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Chapter 16 – Taxation

Chapter 16 – Taxation

What is being negotiated?

Tax revenues, as state revenues, are of great importance in process of creating the state budget and taking over the country's strategic obligations in solving certain economic and social problems. There is no obligation to harmonize all types of taxes within the Union, and tax harmonization is achieved through the coordination of the tax systems of EU Member States in order to avoid national tax measures that can negatively affect the functioning of the EU internal market. Each Member State has the right to retain its own tax system and even introduce new tax forms, with the obligation to align some of its parts (tax rate, base, etc.) with European regulations. Member States unanimously decide on issues in the field of taxation, which additionally protects their national autonomy.

Sub-areas?

The chapter Taxation is divided into four sub-sections: indirect taxation, direct taxation, administrative cooperation and mutual assistance, operational capacity and computerization.

Direct taxes are taxes that impose the economic ability of the taxpayer by directly affecting his wealth or income. Direct taxes include income taxes, ie income, property taxes and taxes on the use of goods.

Most of the provisions relating to these types of tax are determined by the Member States themselves, respecting the four freedoms contained in the Treaty on the European Community (freedom of movement of goods, services, persons and capital).

The acquis in the field of direct taxes relates mainly to corporate income taxes. The aim of the EU is to prevent harmful tax competition among member states and to support the principle of free movement of capital. The lack of these rules in the past has led to excessive tax incentives in some member states, with the aim of attracting foreign investment, often at the expense of other EU countries where the investment was economically viable. In order to eliminate harmful tax measures, Member

States are bound by the Code of Conduct on Taxation of Operations. EU common rules ensure compliance of tax rates for cross-border payments of interest, copyrights and cross-border sales of goods and services within the enterprise (so-called transfer prices).

Indirect taxes are taxes that are levied in connection with the production, consumption or exchange of goods.

Indirect taxes are related to Value Added Tax (VAT) and Excise on Tobacco Products, Alcohol, Energy and Electricity, which directly affect the free movement of goods and the freedom to provide services. Hence, harmonization at EU level is needed, because changes and differences in VAT or excise taxes for these products can easily impair market competition. Value Added Tax (VAT) was introduced in 1970th as general tax, applicable to all stages of production and distribution of goods and services. The minimum VAT rate in the EU is 15% and is valid for most products and services. The differences exist between individual Member States and range from 15% in Luxembourg, Cyprus (17%) and Malta (18%), at a rate of 19% in Germany to the highest rates of 25% in Denmark and 27% in Hungary.

Rates lower than average are permitted for products and services that are not competitive with products and services from other Member States, such as, for example, medicines and the like. Taxes and acquis in the EU related to excise duties include rules with the aim of harmonization for three categories of products: tobacco products, alcoholic beverages and energy products. These regulations, inter alia, define minimum tax rates for each type of product. Minimum tax rates for fuel, natural gas, electricity and coal are in the interests of fair competition and are a means of promoting energy efficiency as well as the use of environmentally friendly fuels. However, EU-level regulations are flexible enough to allow specific national circumstances. Member States may impose special duties on other categories of products whose use may not create obstacles to the free movement of goods outside the territory of that State.

EU legislation in the field of administrative cooperation and mutual assistance between the tax and customs authorities of the Member States offers solutions regarding the exchange of information, in order to prevent, on the one hand, the illegal and legal evasion of tax payments and, on the other, to enable the collection of information on tax entities, automatism as well as on demand.

Operational capacity and computerization are very important for linking and exchanging information at Union tax authority level. In this regard, national capacities need to be upgraded in order to obtain a compact and functional mechanism that will be profiled as a reliable and credible partner to other European tax systems within the EU.

When was the chapter opened?

Chapter 16 - Taxation was officially opened on 22 June 2015 at the Intergovernmental Conference in Brussels.

Closing benchmarks?

The European Commission defined five benchmarks:

• Montenegro adopts legislation in the areas requiring further alignment. First of all, significant progress should be made towards harmonization in the area of VAT, excise duties and direct taxes. Montenegro will submit to the Commission a detailed plan for achieving full compliance with the EU acquis until the date of accession.

• Montenegro has adequate administrative capacity and the required infrastructure to implement and enforce its tax legislation and to effectively collect taxes and control its taxpayers, and to establish the Central Liaison Office and the Central Excise Liaison Office.

• Montenegro demonstrates sufficient progress in developing all the tax administration IT supporting systems,
including those related to interconnection. Particularly for VAT (VIES), Excise (EMCS) and IT systems necessary for tax cooperation and exchange of information in the field of direct taxation.

Closing benchmarks in Chapter 16 – Taxation are primarily directed towards the harmonization of the national with the European legislation, as well as improving the administrative and infrastructure, and information capacity. IT interconnection is crucial to this chapter in order to ensure smooth and timely circulation of information and smooth cooperation between tax authorities.

What are the activities in the following period?

In the following period, Montenegro will be committed to fulfilling its obligations under Chapter 16, which implies the adoption of a set of laws in the field of indirect and direct taxation, such as - the Law Amending the Law on Value Added Tax, the Law Amending the Law on Excise Duties, Law Amending the Law on Corporate Profit Tax. It is also necessary to continue with the implementation of the Action Plan addressing the issues highlighted in the Tax Administration's Analysis using Diagnostic Assessment Instruments (TADAT), as well as finalizing activities to sign the Multilateral Convention on Mutual Administrative Assistance in Tax Matters.

Institutions / organizations participating in the working group?

The Government of Montenegro and the Ministry of Finance are responsible for conducting the tax policy, while the Tax Administration is responsible for its implementation. Also, the members of the Working Group on Negotiation Chapter 16 are representatives of the Central Bank, the Customs Administration, as well as representatives of the civil sector.

What is the benefit for Montenegro from this chapter?

Montenegro will be obliged to harmonize its legislation concerning the exchange of tax information with the relevant EU institutions, which will contribute to more efficient control of collection and reduce evasion and tax fraud and lead to a significant increase in budget revenues and reduction of unemployment. Montenegrin citizens will be able to work in other EU Member States, enjoying the same tax benefits as a home worker.

One of the advantages is the fact that after the accession of Montenegro to the EU, the Montenegrin citizen will no longer be obliged to pay VAT on a used car imported from one of the EU member states.

When it comes to Montenegrin companies, the benefits of doing business within the EU in terms of taxation are related to lower administrative costs for entrepreneurs (lifting customs barriers); less bureaucracy (eGovernment, reduction of administrative and statistical formalities performed by business entities, especially small and medium-sized enterprises); transparent and secure business for entrepreneurs in all Member States (free verification of the validity of VAT identification numbers)

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