Mazars Tax News - February 2022
News from Republic of Croatia
Draft of Act proposal on introduction of euro as official currency in Republic of Croatia, which introduces general provisions that regulate introduction of euro as official currency in Republic of Croatia as well as other provisions that regulate other important questions related to the introduction of euro, has been recently presented to the public through the online platform E-savjetovanje.
In this regard, we give an overview of tax/accounting implications discussed within the draft of the Act and the guidelines published on web pages of Ministry of Economy and Sustainable Development.
Moreover, it is necessary to emphasize that this is draft Act and that there is possibility that final version of Act will deviate in certain parts which are covered below.
General information
At first, it is important to emphasize that preparation for replacement of Croatian kuna with euro includes 3 different periods, i.e. preparation period (from the moment of adopting the decision on adoption of euro and until introduction of the euro as official currency), period of both currencies in circulation – “dual currency circulation period” (period of 14 days after the introduction of euro as official currency) and period after dual currency circulation period.
a) Preparation period
Preparation period will start after the Council of the European Union adopts a decision of introduction of euro in Republic of Croatia. Afterwards, the Government of the Republic of Croatia will adopt a decision where it will announce a date when euro will be officially introduced, fixed rate of conversion, date when dual circulation currency period starts and ends as well as date of start and end of dual prices expression period.
Dual prices expression
Period of voluntary dual prices expression starts the day after the Council of the EU announces its decision and regulation of introduction of euro and fixed rate of conversion of kuna into euro. After fixed exchange rate of kuna and euro become known, the companies can start voluntary expressing their prices in kunas and euros.
Furthermore, obligatory dual prices expression period will start at the first Monday in the month that follows the month in which period of thirty days will pass from the day of announcement of decision and regulation of the Council of the EU and it will finish 12 months after the date of introduction of euro. For example, if decision and regulation of the Council of the EU is adopted in July 2022., deadline of 30 days will pass in August and obligation of dual prices expression will start at the first Monday of September (i.e. September 5th 2022).
Dual prices expression will be governed by the Act on introduction of euro as official currency in Republic of Croatia, Act on consumer protection as well as Rulebook on the manner of displaying the retail price and the unit price of products and services.
Obligation of dual expression of prices will be introduced with the intent of prevention of unjustified increase of prices, unfair calculation and easier adjustment to the prices expressed in euros. According to available information, obligation for dual expression of prices will be strictly related to business conducted directly with end consumers (B2C). On that note, companies will be obliged to dually express the total amount of goods and services in their offers, advances, and consumer contracts.
In doing so, the conversion of prices will be performed exclusively at a fixed exchange rate in the form of a direct quotation EUR / HRK.
Furthermore, dual prices expression is obligatory for all forms of sales to consumers. In accordance with currently available information, dual expression does not include trade agreements, i.e. invoices between businesses (B2B), internal invoices within same company and various records and reports that will be sent to public institutions.
Also, there are some exceptions to the obligatory dual expression of prices:
- totems of gas stations (with prices of derivatives), aggregates and electric charges,
- sales via machines,
- other as prescribed by the draft Act.
Conversion
Fixed exchange rate set by the EU Council, which in most cases consists of six digits, will be used for conversion of kunas into euros. Practically, in case of Croatia, this means that the fixed exchange rate will consist of an integer followed by five decimal places. Moreover, when converting prices from kuna into euro, the fixed exchange rate should be used in full.
After the conversion, the result obtained is rounded to two decimal places with an accuracy of one cent, and based on the third decimal place, as follows:
- if the third decimal is less than five (number from 0 to 4), the second decimal remains unchanged (the amount in cents remains the same);
- if the third decimal is equal to or greater than five (numbers 5 to 9), the second decimal is increased by one (the amount in cents is rounded to the higher cent).
b) Dual currency circulation period
Regarding the dual currency circulation period, it will last for 14 days after the date of introduction of euro as official currency in Croatia. In that 14-day period, it will be possible to simultaneously use both kunas and euros as a mean of payment in the cash transactions. This period will start on the date of introduction of euro in 00:00 and will end at the 14th day in 23:59. For instance, if the date of introduction of euro will be January 1st, 2023, the period of dual currency circulation will be period from January 1st 2023 in 00:00 until January 14th 2023 in 23:59.
Furthermore, in these 14 days, payment recipients (for example retailers, legal entities with public authority and all other companies) will be obliged to return change in euros even though buyer will pay in kunas.
Exceptionally, if recipient of payment is not able to return change in euros, it will be able to return change in kunas and euros or just kunas. However, this exception will relate only to stores in rural and less populated places, where access to banks is limited as well as other recipients of payment who will not have sufficient amounts of euros during the period of dual currency circulation.
c) Period after dual currency circulation period ends
In the period of 12 months after the date of the introduction of euro as official currency in Croatia, banks will convert kunas in euro by applying initially set fixed exchange rate. In relation to that, banks will be obliged to apply regulation on the prevention of money laundering and terrorist financing.
After that period, Croatian National Bank will exchange kunas for euro with application of fixed exchange rate in following manner:
- bank notes, without time constraints,
- coins, up to three years after the date of introduction of euro.
Accounting and tax matters covered by the draft of the Act proposal
a) Invoices
Based on the Act draft proposal, when issuing invoices to consumers there is prescribed obligation to companies, credit institutions, credit unions, institutions for payment operations, institutions for electronic money and providers of financial services to dually present total amount on the invoice by using fixed exchange rate. Also, this obligation refers to public authorities which will be obliged to dually express total amount of the invoice by using fixed exchange rate.
b) Salaries and other compensations
In the period of obligatory dual expression, companies will have to show at least total amount of salary paid to the employee in both euros and kunas. This obligation will also refer to other income as well, i.e. service agreement, travel order, Christmas bonus, children gifts, etc.
Moreover, draft of the Act proposes that after the date of the euro introduction, salary amount in kunas based on the employment contract or other documents will be converted in euro with application of fixed excgange rate. Also, the draft has anticipated that there will be no need to change contracts or other acts, rather the amount in kunas in already mentioned contracts will be considered as amount in euro, converted by using fixed exchange rate and in accordance with the rules for conversion.
c) Bookkeeping records
Balances in kuna transferred from the books for the year preceding the year in which the euro was introduced will be converted into euros using a fixed exchange rate and in accordance with the rules for conversion. Business events relating to the period after the euro introduction date will be recorded in business records in euros.
In addition, differences that will occur due to the conversion will be recorded in the business books as financial income, i.e. financial expense.
d) Annual financial statements
Regarding the preparation of annual financial statements, it will be necessary to consider duration of business year, i.e.:
- If business year is equal to the calendar year, annual financial statements for the year preceding the date of introduction of euro will be prepared in kunas.
- If business year is different than calendar year, annual financial statements will be prepared in euros if last day of the financial year occurs after the date of introduction of euro.
Additionally, financial statements where the data will be shown for the first time in euros, comparative figures from previous reporting periods in kunas will be converted in euros with application of fixed exchange rate.
e) Tax returns
In accordance with the draft of the Act, tax returns will be submitted in kunas for the accounting period that finishes before the date of the introduction of euro.
Corporate Income taxpayers whose tax period starts on the date before euro introduction, and finishes after the date of euro introduction, will submit their CIT return and all other forms in euros for that tax period.
JOPPD form that will have submission date before the date of the introduction of euro will be submitted in kunas. On the other hand, JOPPD form that will have a submission date after the date of introduction of euro will be submitted in euros.
Additionally, tax return correction will be submitted in currency in which the tax return has originally been submitted.
Disclaimer: this document does not represent official interpretation of legal provision and is subjected to changes upon the entry into force the Act on introduction of euro as official currency in Republic of Croatia.
Other news
Invitation to Croatian residents to voluntarily declare foreign receipts
The Tax Authority has recently sent another invitation to Croatian residents to voluntarily report receipts earned abroad in this or previous years (salaries, pensions, other income, interest on savings, dividends, etc.) before receiving official call.
The Tax Authority stated that it has been noticed that a numerous Croatian residents did not fulfil their obligation of reporting foreign receipts via the exchange of information with the Tax Authorities of other countries. It is important to note that reporting of foreign receipts to the Croatian Tax Authority is obligatory regardless of whether the tax has already been paid abroad and whether any tax obligation arises in Croatia. The exception to the reporting obligation applies only to the pension receipts from following countries: Canada, China, Luxembourg, Northern Macedonia, Morocco, Mauritius, Germany, Oman, Poland and San Marino.
Individuals can report foreign receipts earned in previous periods on the form "Voluntary declaration of foreign receipts" through the ePorezna system, by mail or in person at the competent branch office of the Tax Administration according to their residence.
In addition, invitation mentioned that voluntarily declared foreign receipts will be conducted in accordance with the regulations in force on the day of voluntary declaration, without calculation of late payment interest and imposition of a fine for late declaration of foreign receipts.
New OECD Guidelines for multinational Enterprises and Tax Administrations
OECD (Organisation for Economic Co-operation and Development) has released new edition of the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations on January 20th 2022. OECD guidelines provide guidance on the application of the "arm’s length principle", which represents the international consensus on the valuation, for corporate income tax purposes, of cross-border transactions between associated enterprises.
This latest edition consolidates into a single publication the changes to the 2017 edition of the Transfer Pricing Guidelines resulting from:
- Revised Guidance on the Transactional Profit Split Method;
- Guidance for Tax Administrations on the Application of the Approach to Hard-to-Value Intangibles;
- Transfer Pricing Guidance on Financial Transactions;
- The consistency changes to the rest of the OECD Transfer Pricing Guidelines needed to produce consolidated version of the Transfer Pricing Guidelines.
Mazars comment:
As Croatian tax legislation does not address the issue of transfer pricing in sufficient detail, the Tax Authority of the Republic of Croatia is also guided by the OECD Guidelines in determining the Arm's length principle in taxpayer business with both foreign related parties and domestic related parties (when one party is in tax loss position or pays corporate income tax at a preferential rate.)
