Here, we will look at the draft tax reforms proposed by the Government of the Republic of North Macedonia in 2022 (Tax Reforms) that aims to ensure a fair, efficient, transparent, and modern tax system.
The Profit Tax Act (Official Gazette North Macedonia No. 199 dated September 25, 2023)
The main changes concern the exclusion of certain categories of expenses that, above a prescribed amount, were considered non-deductible expenses. They will now be treated as entirely non-deductible expenses – for example, expenses based on life insurance premiums paid by the employer on behalf of the employee as well as expenses for donations to sports clubs. Regarding reinvested profit, the Tax Reforms have not been fully adopted, only the provisions that include that if the taxpayer fails to substantiate their use of the tax exemption for investments in tangible assets such as real estate, plants, and equipment, as well as intangible assets like computer software and patents, to expand their business activities, they will be liable to pay five times the amount of tax that would have been due if the exemption had not been applied.
Regarding transfer pricing reports, the framework for preparing and maintaining them is more precisely defined. At the same time, an additional attachment is introduced to Annual Financial Statements, representing transactions between related parties.
Most provisions take effect upon publication in the Official Gazette but the changes mentioned above will only be applicable from January 1, 2024.
The Value Added Tax Act (Official Gazette No. 199 dated September 25, 2023)
The key change in the VAT act is the entirely new content of Article 14 which defines the place of supply of services. It will be applied from January 1, 2024. This should result in an alignment with EU directives where VAT treatment of online-delivered services is regulated differently than it was in Macedonian VAT law.
Other notable changes include the expansion of Article 2 and Article 6 with additional provisions regarding what constitutes the supply of goods and services. It defines the VAT treatment of value vouchers as an instrument that must be accepted as a means of payment, the solidarity liability of all persons in a related entity with regard to the tax owed, the introduction of a Tax Representative into the VAT system, and changes in the list of goods subject to a reduced tax rate of 5%.
The Solidarity Tax Act (Official Gazette No. 199 dated September 25, 2023)
This law is based on the principles of fairness, equality, and proportionality, according to which everyone is obliged to contribute to covering public expenses in accordance with their economic capabilities. The solidarity tax represents a one-time public tax for 2023 and is a source of revenue for the Budget of the Republic of North Macedonia. It is determined and paid under conditions of unforeseen and unfavorable economic circumstances. The taxpayer of the solidarity tax is the taxpayer of the profit tax in accordance with the Profit Tax Act that in the year 2022 earned a total income greater than MKD 615 million.
These amendments are aimed at aligning and harmonizing with European Union standards and best practices. Laws such as the Solidarity Tax Act are already in force in several countries in the region with different approaches but with the same purpose.
We maintain the stance that this tax should solely apply to businesses that gained advantages from different force majeure circumstances during the pandemic. However, as it stands now, it will also affect companies that merely boosted their profits through investments, without directly benefiting from the impacts of the COVID-19 pandemic.
By Ivica Jevtic, Managing Partner, and Marijana Andrikj, External Tax Advisor, Tosic & Jevtic
This article was originally published in Issue 10.10 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.