Tax Administration of FBiH on taxation of freelancers

(Patria) - The Tax Administration of the Federation of BiH issued a statement on Wednesday, regarding media reports following the publication of a Public Call to taxpayers who earn income from abroad.

The Tax Administration of the Federation of BiH states that it has recently been carrying out data processing activities and determining tax liabilities for 843 individuals residing in the Federation of BiH who, through PayPal, MoneyGram, and other online payment services, earned income from abroad in amounts of 10,000.00 KM or more during one year in the period from 2015-2017, thus earning a total income of over 37 million KM.

The Tax Administration of the Federation of BiH issued the Public Call primarily to apply the provisions of Article 80 of the Law on the Tax Administration of the Federation of BiH, which, among other things, stipulates that the Tax Administration may exempt a person from penalty proceedings if they voluntarily and accurately report the offense to the tax authority before being notified of the intention to conduct a tax audit, or before the offense is discovered by any official or authority of the Federation, and if they fully cooperate in determining the appropriate tax liability.

"The Tax Administration of the Federation of BiH published the Public Call to taxpayers who earn income from abroad on its website on July 12, 2018, and in the media on July 13, 2018. The Public Call aimed to remind individual taxpayers residing in the Federation of BiH who earn income from abroad via PayPal, MoneyGram, or any other electronic online payment service that, if they have not already done so in accordance with applicable laws, they should submit a tax return and pay income tax, thereby avoiding sanctions for late submission of tax returns and payment of taxes," the statement from the Tax Administration of FBiH reads. 

At the beginning of each year, the Administration issued a Public Call to taxpayers to submit an Annual Income Tax Return for all types of taxable income earned by citizens for the tax period, i.e., the calendar year. The calls for submitting Annual Tax Returns also included reporting taxable income earned from abroad.

For 2017, the Tax Administration of the Federation of BiH processed 1,144,970 income tax returns, of which 102,698 were advance tax payments for occasional self-employment (Form AUG-1031) and 91,535 were Annual Income Tax Returns (Form GPD-1051). This number of returns includes returns from taxpayers who timely reported their income earned from abroad from occasional self-employment and used the right to deduct expenses of 20% of the earned income, in accordance with Article 15, point (7) of the Income Tax Law, as well as tax returns of individuals who, as scientists, artists, experts, journalists, and others, earned royalties and were entitled to deduct expenses of 30% of the earned income or the actual amount, in accordance with Article 15, point (8) of the Law.

In the opinion of the Tax Administration of the Federation of BiH, taxpayers still have the right to deduct these expenses.

"The dilemma, or rather the problem in recognizing expenses, arose with the Rulebook on Amendments and Additions to the Rulebook on the Application of the Income Tax Law, published in the 'Official Gazette of the Federation of BiH', number: 30/18 of April 20, 2018, by adding Article 70b, which erroneously states that 'Taxpayers who engage in self-employment activities referred to in Article 12, paragraph (4), point 3) of the law, and earn income directly from abroad, are obliged to calculate advance tax on self-employment themselves on that income, at a rate of 10% of the total compensation without the right to deduct personal allowance referred to in Article 24 of this Law, and pay it no later than the day following the day they received the income'," the statement reads. 

The Tax Administration has informed the Ministry of Finance about this issue and expects this dilemma to be resolved and for these taxpayers to exercise their right to deduct expenses prescribed by law.

The obligation to calculate and pay contributions for health insurance, for income earned from other types of self-employment, at a rate of 4%, is prescribed by Article 10a of the Law on Contributions. Article 5, line 6, stipulates that: "The contributor is an individual - resident of the Federation who receives income from other types of self-employment and occasional non-employment, in accordance with the income tax regulations." Based on the foregoing, Form AMS-1035, Advance Tax on Other Self-Employment Income from Abroad, includes an obligation of 4% for health insurance contributions. We emphasize that residents who perform occasional work in the Federation of BiH, in addition to health insurance contributions at a rate of 4% on earned income, also pay 6% for pension and disability insurance contributions at the employer's expense. 

It should be noted that for a resident taxpayer who earns income abroad, or in another territory of Bosnia and Herzegovina, income tax will be determined based on the provisions of this Law, with recognition of tax paid at source and advance income tax paid abroad, or in another territory of Bosnia and Herzegovina - the Tax Administration of FBiH states. 

Therefore, a person who received income from abroad on which no tax was paid abroad, and for example, in the amount of 1,000.00 KM, has the right to a percentage deduction of expenses of 20% (from occasional self-employment: scientists, artists, experts, journalists, court experts, commercial travelers, agents, sports referees and delegates, and other activities performed alongside a primary self-employment or non-employment activity, or in the amount of 30% of the earned income or the actual amount if it concerns royalties. On the base obtained after deducting expenses from the collected amount from abroad, a health contribution of 4% is calculated, so that with a 20% expense deduction, it amounts to 32.00 KM ((1,000.00 - 20%) x 4%). The amount for health insurance of 32.00 KM is deducted from 800.00 KM, resulting in a base for income tax calculation of 768.00 KM, on which a 10% tax is calculated, amounting to 76.80 KM ((800 - 32) x 10%).

A person who earned income from abroad on which tax was paid abroad at a rate of 10% or more is not subject to tax payment, but is obliged to submit a return with proof of tax paid abroad. If the person paid tax abroad at a rate lower than 10%, they are obliged to calculate and pay the difference between the 10% rate and the foreign rate.

The Public Call does not apply to individuals who earn income from the sale of assets used for personal purposes. Namely, according to the provisions of Article 5, point 7 of the Income Tax Law, income earned from the sale of assets used for personal purposes is not considered income and is not subject to income tax.

"Regarding the remarks about retroactive taxation, we emphasize that this is not retroactive taxation, because the Law has been in effect since 01.01.2009, according to which taxpayers were obliged to calculate and pay tax on earned income themselves, the day after receiving the money, and within 5 days to submit a return to the Tax Administration, i.e., Form AUG – 1031, and since April 2018, Form AMS - 1035. The reason why the period from 2015 to 2017 was mentioned in the call is the fact that the Administration has data on payments made for this period. We emphasize that according to Article 73 of the Law on the Tax Administration of the Federation of BiH, the assessment of tax liability can be made within five years after the tax return for that tax was filed or after the expiry of the legal deadline for filing the tax return, counting from the later date. However, tax assessment can be made at any time if the tax return for that tax is false, or if the tax return for that tax has not been filed," the statement from the Tax Administration of FBiH says. 

It is noted that the basis for submitting tax returns for gift taxation is contained in several valid laws enacted at the level of the Federation of BiH and the cantons.

The Tax Administration of the Federation of BiH will, as stated in the announcement, act in accordance with applicable legal and sub-legal acts, and has invited all those who have remarks on the legal regulations to submit their remarks, suggestions, and initiatives to the proposers of legal solutions, which are the Federal Ministry of Finance and cantonal ministries of finance.

"The Tax Administration is at your disposal because the Tax Administration of the Federation of BiH wants to be a partner to taxpayers and build transparent relationships based on applicable laws," the Administration states.