23. May. 2017.
Draft of new Personal Income Tax Law and new Social Security Contributions Law
Drafts of the new federal Personal Income Tax Law and the new Social Security Contributions Law have been entered in the parliamentary procedure on 31 March 2017 in the Parliament of the Federation of BiH (FBiH).
Although the drafts set out that the said laws will be applicable as of 1 January 2018, considering the significant changes in comparison with the current legislation, we draw your attention to some provisions of said drafts.
Draft of the new Personal Income Tax Law sets out, inter alia, the following:
- Abolishment of non-taxable amount of meal allowance (other than meals prepared in the employer's own restaurants or by a catering company for the employer, up to the amount of BAM 4,50 per employee), holiday allowance, commute reimbursement;
- Abolishment of increased personal allowance for family members and introduction of a single personal allowance of BAM 700,00 per month (BAM 8.400,00 per annum) for all resident taxpayers;
- Taxation of dividends or participation in company profits, savings interest and similar;
Introduction of two tax rates;
- 10% tax rate on a monthly tax base up to BAM 800,00 (annual tax base up to BAM 9.600,00);
- 20% tax rate on the tax base in excess of BAM 800,00 (annual tax base in excess of BAM 9.600,00);
- The tax base is the difference between the taxable personal income (salaries, independent income, rent, dividends etc.) and tax deductible expenses (which includes social security contributions and the personal allowance of BAM 700,00).
In practice, this means that:
- Taxable income now includes the meal allowance (other than the abovementioned exception), commute reimbursement, holiday allowance, participation in company profits etc.;
- Non-taxable annual income amounts to BAM 8.400,00 (personal allowance of BAM 700,00 x 12 months);
- Annual income above BAM 8.400,00 up to BAM 18.000,00 taxed at the rate of 10%;
- Income in excess of BAM 18.000,00 taxed at the rate of 20%.
Below please find an example of an annual calculation of tax liability for a person with a salary before tax of BAM 1.500,00 per month, meal allowance of BAM 170,00 per month, commute reimbursement of BAM 50,00 per month and a dividend of BAM 20.000,00 paid through the year:
In addition, transfer pricing provisions are introduced, which set out which persons are considered related parties (for example a physical person and a legal entity in which the said entity owns 25% or more stake) and an obligation that transactions between related parties must be in accordance with the „arm's length“ principle.
Draft of the new Social Security Contributions Law also brings significant changes, inter alia:
- Abolishment of employer social security contributions (currently 10,50% on the social security contributions base);
- Changes in social security contributions rates which would amount to a total of 33% of which 18,50% for pension-disability social security, 13,50% for health social security and 1,00% for unemployment social security;
- Base for social security contributions base includes meal allowance (other than meals prepared in the employer's own restaurants or by a catering company for the employer, up to the amount of BAM 4,50 per employee), holiday allowance, commute reimbursement;
- Company director who performs the management function without establishing an employment relationship is a social security contributions payer like all other employees;
- Owner of a company registered on the territory of FBiH who is not statutory insured on other basis is a payer of certain social security contributions;
Coefficients for monthly bases for calculation of social security contributions based on independent activities would change, for example:
- Coefficient of 0,80 for payer based on trade and related activities (currently 0,65);
- Coefficient of 0,80 for payer based on other independent activities (currently 0,65);
- Coefficient of 1,40 for payer based on freelance activities (currently 1,10).
In case you would like to have the draft and check how the tax and social security contributions calculation based on new laws and a comparison with the old laws relates to You as an employer, you can find the calculation on the following link of the Federal ministry of finance: