By: Dražen Raičković, Executive Director of Finance Plus
Montenegro’s tax system is in the interest of neither citizens, nor companies, and least of all the state. Is anyone thinking about a new, modern tax system?
The tax system applied by Montenegro is unsustainable. This will become clear — but, unfortunately, only after tens of millions of euros have been spent on information systems, training, penalties, blockades and preventing small business development.
The tax burden falls on the end consumer
When we improve the system and tax collection monitoring becomes more efficient — we will realise that it is impossible for one citizen to bear the burden placed on their shoulders.
The biggest problem for the state’s overall economy is the fact that the entire tax burden falls on the end consumer, who is at the same time the weakest link in the chain (economically speaking). This directly impacts citizens’ living standards and the national economy — because citizens with the lowest salaries and the highest tax burden pay de facto the entire VAT.
A concrete example: a citizen with a net salary of EUR 600
Let’s take an average working-age Montenegrin citizen with a net salary of EUR 600:
- Their employer pays about EUR 240 in taxes and contributions
- The employer’s total cost is about EUR 840
- They spend their salary in retail — paying 21% VAT plus excise taxes and fees
- A “rough” estimate: an additional approx. EUR 120 in VAT monthly
In total they pay the state about EUR 360 — more than 50% of their net salary.
From what is left they have to pay electricity, water, maintenance, food, hygiene, medicines, transport, clothing and footwear for themselves and their children, books, notebooks, stationery. How?
Clearly, with such a tax system the state directly contributes to a decline in citizens’ living standards — and the economy also loses, because the citizen chooses to allocate their income exclusively to basic needs.
Why the VAT system does not suit the state either
The VAT system was introduced in France in 1954, but it solved problems of tax collection in industrial development and was suited to production.
Montenegro, as a small country where industry and production are not the main economic activity, is particularly unsuitable for the VAT system. Service activities are in an unenviable position:
- Their main cost is labour (huge taxes and contributions)
- Production companies with technology as the main cost have VAT credit
Low VAT collection rate
Collected VAT does not mean it is revenue for the state — one company pays, another may request a refund. In practice, the state collects roughly only half of the total VAT liability at the national level (plus refunds during the year).
Conclusion: The VAT system is bad for citizens, companies and the state — so why does no one question this?
Proposal: a 3% transaction tax instead of VAT
Instead of criticism without a solution, the author proposes an innovative tax system as a response to the main problems of VAT:
- Inefficient collection
- Huge burden on the end consumer
Mechanism
- The Central Bank withholds tax on every transaction
- All proceeds are paid into the state budget
- Automatically, without pause, without risk
Rate variants
- A 5% tax paid by both the buyer and the supplier → estimate: state revenue increase of over 60%, consumer prices lower by up to 20%
- A 3% tax instead of 21% VAT → drastic price reductions, instead of 21% only 3% is paid
Effects of the innovative system
For citizens
- All goods and services cheaper
- Higher consumption → better economic situation
- Rising standard of living
For the state
- Money in the account daily — ready for operations
- Higher total revenue despite the lower rate
For tourism and investors
- Montenegro would have the most competitive prices in Europe
- Tourism revenues would rise significantly
- Low prices of construction materials → construction expansion
- Growing demand for labour
Luxury goods as a magnet
Example: a foreigner buys an item worth EUR 100,000. The tax would be EUR 3,000 instead of approximately EUR 20,000 in their country. The savings of EUR 17,000 allow them to stay in Montenegro, continue spending, and even move part of the business.
Tax resident status in Montenegro would become a desire of many wealthy people worldwide.
The big picture
- Rising demand for real estate → higher living standards for citizens
- Cryptocurrency market free — every transaction taxed at 3%
- Stampede effect: the capital market relocates to Montenegro
- Montenegro as an example for other countries
Two kinds of conclusions
The easier conclusion lists the reasons why this could not work:
- Does this system work anywhere else?
- Are we capable enough?
- Would the EU and large systems allow it?
- Do we have the strength, will and competence?
The author calls for a proactive approach — instead of passively waiting for help, to create a system that is an example for others, in line with the demands of the fourth industrial revolution and digitalisation.
It is said that this industrial revolution will change the world — but will the tax system be the only thing that stays the same?
The author is a Master of Economics and Executive Director of Finance Plus.
Taken from: vijesti.me
