FINANCE ADMINISTRATION OF BRCKO DISTRICT BIH Tax, financial and accounting advantages and how to improve them
The Law on Income tax of Brcko District Bi. H • The Assembly of the Brcko District has passed the new Law on income tax in middle of 2003; • The proposal of this law was prepared by tax experts of German association for technical cooperation (GTZ) within the project for reform of taxation of incomes and profit in Bi. H; • It is important to mention that one Law regulates areas of taxation of incomes from nondependent work – salaries, incomes from independent work of natural persons and incomes, or profit of legal entities, what in the past was regulated by three laws.
The Law on Income tax of Brcko District Bi. H • The area of taxation of salaries was regulated by the Law on tax on salaries of Federation Bi. H; • The area of taxation of incomes was regulated by the Law on tax on incomes of citizens of Republic of Srpska; • The area of taxation of profit tax was regulated by the Law on tax on profit of companies of the Federation Bi. H; The application of these three laws was very complicated for Tax administration and for tax payers and it was frequently causing one income to be taxed twice.
The Law on Income tax of Brcko District Bi. H • The new Law on Income tax of Brcko District provides fair taxation by means of providing continuity of incomes taxation; • The income coming from source already burdened with tax can not be the subject of taxation again. • The most common example in practice are interests and dividends which come from source which is burdened with tax and they are not taken into consideration with annual taxation of income; • The profit coming from equities is nontaxable with goal of avoiding multiple burdens; • The simplicity of procedure of new method of taxation is also shown in the fact that tax rate for salaries, incomes and profit of companies is the same -10 %.
The Law on Income tax of Brcko District Bi. H The principle of modified cashier invoice • The calculation of profit and income in the Law on income tax is based solely on cashier invoice; • Financial report – Profit and Loss Statement is not the starting point for calculation of profit tax basis, i. e. invoiced realization does not represent income, but collected realization; • In accordance with modified cashier invoice, determined are the economic incomes and expenditures on basis of flow of cash, inflow and outflow.
The Law on Income tax of Brcko District Bi. H It has to be emphasized that it is not solely cashier invoice that contains only cash inflows and outflows but there were also certain modifications in purpose of simplifying establishment of profit such as: • • Outflows of money in purchase of fixed assets which has to be entered as permanent property may not be recognize immediately as expenditure, but only when they are used – through annual amortizations; In sale of fixed assets recognized is expenditure in amount of accounting value of deleted fixed asset; Inflow of money on basis of approved credits is not considered as income; Out flow of money on basis of repayment of credit may not be recognized as expenditure; Interests paid for taken credits are not recognized as expenditure; Transfer prices are considered as income; Protection interests are recognized as expenditure.
The Law on Income tax of Brcko District Bi. H • Protection interests are special benefit in income taxation in Brcko District; • It is about mathematically calculated interests on own capital which is invested in the company. Protection interest reduces tax basis as a special economic expenditure; • The amount of protection interests which may be deducted as expenditure of operations is the result of average status of own capital (status of capital on beginning and status of capital at the end of the year) and legally determined rate of protection interest.
The Law on Income tax of Brcko District Bi. H • The balance of own capital on beginning of the year and at the end of the year is calculated by application of simplified Balance sheet – short balance scheme which contains items stated in Article 34 paragraph 2 of the Law. • This balance includes on the side of assets the following items: accounting value of fixed assets, balance of cash register and transfer account and accounting value of receivables from the capital, and on the side of liabilities it contains item of liabilities towards suppliers fro fixed assets, liabilities for bank credits and loans. • In calculation of own capital on 31. 12. accounting values of fixed assets are taken with value before the amortization.
The Law on Income tax of Brcko District Bi. H • Protection interest as special benefit in taxation of profit which is considered as special economic expenditure which reduces the basis for income tax, is calculated by taking the average status of own capital from beginning and end of determination period and it is multiplied with rate of protection interest. • The rate of protection interest which we need for calculation of protection interests is prescribed by the Mayor of the District. At the end of every year, information is asked from all banks in Brcko District Bi. H on amount of annual interest rate on one year fixed deposits. On basis of these information form the banks, calculated is the average interest rate on one year fixed deposits which in fact represents the rate of protection interest. • In order to provide simpler application of this Law, for all previous periods protection interest of 6% was applied.
Salaries taxation • • • Salary tax rate is 10% of net paid amount. In taxation of net salary the worker has the right on amount free of tax in amount of 240, 00 Km for himself, as well as 120, 00 KM for each supported member of the family per month; Every worker has the right on flat rate amount free of tax in amount of 600, 00 KM for calendar year; Rate of contribution for health insurance is 12% of gross salary; Rate of employment contribution is 1, 5%, also of gross salary; When we talk about contribution for pension insurance we have to mention that Brcko District Bi. H does not have Pension insurance Fund. Workers decide themselves to which Fund they will pay this contribution, RS PI Fund or BIH Federation PI Fund; If the worker decides for RS PI Fund, than the Law on pension insurance of RS is applied, what means the rate of contribution for PI is 24% of net salary.
The Law on incentives to economic development in Brcko District Bi. H • In 2006, the Law on incentive to economic development in Brcko District Bi. H was adopted. • This Law stipulates that the District shall reimburse the amount, in amount of new investments invested in purchase of fixed assets which are entered in inventory of fixed assets, up to the amount of determined and paid profit tax. • The right on this incentive have all the newly registered companies in period of three years from the moment of registration,
The Law on incentives to economic development in Brcko District Bi. H • In procedure of obtaining stated right, the companies and entrepreneurs are obliged to, on basis of submitted annual tax return, pay the calculated amount of income or profit tax. • After that they submit to the Department for economic development certified copy of bank statement on paid profit tax. • Also they are obliged to submit certified copy of invoice for purchase of fixed asset as well as the certified copy of bank statement on payment of that invoice.
The Law on incentives to economic development in Brcko District Bi. H • Investments in fixed assets in sense of this Law implies purchase of fixed assets which are in financial reports classified as permanent (non current) assets, and on basis of basic rule of recognition of permanent (non current) assets defined in MRS 1 – Presentation of financial reports; • If there is an investment in fixed asset intended fro sale, than that asset has to be reclassified and presented in financial reports as working (current) asset.
Financial reports • When we talk about financial reports, legal entities in Brcko District are obliged since 01. 2006 to prepare financial reports in accordance with international accounting standards. • Taking into consideration that the previous regulations from area of accounting were in great extent harmonized with international accounting standards, for accountants there will be no significant problems related to application of International accounting standards and International standards of financial reporting.
The Law on VAT • With goal of harmonization of tax policies with standards of European Union, one of the conditions for joining the European Union was the adoption of Law on value added tax in Bi. H and it is in use since 01. 2006. • VAT represents radical reform of tax system which includes Bi. H in circle of European countries. • BH Law on VAT is completely in accordance with Directive 6 of the European Union.
The Law on VAT By making the comparison of our Law with Directive 6 we come to conclusion that the following solutions of the Directive are applied: • • • Consuming type of VAT, according to which from basis for taxation excluded are all procurements, including the procurement of equipment and facilities, what basically has positive influence on economic activity; Principle of destination, which implies taxation of turnover of goods and services according to the place of consumption; Credit method in establishing the tax obligation, according to which the tax obligation is established as difference between tax obligation for delivery and tax obligation for procurement.
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