International Tax Planning and Transfer Pricing Planning: Croatia from a US perspective
| Author | Professor Dr. Rainer Zielke |
| Profession | Professor in business economics at Østfold University College, Halden, Norway |
| Updated at | April 2017 |
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According to the International Monetary Fund, Croatia confirms in 2016 with a gross domestic product (GDP) of US$ 49,855 million the twentieth-highest GDP of the European Union. In Croatia, the profit tax rate is 20.00%. Thus, Croatia is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Croatia has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting. According to the OECD, Croatia’s legal and regulatory framework overall requires availability, access and exchange of all tax relevant information in accordance with the international standard. Nevertheless, certain room for improvement was identified mainly in areas concerning availability of information on holders of bearer shares, ownership information of foreign companies and foreign partnership and regarding broad scope of information covered by professional secrecy. Since the cut-off date of the review Croatia has already taken measures to address some of the recommendations made in the review report. Croatia’s response to the recommendations, as well as the application of its legal framework and practices will be considered in the next round of peer review of Croatia which is scheduled to commence in the first half of 2018. This chapter provides a survey on the actual tax law frame conditions in Croatia and provides practical support in international tax planning and transfer pricing planning between Croatia and the US based on cross border case studies.
Abstract transfer pricing planningWith respect to transfer pricing Croatia applies the arm’s length principle and follows the OECD Guidelines, the following transfer pricing methods are applicable: the comparable uncontrolled price method (CUP), the resale price method (RPM), the cost plus method, the profit split method (PSM), and the net profit method. CUP is the preferred method. The following companies are related: companies within a group; a company that holds a majority of shares or voting rights in another company; companies with common shareholders; and companies that have concluded contracts that give the possibility for profits or losses to be transferred between them. There are no specific reporting requirements, but documentation requirements. Business restructuring is possible. There is interaction between customs valuation and transfer pricing. There are no regulations on binding advance pricing agreements.
IntroductionInternational tax planning and transfer pricing planning between Croatia a high-income economy, and the US as most important national economy of the world based on cross-border case studies is of central importance. In addition, the USA confirm with a population of 321 million inhabitants in 2017 3rd place of the most populous countries in the world (4.40% of the world population).
According to the International Monetary Fund, [1] Croatia confirms in 2016 with a gross domestic product (GDP) of US$ 49,855 million the twentieth-highest GDP of the European Union. In Croatia, the profit tax rate is 20.00%. Thus, Croatia is a high tax country. Especially for multinational enterprises, it is interesting to realize profits in low taxing countries by means of tax planning measures. Croatia has introduced numerous anti-avoidance rules to avoid erosion of the taxable basis and to avoid profit shifting.
According to the OECD, [2] Croatia’s legal and regulatory framework overall requires availability, access and exchange of all tax relevant information in accordance with the international standard. Nevertheless, certain room for improvement was identified mainly in areas concerning availability of information on holders of bearer shares, ownership information of foreign companies and foreign partnership and regarding broad scope of information covered by professional secrecy. Since the cut-off date of the review Croatia has already taken measures to address some of the recommendations made in the review report. Croatia’s response to the recommendations, as well as the application of its legal framework and practices will be considered in the next round of peer review of Croatia which is scheduled to commence in the first half of 2018.
According to Orbitax, [3] (Daily Tax News Digest of 10 December 2016), on 2 December 2016, the Croatian parliament adopted a number of laws as part of Croatia's tax reform. Key measures include:
- The standard corporate tax rate is reduced from 20% to 18%, and a reduced corporate tax rate of 12% is introduced for small business with annual revenue up to HRK 3 million;
- The number of individual income tax brackets for employment income is reduced from three to two as follows:
a) annual income up to HRK 210,000 - 24%
b) annual Income in excess of HRK 210,000 - 36%
- The VAT registration threshold is increased to HRK 300,000 from 1 January 2018;
- Measures are adopted to implement the automatic exchange of financial account information under the OECD Common Reporting Standard (CRS) as well as under U.S. FATCA; and
- Measures are adopted to harmonize domestic legislation with EU law, including the amendments made to the EU Directive on administrative cooperation in the field of taxation (2011/16/EU) concerning the exchange of cross border tax rulings as per Council Directive (EU) 2015/2376 and the exchange of Country-by-Country (CbC) reports as per Council Directive (EU) 2016/881.
As per the EU Directive, Croatia's CbC reporting requirements will apply for fiscal years beginning on or after 1 January 2016 for MNE groups meeting a EUR 750 million consolidated group revenue threshold in the previous year. The specific rules for the submission of CbC reports and other requirements are not included in the adopted law and will be regulated by the Minister of Finance in the future.
The respective laws will enter into force after being published in the Official Gazette and will generally apply from 1 January 2017 unless otherwise specified.
According to Orbitax, [4] (Daily Tax News Digest of 2 November 2016), Croatia Tax Reform Legislation Presented Including Corporate, Individual, and VAT Rate Cuts
Croatia's Minister of Finance Zdravko Maric has announced tax reform plans that include a number of major tax rate cuts and other measures to simplify the tax system. Proposed changes include:
- Reducing the corporate tax rate from 20% to 18%;
- Introducing a reduced corporate tax rate of 12% for small business and farmers;
- Reducing the tax rates for the middle and top individual income tax brackets from 25% to 20% and from 40% to 36% respectively;
- Reducing the standard value added tax (VAT) tax rate from 25% to 24%; and
- Replacing the current reduced VAT rates of 5% and 13% with a single reduced rate of 12%.
The proposed measures are to be finalized and submitted to parliament by 9 December 2016. If approved, it is expected that the proposed changes would apply from 1 January 2018. Additional details will be published once available.
According to Orbitax, [5] (Daily Tax News Digest of 2 August 2016), Croatia's Tax Administration has published guidance that clarifies the application of tax relief (exemption) for reinvested profits from 2015. The exemption for reinvested profits was introduced in 2012, with the conditions expanded with effect from 2015, including that:
- The profits must be reinvested in long-term assets used in business activities to preserve existing jobs; and
- The total number of employees as established at the beginning of the period in which the incentive is claimed must not be reduced for at least two years.
The guidance clarifies that for the purpose of the employment condition, employers must monitor the total number of employees from the first day of the period in which the incentive is claimed until two year after the end of that period. If during the monitoring period the total number of employees dips below the established level, the employer will still generally be eligible for the reinvestment incentive, provided it is a short-term reduction, it was not the employer's intention to reduce the number of employees, and that action is taken to increase the number of employees back to or in excess of the established level.
The pivotal question is therefore, how groups of affiliated companies with group companies in Croatia and in the US can – before the background of anti-avoidance legislation and other tax law frame...
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