THE PRINCIPLES UPON WHICH THE LAW IS BASED

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1 1.The General Tax Law The General Tax Law systematically, integrally and uniformly regulates the legal relations of tax payers and tax authorities that are common to all taxes. Thus who are involved in relationships covered by the tax law are, on the one hand, all natural and legal persons and, on the other, the state. However, the positions are not equal. The state makes the rules, and tax authorities carry out the taxation procedure and control its implementation. Taxpayers are in a subordinate position, although they do have formal and material rights and obligations with respect to the state. For this reason it is very important to define in detail all their mutual relationships. In this part an endeavour is made to give a short overview of everything contained in the General Tax Law, while particular attention is paid to those parts of it that are considered to be crucial for taxpayers in the taxation process. THE PRINCIPLES UPON WHICH THE LAW IS BASED 1. Lawfulness: one of the principles of a law respecting society who are involved in relationship cavered by the tax law are obliged to respect all the legal rules, irrespective of the name and kind of the legal instrument. 2. The application of tax provisions: in the taxation procedure, the tax rules that were in force at the time of the occurrence of the fact on which the taxation is based will be applied. 3. Objectivity: during the taxation process, the tax authorities establish the facts objectively and conscientiously, irrespective of whether they tend to be to the benefit or the detriment of the taxpayer. 4. Right to appeal: this enables a taxpayer to file complaints against tax instruments. 5. The keeping of books and records: this binds the taxpayer to the keeping of records in accord with current bookkeeping regulations. 6. Evidences: both the taxpayer and the tax authority have to prove the facts in the tax procedure. 7. Auditing: this is carried out with respect to both small and large taxpayers.

2 8. Good faith behaviour of all participants of tax procedure: all participants are obliged to behave properly, with good intentions, cooperatively and conscientiously. 9. Employment of the standard language and writing. 10. Economic approach: taxation facts are established according to their economic importance, which means that every acquisition of some income is taxed, irrespective of whether this is a legal or an illegal business. The law also enshrines the protection of human rights such as: 1. The right to response taxpayers have the ability and the right to speak their mind about all the essential facts related to the adoption of any decision (ruling or judgement) before that decision is made. 2. Protection of confidentiality of data and privacy the taxpayer duty is bound to give to the tax authority truthful data that are essential in the taxation procedure, and the tax authority is bound to preserve confidential data in the interests of the taxpayer. In this manner the privacy of the taxpayer is protected. If the taxpayer renounces in writing his right to protection of privacy, these data can be announced in public. 3. Protection of human dignity in the tax procedure, tax authorities may not threaten the reputation, dignity or honour of the taxpayer. 4. The right to be informed the tax authority many not use forcible payment methods, by seizure, for example, to take away the radio or television sets that is the source of information for the taxpayer. PARTICIPANTS OF TAX PROCEDURE A tax authority has the right to collect: 1. tax 2. interest and fines 3. monetary facts pursuant to responsibility deriving from tax guarantees. A taxpayer has the right to: 1. return of tax that has been paid without any legal grounds for the payment, 2. interest on tax that has been paid without any legal grounds.

3 Joint debtor Tax can be collected from third persons or from a join debtor. This means that the tax administration (TA), if there are several joint debtors in the tax debt relationship, can collect the whole of the tax from one, or distribute the debt out among all the debtors. If at least one of the joint debtors meets the debt, the tax obligation ceases, and the relationship of the taxpayer and the persons jointly liable becomes a matter for private or civil law. Rights and obligations in the tax relationship cease on by: - payment, or the meeting of the tax liability, irrespective of who has paid the debt. The debt is considered to have been paid when the bank in which the account for paying in is kept receives the payment. - refund of tax with interest if the taxpayer has paid tax that he should not have paid, or has paid more than he should, the taxation body will make a refund together with interest up to the date of payment. - compensation, through which a tax debt is offset; this means that in agreement with the tax authority, the taxpayer, instead of receiving a refund of taxes, can settle certain debts (only public debts). - write off: if not even execution or forcible payment has managed to collect a tax debt. - statute of limitations: with various dates for participants in tax procedures. STATUTE OF LIMITATIONS The relative period for the statute of limitations is three years. The absolute period for the statue of limitations for establishment of tax debt and interest, the filing of offence procedures, the collection of taxes, interest, costs of execution and fines, and the right of the taxpayer to a refund of taxation, interest, costs of execution, and fines is six years, counting from the date when the statute of limitations for tax purposes starts to come into effect. Both relative and absolute perios, on the whole, begins with the elapse of the year in which the taxation event occurred.

4 INTEREST The law also governs the manner and the time for the payment of taxes, the order in which tax obligations are to be paid, as well as the interest charged or allowed on under- or overpaid taxes. If the tax is not paid in time, interest is charged (according to the Penalty Interest Act) at the rate of 18% p.a. The period for the calculation of interest starts from the day when the tax should have been paid and goes on to the day when it actually is paid. If the tax authority refunds the taxpayer excess taxes that have been paid, the period for the calculation of the tax runs from the fifteenth day after the claim for a refund has been received until the payment of the refund. If it is a matter of the refund of tax paid without good legal grounds (if the ruling determining the payment of tax has been annulled or cancelled), then interest will be calculated from the day of payment until the day of return. Taxpayers will receive their refund with the addition of interest at the rate of 6.5% annually. DETERMINING THE TAXABLE BASE Ever since the imposition of the first taxes, and even now when taxation is governed in detail by numerous laws, the most common uncertainties arise during the determination of the taxable base on which the tax rate is applied in order to determine the amount of the tax obligation. The taxable base is not always shown realistically, which can be the consequence of carelessness or ignorance on the part of the taxpayer, but also the effect of the deliberately inaccurate presentation of business events in order to reduce or to evade tax obligations. When a tax authority cannot determine the taxable base from business books or records, it has to resort to making an estimate, which will be done if the taxpayer: cannot supply books or records that must be kept according to the tax laws, does not issue the proper invoices and does not keep business books accurately, regularly and promptly, cannot prove the data regarding taxation with credible documentation, refuses to take part in the taxation procedure or makes it impossible for the taxation procedure to be carried out.

5 The base for income tax, or the profit of natural persons, can also be determined by an estimate as the difference between the private expenditures of the taxpayer and/or private assets acquired, and the income or profit that has been reported. AUDIT Auditing, control by tax inspectors, can also be employed to determine circumstances that are essential for taxation; this is carried out after it has been established that there has been an incorrect statement of the tax obligation. The taxpayer is bound to cooperate in the procedure of auditing, showing all the necessary documentation, giving any information required, providing explanations about any business operations and so on. AN AUDITING ORDER An auditing order sets out in detail all the reasons for making such an order and carrying it out. An order is delivered to large taxpayers 30 days and small taxpayers 30 and 15 days, respectively, before the beginning of the auditing. It is possible to make an objection, stating reasons, within a period of 8 days. However, no appeal can be made to the decision about this objection. If the tax authority considers that a premature delivery of the order might compromise the auditing, that is, that the taxpayer might prepare and change some factors that are crucial for taxation, the order may be handed to the taxpayer immediately before the start of the auditing. After the determination of the taxable base, a tax ruling is made, in which the tax liability is precisely laid down, as well as the manner in which it is to be fulfilled. TAX LIEN If the tax cannot be collected in the normal procedure, it can be collected forcibly from the assets of the defaulting taxpayer, and also from the assets of the tax guarantor pursuant to tax lien documents (an tax lien ruling) and trustworthy papers (bookkeeping printouts of the state of the tax debt). Tax lien is carried out by seizure of movables (cash, securities, semi-products, raw materials, patents, technical advances, and other rights), of the claims of tax debtor, property rights and real estate.

6 Concepts related to tax lien Tax lien forcible collection of a debt. Lien executor the tax authority that is carrying out the tax lien procedure. The tax debtor the tax defaulter or the guarantor of the tax defaulter from whom a tax debt is to be collected. Things that may not be seized - Money that is needed for the basic necessities of life; this is calculated as being equivalent to the basic personal allowance plus any amount of allowances for dependents as well as receipts that are not taxed according to the Income Tax Act prizes, grants, scholarships. - Movables that are essential for life (clothing, footwear, a refrigerator, a television set, fuel), agricultural machinery, books, tools and everything else that is necessary for some industry to be carried out. APPEALS First instance tax documents can be appealed against. The deadline for an appeal is 30 days after the receipt of the document containing the ruling. Filling an appeal will put off the execution of the document that is contested until the ruling on the appeal is made. If a tax ruling is made pursuant to data that the taxpayer has himself stated in the tax return, then an appeal will not put off the execution of the ruling. A suit can be filed about a ruling on an appeal with the Croatian Administrative Court. However, filing a suit does not put off the execution of the tax document. PENALTIES FOR TAXATION OFFENCES The General Tax Law prescribes in detail the fines for precisely determined tax offences, fines that range from 500 to 200,000 kuna. THE REGULATION - The General Tax Law, NN 127/00, 86/01, 150/02