In)efficiency of corporate income tax expenditures on underdeveloped areas of special tax treatment in Croatia

Abstract

The introduction of various tax expenditures by the tax authorities, mostly in corporate income taxation (CIT), in order to kick start development in areas affected by the war as well as in economically underdeveloped areas has been characteristic of the Croatian tax system since 2000. Although the purpose of such forms of state aid was to foster economic development and equalize the level over the entire country, at the same time they caused forgone tax revenues and it is therefore necessary to analyze their advantages and disadvantages and evaluate their possible positive or negative effects. This paper deals with the analysis of tax expenditures in the system of CIT in Croatia and it investigates their effect on the budget and the possible advantages brought by their introduction. The main purpose of the paper is to answer the questions as to whether the expenditures that have been introduced in CIT justify their purpose and the goal of their introduction and what can be done to improve the existing CIT expenditures system.