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Evasion of Social Security Contributions: the example of Croatia and Bosnia and Herzegovina

Avoidance and evasion are present in every fiscal system and lately they have become a serious global problem. Similar to developed countries, transition countries such as Croatia and Bosnia and Herzegovina (B&H) are also challenged with this problem. During transition process both of these countries are confronted with social, political and administrative difficulties in establishing efficient fiscal system, hence social security contributions’ system (SSC). As a consequence Croatia and B&H are vulnerable to avoidance and evasion from both individual taxpayers and corporations to a greater extent than other developed countries. It is generally well known that individuals as well as corporations are not too keen on paying either taxes or SSC ; therefore it is in everyone's interest to reduce tax liability which in turn lowers public revenues. On the other hand, growing public expenditures (caused by for example aging population and therefore high social spending) puts pressure on budget and could lead to budget deficits. In both analysed countries, paying SSC’s is obligatory since it is regulated by law. Since both countries come from the same legal frameworks of the ex-Yugoslav SSCs system, comparison in the area of current legal solutions is even greater bearing in mind Croatia’s recent EU membership and B&H’s two differently regulated entities. Hence, similar to Croatian case, B&H has to follow EU perspective in this area. This is a more challenging task for B&H bearing in mind different legal solutions in two B&H entities (excluding Brčko District). Moreover, this paper will give insights into complex (and inefficient) SSC’s system in Croatia and B&H (FB&H and RS). Inefficient and complex SSC systems are further supported by high SSC rates, weak administration, large and growing number of retirees and most importantly strong presence of shadow economy in both analysed countries. The shadow economy is caused by, inter alia, an increase in tax burden and social security burdens. This paper will try to highlight current problems regarding avoidance and evasion in Croatia and B&H for SSC. In regards to contributions paid to pension funds, Pearson’s coefficient calculated for Croatia and B&H (FB&H and RS separately) shows high level of correlation between SSC revenues and average pensions, i.e. in Croatia (r ≥ 0, 88) and in B&H (r ≥ 0, 95). This is a very important issue bearing in mind inadequate effort these countries are pursuing in order to prevent and/or punish those who legally or illegally evade paying SSC.

avoidance, evasion, fiscal system of Croatia and Bosnia and Herzegovina, social security contributions

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