Macedonia introduces flat-tax rate

A major restructuring of the Macedonian tax system is under way this year. As promised in the elections, the government is introducing a 12% flat rate personal income and profit tax. Currently, progressive personal tax rates -- 15%, 18% and 24% -- are in place. The profit tax rate is 15%, property tax 3%, and VAT 15%.

The authorities say they plan to go even further, cutting the flat tax rate to 10% in 2008.

Experts and financial institutions say that the new tax system is likely to have a positive impact on the economy, especially in terms of increased foreign investment. Tax collection will become more efficient, making tax evasion more difficult.

Similar tax overhauls in other countries, particularly the Baltic states, have shown favourable results. The gray economy is reduced as businesses find the benefits of avoiding taxation are small compared to the risk.

However, the government will be under pressure to exercise fiscal discipline, given the potential drop in revenues.

IMF representatives recently visited Macedonia to discuss the budget for 2007 and, according to Finance Minister Trajko Slavevski, generally agreed with the changes to tax policy. However, they were worried about the budget deficit. The government expects a substantial deficit, whereas the Fund would like to see this reined in.

The IMF says it hopes these differences will be resolved soon, allowing completion in January of the second review of Macedonia's standby arrangement with the Fund.

Mark Griffiths, head of the IMF mission, said his team is satisfied with Macedonia's accomplishments in macroeconomic policy. The country has had low inflation rates, a stable currency, and 2% to 4.6% growth for ten years, he said. Structural reforms have been implemented, even though the government changed as a result of elections.

Griffiths welcomed the government's aim of high sustainable economic growth and lower unemployment while keeping inflation in check. Macedonia hopes to double the standard of living over the next ten years, he noted.

National Bank Governor Petar Gosev projects inflation at 3%, along with stable foreign exchange rates and foreign currency reserve growth of up to $1.7 billion in 2007.