North Macedonia: Introduction of Progressive Taxation and Increased Mandatory Contributions

A new law on personal income tax went into effect that introduces a progressive income tax in North Macedonia. The purpose of this measure is to reduce social differences, but public opinion regarding the new taxation system is divided. Many fear that this measure will only increase tax evasion and stimulate manipulation of the tax system.

The progressive tax replaces a flat tax and undoubtedly represents a huge change for the local society and economy. In order to achieve greater social equality and cohesion, higher tax rates will apply to salaries, pensions and similar work-related income of higher earners. The progressive taxation will be applied on monthly incomes greater than MKD 90,000 (which is approximately EUR 1,463) and annual incomes greater than MKD 1,080,000 (approximately EUR 17,561). An increased tax rate of 18 percent will apply only to the amount exceeding the provided thresholds, while the existing tax rate of 10 percent will apply to income up to these thresholds. In accordance with the newly introduced reforms, there will be an increase in the mandatory contributions for pensions and health insurance of 0.5 percent, out of which 0.4 percent will be allocated to the Pension and Disability Insurance Fund of North Macedonia and 0.1 percent to the Health Insurance Fund of Republic of North Macedonia. Although aimed at addressing injustices in society, some fear there may be negative consequences for the Macedonian economy and labor market, such as increased tax evasion.

Comment

The government hopes the changes will lead to a fairer society with less inequality and lower social division. Opponents say the increased tax rates of high earners may adversely affect the motivation of highly productive and educated workers, leading to an increased “brain drain” as they leave the country to find employment elsewhere. This could mean the anticipated extra tax revenue may not materialize and that the public may not see the desired improvements.

Many employers have complained that the new regulation went into effect with little warning and they did not have time to adjust their payroll and tax arrangements.

Written by Ljupka Noveska Andonova and Veton Qoku in cooperation with Karanović & Partners and Roger James of Ogletree Deakins

© 2019 Karanović & Partners and Ogletree, Deakins, Nash, Smoak and Stewart, P.C.