National Alliance for Local Economic Development (“NALED”) has submitted its proposal for the changes of the flat-rate taxation system to the National Coordination Body for Battling Underground Economy (“NCB). This Government body will review the proposed changes, which would substantially alter the system of flat-rate taxation of independent contractors (i.e. individual entrepreneurs) as it exists now, and have a particular impact on certain industries which rely on it to a great extent, such as the IT sector.

At the beginning of July, it was announced that NALED submitted its proposals for changing the flat-rate taxation system in Serbia, which the NCB will consider with the aim of developing a new system for this type of taxation in the second half of 2018. Although aimed at being neutral, the wording of some of the proposed changes inadvertently affects certain classes of contractors – especially those in the IT industry.

Fighting Employee Misclassification through Changes of Flat-Rate Taxation System

First of the proposed changes suggests the introduction of an electronic app through which it would be possible to automatically check whether a certain business activity can be subject to flat-rate taxation, and to calculate the exact amount of taxes and contributions that the contractor would be required to pay.

Secondly, it is suggested to redraft the list of business activities eligible for flat-rate taxation and introduce a limit so that individual contractors in flat-rate taxation system cannot obtain more than 80% of their income from one single client. If this proposal is accepted, it will represent one of the first steps Serbia has ever taken with the aim of battling the phenomena of “employee misclassification” – hiring personnel as independent contractors when they effectively perform all duties as employees, in order to avoid paying for salary tax, healthcare, and social contributions. While the US and European legislation have long ago recognized and started to fight employee misclassification, this is mostly done by introducing various misclassification tests, and not through the indiscriminate application of a single rule to all industries equally.

Other proposed changes primarily relate to the need to increase the efficacy of the tax administration, but also pertain to the possibility for newly registered independent contractors to be completely exempt from payment of taxes during their first year of activity.

Relevant industry associations have already voiced their concerns regarding some of the proposed changes, especially those which would affect work in IT, and it can be expected that they will influence the decision makers to a certain extent in terms of the final legislative solutions.