The Law on Indirect Tax System in Bosnia and Herzegovina (ITA Law)

The Law on Indirect Tax System in Bosnia and Herzegovina (ITA Law)³⁸⁹³ was passed in late 2003 by the BiH parliament. Article 38 expressly states that this law could not come into force unless the transfer of competency agreement had been approved by both Entities. The text states “Publication shall take place immediately after the entry into force of an agreement by the Federation and Republika Srpska by which they transfer responsibility under Article III.5(a) of the Constitution of Bosnia and Herzegovina so as to allow for the establishment of a single indirect taxation system in Bosnia and Herzegovina, or immediately following the adoption of this Law, whichever occurs later.”

This law repealed the Interim Law referred to above and legally created the Indirect Tax Administration and paved the way for this BiH-level institution to assume full responsibilities for all indirect taxation.

Article 14 establishes the Governing Board (Board) of the ITA. This is effectively the Steering Board referred to in the transfer of competency agreement. This Article sets out the Board’s general responsibilities.

Article 16 sets out the membership of the Board. This includes as ex-officio officers the three Ministers of Finance – those of the Entities and the BiH level Minister. Three other expert officials, one from each of the Entities and the BiH level are also provided for, and there is an observer from the Brčko District.

Article 19 is the most critical. This sets out the rules for voting and making decisions at the Board. If decisions cannot be taken by consensus and a vote is required, specific qualified majority votes are required.

For decisions affecting customs tariffs, a majority is required including the vote of the BiH-level Minister of Finance.

For decisions affecting the rates of indirect taxes (VAT, excise duties), a majority is required including the votes of both Entity Ministers of Finance.

For decisions affecting the allocation of revenue, a majority is required including the votes of all three Ministers of Finance.

The latter two of these qualified majority voting rules comprise the “dual key” referred to above. Essentially, this means that without securing the agreement of both Entity Ministers of Finance, no indirect tax rate or changes to allocations of revenue can be made. During the transitional period of reform, there was a “first chairman” who was not a citizen of BiH who had the ability to impose Board Decisions if there was an impasse. However, even these powers of the first chairman were expressly forbidden from use where qualified majority votes for indirect tax rates and revenue allocations were required.

Due to this dual key approach, it means that while, for example, the VAT law is a BiH-level law and passed by the BiH Parliament, changes to this law or any other law that would impact on indirect tax rates or allocation of indirect tax revenues cannot be made without appropriate Board approval. This has been argued by some commentators to undermine the competency of the BiH parliament as this means that changes to tax rates or revenue allocation cannot be made by the parliament alone. However, this argument may be countered by observing that prior to the transfer of competency agreement and establishment of the Board, the BiH parliament had no rights whatsoever to pass laws in the sphere of indirect taxation. The participation of federal Entities in the legislative process in federal states is, moreover, not unusual, especially in regulatory areas which fall under a shared competence.

Article 21 of the ITA Law addresses the distribution of indirect tax revenues. This is the key element that serves to vary the provision in Article VIII that the BiH level derives a substantial part of its funding from the two thirds and one third Entity funding that has been discussed above. The order of allocation of indirect tax revenues is as follows:

■ The amount needed to cover the current year BiH budget is allocated to the BiH level. This change was radical. It meant that the BiH level benefits from the first tranche of the funds available and was no longer dependent on transfers from the Entities;

■ The balance of funds is allocated to the Entities and the Brčko District based on final consumption data as revealed by VAT returns;

■ The amount needed to satisfy BiH’s international debt obligations from each Entity is taken directly from the single account (after determining the total share of revenues available to each Entity).

This allocation mechanism raised concerns within the International Financial Institutions.³⁸⁹⁴ As the BiH level has the first tranche of funds, it seemed to create a licence for the BiH level to set ever higher budgets without paying attention to the resources needed at the Entity and District level. In a downturn year, or in a year of excessive BiH-level spending, the Entities may be deprived of sufficient funds to meet their obligations. However, due to how the BiH Parliament’s own qualified majority voting rules with majorities needed from both Entities for the budget (or any law) to be passed, this has so far served as a check on such unsustainable expenditure growth.