{
  "title": "IMF Survey: Macedonia Makes Early Headway After Flat Tax Debut",
  "publication": "IMF News, April 30, 2008",
  "sourceUrl": "https://www.imf.org/en/news/articles/2015/09/28/04/53/socar043008a",
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  "summary": "Macedonia's government has early evidence of positive results from tax reforms intended to help lower unemployment and boost investment. Total income tax revenue has risen after a drive to achieve a more efficient tax system with transparent, simple, and lower taxes.",
  "authors": [
    "Pablo Lopez-Murphy IMF European Department April"
  ],
  "publishDate": "2008-04-30",
  "sections": [
    {
      "heading": "Overview",
      "content": "- Macedonia's government reports early evidence of positive results from tax reforms intended to help lower unemployment and boost investment.\n- Total income tax revenue has risen after a drive to achieve a more efficient tax system with transparent, simple, and lower taxes.\n- Government objectives included reducing an unemployment rate of close to 40 percent and increasing foreign direct investment (FDI) from very low levels."
    },
    {
      "heading": "Assessment of tax reforms",
      "content": "- Unification of personal income tax (PIT) and corporate income tax (CIT) at flat and lower rates:\n  - Objective: simplify the tax system and encourage beneficial supply-side effects and better compliance.\n  - Context: 98 percent of taxpayers were paying the lowest PIT rate of 15 percent prior to reform; with this rate the same as the CIT rate, Macedonia already had, in substance, a flat tax before the reform.\n  - The pre-reform rate was already quite low compared to other countries in the region.\n- Zero taxation of reinvested profits:\n  - Goal: foster corporate investment by allowing reinvested profits to be deducted from the CIT but with no further deductions for depreciation allowances.\n  - Concerns: threatens the base of the CIT and creates a \"lock-in\" effect so that profits are left in the company even if more profitable investments are available elsewhere.\n  - Mitigant: elimination of the double deduction protected revenues and removed a significant tax distortion.\n- Increase tax concessions in free economic zones:\n  - Motivation: provide tax incentives for investment in Macedonia.\n  - Evidence: tax incentives are only one factor investors consider; many concessions may be incompatible with EU regulations, complicating eventual accession.\n- Simplified CIT regime for small enterprises:\n  - Aim: reduce compliance costs for taxpayers and collection costs for the tax authority.\n  - Design: use of a flat rate of 1.5 percent of the turnover, described as in line with best practices in tax design.\n- Harmonization of minimum social insurance contribution (SIC) bases:\n  - Previous system: minimum pension and unemployment contributions bases at least equal to 65 percent of the average wage of the economy; health contribution bases were sector and skill specific.\n  - New system: brings health contribution bases in line with the other social funds to reduce computational work for employers and scope for evasion.\n- Lower VAT for selected items:\n  - Change: reduction of value-added tax (VAT) from 18 percent to 5 percent on computers, medicines, and public transportation.\n  - Note: international experience suggests administrative and compliance difficulties weaken the case for multiple VAT rates."
    },
    {
      "heading": "Recent tax policy reforms (enumerated)",
      "content": "- Unification of personal income tax (PIT) and corporate income tax (CIT) rates at a flat 12 percent rate from 2007, falling to 10 percent from 2008\n- Zero taxation of reinvested profits with no further deduction for depreciation allowances from 2007\n- Increasing tax concessions in free economic zones from 2007\n- Harmonizing minimum social insurance contribution (SIC) bases from July 1, 2007\n- Reduction of value-added tax (VAT) from 18 percent to 5 percent on computers, medicines, and public transportation from October 1, 2007\n- Introduction of a presumptive tax for small enterprises from 2008"
    },
    {
      "heading": "Preliminary outcomes and key statistics",
      "content": "- Despite rate cuts, income tax revenue increased during 2007.\n- PIT revenues fell slightly as a fraction of GDP.\n- CIT revenues increased, driven in part by a substantial 30 percent increase in reported profits.\n- Unemployment rate: fell from 36 percent to 35 percent during 2007.\n- Green field FDI: increased from 1.2 percent of GDP in 2006 to a projected 4.1 percent in 2007.\n- Comparative observations: similar patterns observed in Estonia, Georgia, Ukraine, the Slovak Republic, Lithuania, Latvia, Russia, Georgia, and Estonia for various revenue effects."
    },
    {
      "heading": "Labor taxes and policy recommendations",
      "content": "- Issue: The labor tax wedge—the tax share of labor costs—remains high and likely contributes to high unemployment and a large informal sector.\n- Main cause: social insurance contributions account for more than two-thirds of the wedge.\n  - Example: health care contributions of part time workers are calculated assuming a full time workweek, making formal part-time employment extremely expensive for the employer.\n- Distributional effect: the size of the labor tax wedge grows exponentially for lower wages because of high minimum contributions.\n- Recommendation: use any fiscal margin to link social contributions for low wage workers to their actual earnings.\n  - Expected effects: encourage formality and reduce unemployment for workers with less marketable skills.\n\nSource: IMF Survey by Pablo Lopez-Murphy, April 30, 2008.\n\n---\n\n\n References\n\n- https://www.imf.org/en/News/country-focus\n- PRESS CENTER\n- IMF Country Focus\n- IMF staff assessment\n- IMF Board assessment\n- Intermediation in Macedonia\n- Banking in transition economies\n- Resilient Europe faces test\n- Europe's structural issues\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2015/09/28/04/53/socar043008a"
    }
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    "Authors: Pablo Lopez-Murphy IMF European Department April",
    "Published: April 30, 2008",
    "Macedonia's government reports early evidence of positive results from tax reforms intended to help lower unemployment and boost investment.",
    "Total income tax revenue has risen after a drive to achieve a more efficient tax system with transparent, simple, and lower taxes.",
    "Government objectives included reducing an unemployment rate of close to 40 percent and increasing foreign direct investment (FDI) from very low levels.",
    "Unification of personal income tax (PIT) and corporate income tax (CIT) at flat and lower rates:",
    "Zero taxation of reinvested profits:",
    "Increase tax concessions in free economic zones:",
    "Simplified CIT regime for small enterprises:",
    "Harmonization of minimum social insurance contribution (SIC) bases:",
    "Lower VAT for selected items:",
    "Unification of personal income tax (PIT) and corporate income tax (CIT) rates at a flat 12 percent rate from 2007, falling to 10 percent from 2008",
    "Zero taxation of reinvested profits with no further deduction for depreciation allowances from 2007",
    "Increasing tax concessions in free economic zones from 2007",
    "Harmonizing minimum social insurance contribution (SIC) bases from July 1, 2007",
    "Reduction of value-added tax (VAT) from 18 percent to 5 percent on computers, medicines, and public transportation from October 1, 2007",
    "Introduction of a presumptive tax for small enterprises from 2008",
    "Despite rate cuts, income tax revenue increased during 2007.",
    "PIT revenues fell slightly as a fraction of GDP.",
    "CIT revenues increased, driven in part by a substantial 30 percent increase in reported profits.",
    "Unemployment rate: fell from 36 percent to 35 percent during 2007.",
    "Green field FDI: increased from 1.2 percent of GDP in 2006 to a projected 4.1 percent in 2007.",
    "Comparative observations: similar patterns observed in Estonia, Georgia, Ukraine, the Slovak Republic, Lithuania, Latvia, Russia, Georgia, and Estonia for various revenue effects.",
    "Issue: The labor tax wedge—the tax share of labor costs—remains high and likely contributes to high unemployment and a large informal sector.",
    "Main cause: social insurance contributions account for more than two-thirds of the wedge.",
    "Distributional effect: the size of the labor tax wedge grows exponentially for lower wages because of high minimum contributions.",
    "Recommendation: use any fiscal margin to link social contributions for low wage workers to their actual earnings.",
    "[https://www.imf.org/en/News/country-focus](https://www.imf.org/en/News/country-focus)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[IMF Country Focus](https://www.imf.org/en/news/country-focus)",
    "[IMF staff assessment](https://www.imf.org/external/pubs/cat/longres.cfm?sk=21827.0)",
    "[IMF Board assessment](https://www.imf.org/external/np/sec/pr/2008/pr0833.htm)",
    "[Intermediation in Macedonia](https://www.imf.org/external/pubs/cat/longres.cfm?sk=19936.0)",
    "[Banking in transition economies](https://www.imf.org/external/pubs/ft/survey/so/2008/CAR042508A.htm)",
    "[Resilient Europe faces test](https://www.imf.org/external/pubs/ft/survey/so/2008/CAR042108A.htm)",
    "[Europe's structural issues](https://www.imf.org/external/pubs/ft/survey/so/2008/INT042108A.htm)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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