Friday, November 28, 2008

The Flat Tax at Work in Montenegro

November 26, 2007

By Alvin Rabushka

In December 2006, Montenegro’s parliament approved a 15% flat tax on personal income. The new law sets the flat rate at 15% in 2007 and 2008, reduces it to 12% in 2009 and 9% in 2010. Montenegro has set the corporate profits tax rate at 9%, reduced from the previous two-rate system of 15% on taxable profit up to €100,000 and 20% on the gain exceeding €100,000. In 2010, Montenegro will have a unified flat tax of 9% on personal and corporate income.

The tax rate reductions have had a positive effect on bringing underground economic activity out into the formal economy, where it can be taxed, and improving compliance.

In a report released by Montenegro’s government, the tax administration collected 30% more revenue in the first 10 months of 2007 over the comparable period in 2006. For the month of October 2007 compared with October 2006, the increase in revenue consisted of a gain of 13% in personal income taxes, 100% in business profit taxes, 25% in value added taxes, and 150% in property taxes. These results mirror the same pattern that emerged in Russia, Romania, and other Central and Eastern European countries that previously adopted the flat tax as part of a process of tax reform and tax-rate reductions.

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