opportunity to develop a specialist profile.

The project is helping to improve the damaging web of relationships that consists of mutual mistrust, citizens’ latent and even illegal tax avoidance strategies, and excessive control by the tax authorities. In the long term, this will have a positive effect on relations between citizens and the state, notably in relation to the tax administration culture. Follow-up costs are not anticipated; on the contrary, tax revenue is likely to increase as a consequence of increased tax compliance.