Croatia Urged To Further Streamline Tax Administration

by Lorys Charalambous, Tax-News.com, Cyprus

24 November 2009

A study by the Croatian Institute of Public Finances (IPF) has shown a marked increase in the efficiency of the tax authorities' tax collection, spending less taxpayers' money per Kuna collected in revenues.

For the period under analysis, 1997-2006, the cost of overseeing the payment of tax reduced significantly against the amount collected in revenues. In the period 1997-2001, it cost HRK0.022 for every HRK1 in revenues, improving to HRK0.019 for every HRK1 in revenues for the period 2002-2006 (HRK1 is equal to USD0.20).

“Due to increasing financial needs and less funds flowing into the state treasury, tax authorities have to be disciplined and as efficient as possible in implementing tax and customs laws and regulations,” the report noted.

The Tax and Customs Administration as well as the Financial Police are responsible for collection of all tax and customs duties in Croatia. The Tax and Customs Administration is financed from the State Budget and, to a smaller extent, from the authorities’ own sources, whereas the Financial Police is financed only from the State Budget. The Financial Police was abolished in 2001 but was reinstated in 2006 as part of a compliance drive.

The IPF’s findings show that the total cost of running the tax authorities increased during 1997-2006 as a result of increased employment, which only decreased between 2000-2002 as a result of the abolition of the Financial Police.

The study observed that there were two main reasons why the financial cost of Croatian tax administration has reduced since 1997 – lower overheads due to the closure of the Financial Police in 2001, and new investment to conform with the requirements of the European Union on tax evasion.

Having re-established the Financial Police however, which has driven employment to pre-2001 levels, the IPF has noted that a comprehensive analysis of spending should be undertaken, particularly in light of decreasing revenues.

The IPF observed that, whilst efficiency for the period 2001-2006 did increase, employment at the Tax Administration and Customs Administration remained level while the total cost of running the administrations increased by HRK300m.

The IPF noted that whilst this could be related to the increase in workload after the abolition of the Financial Police, further research could be done to establish where costs increased in order to streamline spending.

“A more detailed analysis of their work and expenditure structure is required. In the meantime, tax authorities will have to continue insisting on as efficient revenue collection as possible, but also on further total costs reduction, especially in times of growing financial needs and employment restrictions in the public sector,” observed the report.

“Since the total costs of tax authorities are directly influenced by high quality infrastructure and professional skills, motivation, diligence and possible corruption of their employees, further investment in the infrastructure, specialist training and providing incentives for employees is imperative, in order to increase the average efficiency of Croatian tax and customs authorities,” the report concluded.

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