In its December session the Slovak parliament will decide whether to adopt a sectoral tax in the form of a 2.5% levy on net quarterly turnover of retail chains (the “retail chains levy”). The official purpose of the bill under consideration is to reach the strategic goal of food self-sufficiency, to finance the creation of mechanisms supporting Slovakia’s agricultural production and food industry, and to weaken the allegedly dominant position of large retail chains as regards their profits. The annual yield of the new tax is estimated at approximately EUR 150 million – a figure on which the Ministry of Finance relied in calculating its state budget for 2019.
The new regulation – nicknamed the “tax on food” – quickly drew fierce criticism as discriminatory, arbitrary, market-distorting, and violating expectations of equal treatment. Nonetheless, the government coalition insists on moving forward with it, making its introduction on January 1, 2019 likely. It is regrettable that Slovakia, once known for its simple and investor-friendly “flat tax” system, is now steering towards discriminatory sectoral tax solutions aimed particularly at foreign investors. Similar retail taxes were introduced in Hungary and Poland in recent years but were either watered down or never collected due to the violation of EU rules and the opposition of the European Commission.
The Slovak bill was not introduced by the government but by a group of deputies from a junior coalition party – the Slovak National Party – allowing its supporters to circumvent the interdepartmental review and expert debate process. Politicians backing the draft bill are openly declaring that the retail chain tax is targeted at the largest foreign-owned chains, which allegedly harm the interests of Slovak farmers and food producers. And in order to defend the bill, various unfounded accusations have been put forward, such as massive tax avoidance, chicanery of employees, abuse of dominant positions, and liquidation of small retailers. It is not clear how the new retail chains tax can remedy this alleged misconduct.
For the purposes of the levy, a retail chain is a group of shops operated under the same brand or by the same owner(s) and having a common design and marketing strategy in at least two Slovakian districts. It has also been proposed that at least 10% of their net turnover must be generated from the sale of food products. However, the tax is to be levied on the whole net turnover of retail chains, regardless of whether that turnover is generated from the sale of food or other retail products. This would mean that the largest drugstore markets fall under the scope of the retail chain tax as well. Having their entire turnover taxed would naturally lead to a far-reaching distortion of the drugstore products retail market. Due to this, an amendment increasing the threshold to a 25% food products turnover has been announced.
The original draft bill has been construed to exempt small retailers and to catch all large supermarkets, including chains owned by Slovak entrepreneurs. The amount of the tax rate (2.5% of turnover) has not been justified by any economic analysis, and it has become clear that most retail chains operators (particularly Slovak ones) would not be able to withstand its effect. Based on the ongoing discussion in parliament, it seems that the final version will go even further down the discrimination line by exempting all food retailers except the largest market players, owned mainly by foreign companies.
Following our analysis, in our view the proposed retail chains tax will not only violate EU rules banning discrimination and state aid but – taking into account case law of the Slovak Constitutional Court – will also clearly be unconstitutional. At the very least, it breaches the constitutional principle prohibiting discrimination in the right to own property. Of course, Slovakia has the right to decide on its taxation system or on the objective of different taxes, which to some extent legitimately interfere with the right to own property. However, taxes cannot be set in a discriminatory manner and without reasonable justification. Moreover, the new tax may have suffocating effects resulting in market distortion and market exits. And if the scope of the retail chain tax were to be further narrowed in order to leave out medium-sized Slovak chains, it would most probably not comply with EU state aid rules. Thus, if the retail chains tax is introduced, it will almost certainly be challenged before the Slovak Constitutional Court, which may freeze its effect until deciding on its constitutionality.
By Radovan Pala, Managing Partner, and Jan Lazur, Partner, Taylor Wessing Bratislava
This Article was originally published in Issue 5.12 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.
