With VAT the biggest single source of government revenue in Bosnia and Herzegovina, the Indirect Taxation Authority (ITA) will be the next target of Milorad Dodik’s agenda to weaken state institutions.
By Matthew Parish
The president of Republika Srpska is the most powerful politician in Bosnia. He is also one of the easiest to understand, since his public pronouncements are frequent, his language is blunt, and his actions tend to follow his words. His strength derives from the structure of the Bosnian constitution, the unity of his electorate, the divisions within Bosniac politics and the terminal weakness of the international community.
His current aim is gradually to dismantle Bosnian Serb reliance upon the institutions of the central government. As a matter of constitutional logic, this is easy because many of the things the state government does were not anticipated by the Dayton constitution. Instead they were created by impositions and threats of the High Representative: an institution that has now collapsed. In the absence of a modern constitutional settlement to replace Dayton, Dodik can assert that he is simply upholding the Dayton agreement over international dictatorship. Bosniac politicians have proven mostly powerless to resist him, because they fight amongst themselves for votes. Dodik can thus endlessly meander between the now four principal Bosniac parties, playing them off one against the other as he offers them elusive coalitions and the promise of power in an as-yet still unformed central government.
SNSD is the dominant political party in its Entity because the agenda it offers – detachment from the rest of Bosnia – is universally appealing to Bosnian Serbs. Its only plausible opposition, SDS, has little traction to divide the parties’ agendas because its leadership privately agrees with everything Dodik is doing. The international community limps along, the PIC divided between those foreign states who would still fight for a centralized Bosnia and those who have reluctantly concluded state-building in Bosnia has been tried, it has failed, and the country should be allowed to dissolve slowly.
Even those foreign diplomats who think Bosnia should not be abandoned are not prepared to offer the money, troops or resources to make their influence meaningful. The tired and worn-out staff of OHR are incapable of renewal or original ideas, peddling recycled nonsense about state property or electricity regulation when no Bosnian politician gives these issues the slightest attention. The reasons for this directionless rambling are threefold: the international community is so divided it fails to support OHR; its employees have become bloated and lazy on the arrogance of unrestrained power; and no capable international official would take a job in so decrepit an institution. OHR remains a slow form of career suicide.
From this unhappy confluence of events we can now predict Dodik’s next move. He will pick upon the weakest state institution in his sights, and shake it to see whether it will fall apart. His preferred target will be an institution created by OHR, to test the organisation’s continued feebleness in resisting his attacks. His next victim will be the Indirect Taxation Authority, a product of High Representative Paddy Ashdown’s aggressive period of state building. Under the usual threats of peremptory removal from office or worse, Republika Srpska agreed to transfer competences in the field of indirect taxation to the state in December 2003. Nevertheless the Entity’s heart was not in the project. The legislation creating the ITA had to be drafted by foreign OHR officials; the Indirect Taxation Authority is another Bosnian legislative mutant, drafted and imposed by foreigners with not the slightest of understanding of Yugoslavian legal or administrative traditions.
With effect from January 2006, VAT would no longer be collected separately by each of the Entities and Brcko District. Instead there would be a central collection account for all VAT revenues received countrywide, administered by the ITA. VAT is the biggest single source of government revenue in Bosnia and Herzegovina. Unlike many European countries, income tax in Bosnia is a relatively modest proportion of the government budget because income tax rates are so punitively high that the majority of employees hide their true income and underdeclare their salary. High tax rates yield low tax receipts because of the incentive they create for fraud. In this context VAT at a moderate rate, low by European standards of 17%, is a significant source of income for the public purse. Ashdown’s reform placed this goldmine at the disposal of the state government rather than the Entities.
Ashdown’s reform was critical, because previously the state had no sustainable source of income. The state institutions Ashdown had created needed to be funded. The source of that funding had been international community donations, but by 2003 foreign governments were tiring of their aid commitments to sustain the bloated Bosnian bureaucracy. Thus an alternative source of domestic revenue for OHR’s state-building programme had to be found, and VAT was chosen. Nevertheless the Entities were barely happy about having control over their principal source of revenue torn away from them, even if this was all to take place in the name of the over-belaboured notion of Euro-Atlantic integration.
To sweeten the bitter pill, Ashdown’s ITA would incorporate two innovations. First, surplus tax receipts after payment of state expenses would be distributed to the Entities and to the District, pro rata to the VAT receipts collected in each territory. Second, day to day decisions on the proportions to be distributed from the central pot would be made by consensus of the two Entity ministers of finance. And herein lay the seeds of the system’s dysfunction: either Entity could veto the ITA’s operation, by arguing over the proper distribution proportions and withholding the consent of its Minister of Finance to distributions out of the pot.
That the ITA law could harbour within its folds so fundamental a structural flaw is testament principally to the incompetence of the legislative drafters within the international community who advised Ashdown and his clique of OHR officials. Nevertheless the consequence of this defect soon became apparent. On the pretext of debates about the veracity of the data, the RS Minister of Finance began to withhold his consent with effect from July 2006, seeking a higher proportion of VAT receipts to be allocated to the RS than the figures revealed. Unless the internationally appointed Chairman of the ITA board and the Federation Minister of Finance buckled in the face of RS intransigence, the ITA’s bank account would be frozen and the Entities would be starved of their allocations. The Federation is more economically precarious than Republika Srpska, and thus Republika Srpska had a winning hand in a game of hold-out.
The issue on which Republika Srpska decided to apply pressure was the VAT allocation to Brcko District. Brcko represents a mere 2% of the population of Bosnia, yet the ITA’s figures revealed that it accounted for some 4% of the VAT revenues received. By contrast the RS represents 34% of Bosnia’s population, yet it accounted for only 30% of VAT revenues. Republika Srpska could therefore argue that the system was “cheating” the RS to the benefit of Brcko District, which was getting “twice as good a deal” as it should; and some of Brcko’s revenue should be redistributed to the RS to ensure “equity”. There were three reasons why Brcko District had a share of VAT revenue in excess of its size. First, its comparative economic success (at least at one time) led to increased consumption by its citizens which in turn led to increased VAT receipts proportionate to population. Second, the presence of several hypermarket shopping centres in the District (principally for reasons of moderate tax and relatively lax building regulations), including the Arizona market, meant many people from outside the District (or even outside the country) were shopping there. Third, intensive international oversight had delivered to the District a comparatively robust compliance function within its finance directorate, meaning the proportion of businesses working in the black market and thus not paying VAT was lower.
By contrast RS impoverishment led to lower consumption levels, fewer supermarkets and thus lower VAT collections. The RS’s position therefore amounted to an assertion that Brcko District should subsidise the RS by reason of the former’s success and the latter’s penury. For politicians in Brcko, this was an unpalatable message, particularly because the only basis of multi-ethnic cooperation in Brcko District is a sufficiently large budgetary income to divide between the three national groups in grants, bribes and favours. Take away Brcko’s comparative financial superiority, and the glue holding together this supposed multi-ethnic paradise dissolves.
It has long been known that Republika Srpska has little interest in preservation of Brcko District. Dodik’s agenda for Brcko is to engineer its gradual collapse, followed by repartition. Former Brcko Supervisor Raffi Gregorian was complicit in this ugly plan, appointing SNSD Mayor Dragan Pajic in 2009 after having vetoed SDP and SDS winning candidates in the October 2008 Brcko elections. Under the SNSD agenda Brcko town will be absorbed into the RS (albeit with a substantial Bosniac minority numbering perhaps 20,000 people), while the rural areas south of town will be abandoned to Tuzla canton. Thus a strategy of squeezing Brcko suits Dodik well. More intriguing was the lack of interest the Federation harboured for Brcko’s fate. The financial collapse of the District according to Republika Srpska’s wishes was seemingly of no concern to SDA, the dominant Bosniac political party at the time, because the bulging Brcko budget was seen as a slush fund for its rivals SDP.
Thus the Federation showed itself prepared to cooperate with the RS to sacrifice Brcko in the revenue wars. Whereas both Federation and RS Ministers of Finance had veto votes on ITA decisions, Brcko had no vote at all, being accorded mere “observer” status. In the end it was only concerted lobbying efforts by a small number of interested international officials, including this author, that saved Brcko from a fate of being squeezed between the Scylla and Charybdis of an unholy Entity compromise. By a High Representative’s decision dated 4 May 2007, the District’s share of revenues was fixed for a period of four years, at a sum representing 3.55% of VAT revenues. In other words, Brcko’s receipts from the ITA’s single account would be divorced altogether from the political bargaining between the Entities.
OHR’s imposition comes to an end in 2011. This year Brcko will again be held hostage. Dodik’s agenda will be just the same as it was before: find an excuse in the complexities of the statistics and the legislation to give Brcko ever less. A financial stranglehold on Brcko will accelerate the process of partition and destruction of District institutions, created by the Americans but over which they now care little and have neither funds nor troops to support. OHR is significantly weaker than it was some four years ago, having since been through two High Representatives and countless crises as it sought to confront the RS and repeatedly lost. Dodik’s current strategy is to goad OHR into precipitous actions, which he can use both as further evidence in Brussels of the organisation’s tyrannical tendencies (hence arguing for its immediate closure) and also evidence for the unsustainability of the central Bosnian state. Only with interminable OHR life support, he argues, can the most fundamental of state institutions function. Thus an OHR intervention to prop up the ITA would be still further evidence that his plan for the RS government to reclaim powers from the central state is the most rational course for Bosnia’s future. OHR will be faced with a stark choice: either step in to support Brcko, thereby strengthening Dodik’s hand; or stand idly by while the Entities dismember Brcko’s finances, leading to the District’s collapse: something that also achieves Dodik’s goals. Either way, Dodik wins and OHR loses.
OHR is unlikely to save Brcko; but there is another possibility, albeit remote, of a white knight emerging from the shadows. There is one political party with a real interest in preserving Brcko, and that is SDP, because it has voters and budget support within the District. If SDP were to control the Federation Finance Ministry in a new Federation government, then it might be able to do battle with the RS and argue for a fair distribution to Brcko. Will this happen? It seems unlikely: the Federation’s finances remain in a substantially poorer state than those in the RS, and it can ill afford several months during which the ITA’s single account is blocked by RS objections. Dodik has explicitly said that he wants the RS to withdraw from the ITA. This is arguably the most important state institution for him to dismantle: with financial autonomy, political autonomy will surely follow. In the process he has an opportunity to squeeze Brcko flat; and the only person who might possibly be able to stop him is Mr Lagumdzija. Do not count on the formation of an SNSD-SDP government coalition any time soon.
Matthew Parish was formerly Chief Legal Adviser to the International Supervisor of Brčko, a city in northern Bosnia subject to post-war supervision by the US government by reason of its strategic importance in the country’s conflict. He is a frequent writer and commentator on Balkan affairs.
Mr. Parish’s book on international intervention in post-war Bosnia, ‘A Free City in the Balkans: Reconstructing a Divided Society in Bosnia (International Library of War Studies)‘, is published by I.B.Tauris.
This article originally appeared in Oslobodjenje on Thursday January 27th 2011. You can read the original version by clicking here.