Importance of theoretical value added tax for Croatia's fiscal capacity in the context of the European Union

Abstract

The main purpose of this article is to assess Croatia’s fiscal capacity in 2007 by means of the National Accounts Supply and Use Tables (SUT) approach and its harmonisation with EU regulations. National fiscal capacity is important for assessing an EU member country’s contribution to the EU budget. Based on theoretical considerations and EU regulations, Croatia’s GDP expenditure components for 2004 were used for the approximation of Croatia’s theoretical value added tax (VAT) base and a weighted average VAT rate (WAVR). The harmonisation of Croatia’s intermediate VAT base with EU regulations was carried out using cash receipts from the Tax Authority, gross national income (GNI) and WAVR. If the theoretical VAT base of any EU member country is under 50% of GNI then it is used as a base for the calculation of country contribution to EU budget, otherwise it is capped at 50% of GNI. The results of this assessment show that Croatia’s harmonised 2007 VAT base is in the zone of capping and that Croatia’s WAVR is bigger than those of all but one of the 12 new EU member states, while a comparison of theoretical VAT to VAT net cash receipts indicates that there is room for upward revisions of GDP/GNI.