Forto and Čičić: Sarajevo Canton budget endangered, the fundamental rule is that the largest portion of taxes returns where it was generated

SARAJEVO, (Patria) - On Monday, January 24, the House of Representatives of the Parliament of the Federation of Bosnia and Herzegovina will consider, among other things, the Bill on Amendments to the Law on the Allocation of Public Revenues in FBiH.

What is proposed is a correction of only one provision of the said law, which sets the coefficient of 1.9658 for Sarajevo Canton. The explanation states that there is no need for a special coefficient for Sarajevo Canton given that war damages have been repaired, meaning that the emphasis should now be on a fairer distribution of revenues.

The explanation ignores that in the Law on the Allocation of Public Revenues (adopted in 2006), the mentioned coefficient for Sarajevo Canton was determined by applying the historical principle, i.e., the share of Sarajevo Canton in turnover tax, which in 2005 amounted to 35.5 percent. Therefore, care was taken to maintain the share of Sarajevo Canton in indirect tax revenues at approximately the same level by applying the new formula. In the first year of the new Law's application, Sarajevo Canton's share in indirect taxes was 34.7 percent. According to projections for 2021, Sarajevo Canton's share will be 30.7 percent, i.e., four percent less compared to the first year of the Law's application.

According to the Prime Minister of Sarajevo Canton, Edin Forto, the justified feeling of injustice in Tuzla Canton that the distribution between cantons is unfair has been misused in a way that "everything that belongs to Tuzla Canton went to Sarajevo Canton".

"That is simply not true. The way out of this situation is not to destroy the budget of Sarajevo Canton, but to adopt a good, completely new federal law. The citizens of Sarajevo Canton have no doubt that for the first time their money is being spent responsibly. Voting to take budget money exclusively from the citizens of Sarajevo Canton and redirect it to other cantons is a bad therapy for the correct diagnosis," concluded Prime Minister Forto.

According to Davor Čičić, Minister of Finance of Sarajevo Canton, although the proposed amendment to the regulations directly affects, and even endangers, the balance of the Sarajevo Canton budget, it is not accompanied by the mandatory calculations of its impact on this canton's budget.

"However, what is particularly concerning is that, instead of proposing a completely new law, amendments to only one provision of the existing law are being considered, which has proven to be non-transparent and ineffective. Non-transparency particularly relates to the interpretation of the 'special expenditure needs' construct, which is present in the case of distribution between cantons, as well as local communities, which is often overlooked," explains Minister Čičić.

He adds that another problem with the model on which the existing law is based is the "avoidance" of the basic criterion for the distribution of reported and collected taxes as the basis for determining coefficients. Instead, a model with criteria and weights has been imposed that suits no one, not even Sarajevo Canton.

"The existing model installs a kind of 'leveling' in revenue distribution, which encourages the introduction of 'total leveling,' as confirmed by the new proposals for amendments and additions to the said law. This approach jeopardizes the fundamental rule that the largest portion of taxes returns to where it was generated," states Minister Čičić.

A study prepared by the Sarajevo Economic Institute in 2015 showed that approximately 24 percent of indirect tax revenues (approximately 100 million KM annually) that would belong to Sarajevo Canton according to economic criteria (share of Sarajevo Canton in final consumption, reported income, generated value added) are transferred to other cantons. Similar results are obtained when analyzing data from 2019. In that year as well, the "transfer" from Sarajevo Canton to other cantons amounted to about 100 million KM. According to any economic criterion commonly used in such situations, Sarajevo Canton's share in the Federation of Bosnia and Herzegovina is higher than its share in the distribution of indirect tax revenues.

The statements from the mentioned study were confirmed by the expert mission of the International Monetary Fund, which visited Bosnia and Herzegovina in 2015.

"Taxpayers in Sarajevo Canton paid 3.4 billion KM in VAT in 2019, and only 457 million KM was returned to Sarajevo Canton through revenues. In the same year, Republika Srpska paid 1.7 billion KM in VAT, and they received 1.7 billion KM back through revenues. This also raises the issue of unfair vertical distribution, which the proponents of this law ignore and refer to their lack of jurisdiction, even though they were elected to represent and fight for the interests of the Federation of Bosnia and Herzegovina, through their work in the Parliament of the FBiH and through actions towards higher levels of government where the FBiH has its representatives. It is often speculated in discussions that numerous large companies have their headquarters in Sarajevo Canton, and based on that, an unjustifiably large amount of indirect tax payments from Sarajevo Canton is presented. However, if the total amount paid by the 38 largest companies were deducted from the total indirect taxes paid from the Sarajevo Canton level, the payments from Sarajevo Canton would still be more than four times higher than the amount of money Sarajevo Canton received in distribution under the current law," explains Minister Čičić.

As proposed by the study conducted by the Sarajevo Economic Institute, and in accordance with the recommendations of IMF experts presented at meetings with representatives of federal and cantonal ministries of finance, it is necessary to develop a completely new distribution model based on a combination of economic and social principles, in a way that improves the fiscal position of "poor" cantons without jeopardizing the development potential of "richer" cantons.

"According to the adopted initiative of the representatives, the Federal Ministry of Finance has formed a working group for the drafting of a new law on the allocation of public revenues in FBiH. The working group has never held a meeting, which gives the impression that there is no goodwill to resolve this issue systematically and professionally. On the contrary, the intention of the proponents is to hastily amend the law, which will cause long-term damage only to Sarajevo Canton because it will jeopardize all existing acquired rights, loan repayments, and the further development of Sarajevo as the capital and driver of economic activities, which will, through the economic multiplier, also affect the long-term development of the entire FBiH," explains Minister Čičić.

Given this, the Sarajevo Economic Institute, with the engagement of several professors and experts in this field, has prepared a proposal for a model that would be proposed in a completely new and more transparent law on the allocation of public revenues, which would take into account both economic and social elements, and which will be presented tomorrow at the premises of the Faculty of Economics in Sarajevo. The minister invites the media and interested parties to follow the presentation.