In the process of aligning the Croatian VAT system with Directive 2006/112/EC, which is nowadays the fundamental document for harmonising VAT systems in the EU, Croatia will have to re-examine the threshold for entry into the VAT system. The current threshold of HRK 85,000, or 11,675 euros, is higher than the one defined in the Directive. Although in principle the Directive sets a threshold of 5,000 euros, it has also made it possible, under certain conditions, to set a higher threshold, which is evident in all the member countries.
Setting an appropriate threshold requires an analysis of the costs and benefits stemming from possible modifications. The threshold in Croatia, compared with other countries, is quite low, and an increase could be proposed, since an excessively low threshold increases compliance and administration costs, without the fiscal effects being significant.
The fundamental objective of this work was to determine the effects of an increase of the VAT threshold on:
- central government budget revenues from VAT,
- the operations of the Tax Administration and VAT payers’ compliance costs,
- the number of taxpayers.