Zero rate tax on income will reduce local authorities’ financial autonomy, experts say

Lowering the rate of the income tax for businesses to zero, as provided by the Law on Economy Liberalisation, will cause annual losses of $810 million over the next three years, which is 1.5 percent of the GDP. According to economic analyst Valeriu Prohnitchi, co-author of the study titled “Fiscal amnesty and zero rate tax on income for businesses in Moldova: potential impact and risks”, these losses will be mainly sustained by the local budgets, where the tax on income forms at present one-third of their total revenues. As for the State Budget, the income tax accounts for as little as 3.2%, that is why losses here will be barely noticed. Although the losses to the local budgets are planned to be covered in 2008 by larger disbursements from the national budget – 2.9 billion lei compared with 2 billion in 2007, this will indirectly mean a blow delivered to the financial autonomy of the local authorities, the expert says. According to Valeriu Prohnitchi, Estonia’s experience shows that the zero rate tax can produce positive effects only if coupled with broader reforms, continuous integration into the European and global economy and larger direct investment into Moldova. The zero rate tax on income for businesses will be in effect from 1 January 2008.