BALKAN BLOG: Croatia unveils tax roll of shame

By bne IntelliNews August 1, 2012

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Until recently, the fact that in southeastern European countries such as Croatia tax evasion had become something of a national sport - and a very professional one at that - was widely conceded, but ultimately unproven. No longer.

As part of its pledge to uphold greater levels of financial transparency than its predecessors - not a difficult act by any means - the centre-left coalition government that came to power in Croatia in late 2011 unveiled on July 31 an extensive list of 130,000 individuals and firms that, according to the country's tax office at least, had reneged on up to HRK52bn (€6.9bn) of payments. That's some going in a country given that this year's government budget is HRK118bn.

The schedule of debtors comprised companies that owe at least HRK300,000, sole traders that owe at least HRK100,000 and private individuals that owe at least HRK10,000.

The hotly anticipated list of shame includes many of the great and not so good of the Croatian corporate and social world, and shone a long overdue spotlight on the financial shenanigans in the country that have caused widespread concerns - abroad at least - about Croatia's accession to the EU, which is due to happen on July 1, 2013.

Top of the corporate list of tax debtors was construction company Tempo, which owes a not so grand total of over HRK292m to the cash-strapped Croatian state, which faces the unwelcome prospect of turning to the International Monetary Fund if it cannot shore up its own finances in the next few months. Tempo can safely said to be a perfect template for the whole Croatian construction industry whose fortunes have nosedived since the country entered into recession in 2008, leading to a sharp decline in spending by both the public and private sector.

Other troubled builders include Industrogradnja, which is almost HRK107m in hoc to the state - making it the country's fifth biggest tax debtor - while civil engineering firm Konstruktor is ranked at number eight, with debts of HRK72m. While one-time private sector heavyweights such as Industrogradnja and Konstruktor can arguably claim to be victims of the global credit crunch and associated economic downturn, which has choked off the hitherto plentiful supply of cheap credit and construction projects in Croatia, the same cannot be said for state firms such as broadcaster HRT.

Not only does it levy a subscription from hard-pressed Croatian taxpayers at a monthly rate of HRK60, it is also able to attract advertising and sponsorship revenue, much to the chagrin of commercial broadcasters against which it competes. HRT ranks number two on the country's tax pillory, having amassed a debt of almost HRK223m. While HRT has so far emerged scot-free from its debts, there's widespread anger in the county that it levies a charge of HRK250 through a private law firm if subscribers miss a single monthly subscription.

Whether the Croatian government will ever see any of the taxes owed by corporate debtors is a moot point. A number of the companies that owe the largest amount of unpaid taxes have already been declared bankrupt, meaning that there's effectively no chance that the government will ever be able to recover any money from them.

These include paper firm Pan, which owes HRK143m, and tourism and export-import firm Langer, which owes roughly HRK52m. Meanwhile a number of once household names from the fashion industry are teetering on the brink of existence thanks to their inability to pay their dues to the state . Most notable are the country's biggest clothing manufacturer Varteks, which is the country's fifth biggest debtor with roughly HRK103m of unpaid dues, while Slavonska Modna Konfekcij owes around HRK48m.

Commenting on the accumulated debts, Nada Cavlovic Smiljanec, head of the Croatian tax service, tweeted that previous governments had effectively ignored the build-up of liabilities to the state, with politically well connected firms and individuals able to dodge their liabilities. "The backlog of HRK52bn was not even mentioned in previous years, as if it did not even exist. We are primarily talking here about entrepreneurs and heads of companies who enjoyed good relations with the previous government and were allowed to avoid tax liabilities," she said. She added that information on tax debtors would be updated on a daily basis, while the list of recalcitrant payers would be published on a quarterly basis.

While Croatian corporations represent the biggest tax debtors, there is also a significant number of individuals who are reported to have failed to meet their fiscal duties. These include musicians such as nationalist rock singer Marko Perkovic, aka Thomson, as well as Croatian trash pop princess Jelena Rozga. Also among the reported tax dodgers are footballers Dino Drpic with debts of around HRK1m and Ahmad Sharbani who is alleged to owe HRK830,000.

Unsurprisingly, some of the personalities fingered by the tax office have protested their innocence. Singer Alen Vitasovic claims that due to a case of mistaken identity, instead of owing the state HRK965,000 the government actually owes him money.

Commenting on the publication of the unpaid tax data, Finance Minister Slavko Linic told commercial broadcaster RTL that the blame lays largely with previous rightwing premiers Ivo Sanader and Jadranka Kosor, who ruled the country between 2003-2011 and had forgiven the debts of politically connected businesses and individuals. "For eight years they did not collect their claims," he asserted.

With regard to those on the list, Linic said: " I do not feel sorry for them because they were friends with the authorities and did not take care of their companies," adding that the failure of many companies to pay their subcontractors had led directly to non-payment levels reaching HRK45bn. He said that the growing volume of unpaid taxes and receivables means that increasing financing costs for the government might lead to calling in the International Monetary Fund. "If we are able to pay interest at a rate of 6%-7%, then it is fine. If the rate is higher...then we'll have to call the IMF. "

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