Youth tax refunds and the COVID-19 pandemic: how the Ministry of Finance has found a way to delay part of the refunds

Croatia

In addition to the age of the employee, the only restriction related to the refund refers to the amount of the tax refund: the tax paid at the rate of 20% (24% in 2020) is refunded, i.e. up to the tax base of HRK 360,000 per year.

After the announcement that all tax refunds to young people will be paid by the end of May, the government daily monitored which counties, even which neighbourhoods, would come next. However, many were greeted by a shock and a new, hitherto unknown "condition" for receiving a tax refund.

Instead of a decision on refund, some employees received a notification from the Tax Administration that proceedings were being conducted against the payer of income (i.e., the employer) in order to collect receivables based on receipts from self-employment / other income and the decision on determining the annual income tax for 2020 will not be issued until these procedures have been carried out on the payer(s) of receipts.

We can say without fear of contradiction that the notice is incomprehensible not only to workers and employers, but also to those dealing with finance. Tax officials, exclusively orally, explained that the notice was sent to workers whose employers used the option of repayment of tax liabilities due to the special circumstances (pandemic COVID-19). They will receive a tax refund for the entire year 2020 only when the employer pays all the taxes from their salaries.

To explain, entrepreneurs were able to seek a deferral of payment of tax liabilities due in the period from 20 March to 20 June 2020. Upon maturation of these deferred tax liabilities, they could request to pay in up to 24 instalments without interest. Instalment payments could include a maximum of 3 salaries, i.e. 3 monthly liabilities of income tax and surtax (for the 3rd, 4th and 5th month of 2020). For the remaining 9 months of 2020, the tax was paid in full and on time.

However, some workers will not see a single tax refund for 2020 until 2022.

Entrepreneurs who were closed or had a 50% drop in income could be completely exempted from paying taxes (which matured from 1.4 to 20.6.2020). When asked how this would affect the tax refund to employees, the Tax Administration issued an Opinion: the employee will be entitled to a refund of overpaid income tax, which is calculated from their salary, regardless of whether the tax is paid or written off due to special circumstances.

There is no published instruction or opinion from the Tax Administration on how the instalment payment of tax from 3 salaries affects the complete annual calculation of income tax. Without clear regulation of this issue, the Tax Administration ultimately put at a disadvantage workers of companies that better withstood the crisis and could not / did not need to seek exemption from payment.

At the time they used COVID-19 measures, employers could not have known that the measures would affect their workers in this way and the question is whether anyone would have used the instalment payment if they had had all the information.

The Tax Administration therefore, also orally, offers a "simple" solution to employers: in order for their workers to get a refund, they need to pay all the instalments of their tax liabilities at once!

It is hard to shake off the impression that the state budget could not withstand the measures that the Ministry of Finance once offered to entrepreneurs, so they are trying to fill the empty coffers in this way – to the detriment of young workers.