Abstract
In 2015, the Slovak Parliament adopted the Law on Amendments to the Law on Value-Added Tax. This law came into force on January 1, 2016. One of the most significant changes was the introduction of a reverse-charge for the provision of construction works. A government statement of its positive influence on the business environment is inconsistent with the two-year experience in the building sector. The main goal of this paper is to establish the reason for the practical effects of the value-added tax reverse-charge mechanism on the construction companies. The hypothesis is that the negative effect on the cash flows of the construction companies increases ‘opportunity costs’ connected to excessive deductions. The paper focuses on evaluating and quantifying such an effect. It presents a comparison of the conditions before and after the adoption of the Act. No. 222/2004 Coll., as amended in 2016 and includes factors that influence costs and cash flows of construction companies. It but does not consider factors related to turnover and the economic situation. The reverse-charge mechanism affects the total of tax owing, the total deductible tax, the total excessive deduction, and the construction companies’ cash flows. In this study, the data from the information system of the Slovak Republic, under the condition of anonymity, are analyzed for the period 2014–2017. The effect of the value-added tax is quantified by way of financial interest expenses. These expenses depend on time limits for the excessive deduction, total of tax owing, and on the excessive deduction amount. Indicators of ‘Financial Burden 1’ and ‘Financial Burden 2’ are calculated. The results show that the Law on Amendments of Value Added Tax has significantly affected the constructions companies since January 2016. The reverse-charge system has not changed the delay in excessive deduction payments to the taxpayer’s bank account. It has changed the amount of excessive deduction expressed through money and the total tax owing. Based on the study results, this change markedly affects the financial burden of construction companies and provides an ‘opportunity cost’ Value Added Tax payers‘ construction company.
Highlights
All European countries rely on value-added tax (VAT) as the main source of government revenue (Barbone et al, 2015)
The average monthly excessive deduction was EUR 2 024 524 and average deviation was about EUR 419 755 (January and December seasonal deviation)
The analysis presented in this paper shows that the reverse-charge on provisions from construction works had important economic consequences for the construction companies
Summary
All European countries rely on value-added tax (VAT) as the main source of government revenue (Barbone et al, 2015). The capability to generate significant amounts for the national budget is a positive aspect of the VAT, with about one-fifth of all tax revenues being collected as part of this tax globally (Borseli, 2011). This indirect tax has an important effect on state revenues (Bojňanský et al, 2013). Tax avoidance is the legal use of tax laws to reduce one’s tax burden (Miller & Pangbourne, 2010; Scott, Hanlon, & Maydew, 2010). According to Auerbach (2008) and Banks (2010), the value-added tax is less distortionary than other taxes for several reasons
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