Dynamics of tax law: drivers of legislative change and a case study from Slovakia

https://doi.org/10.63189/DJTW6840

The functioning of law in society is generally characterised by a constant internal struggle between the desired stability of law and the dynamic development of society. This internal struggle is reflected in frequent changes in legal norms. Law, as an objective normative system, is constantly influenced by factors, phenomena, and processes that arise and unfold relatively independently of legal regulation. The optimal scenario would involve the legal regulation of these factors at the time of their creation. However, the objective reality is usually such that the law reacts only after a certain time interval to changing facts and relationships that, due to their impact, require legal regulation.

In this respect, tax law, or the legislation within its structure, ranks highly not only in terms of frequency but also in the scope of amendments. A closer examination of the current state of tax legislation reveals that tax law regulations are typically amended several times each year during their period of effectiveness. For example, in Slovakia, Act No. 563/2009 Coll. on Tax Administration (Tax Code), effective from 1 January 2012, has been amended 52 times to date, while Act no. 595/2003 Coll. on income tax, effective from 1 January 2004, has been amended more than 100 times. Although these are merely figures, they signal the absence of stability in tax law. In this situation, legal theorists raise legitimate questions as to whether new legislation is always objectively necessary, whether it meets the requirement for the stability of law, and whether it compensates for the shortcomings associated with the fluidity of law. We also ask ourselves these questions in the area of tax law, especially considering the fact that the effects of new legislation always become apparent only months or years after its application.

Studying the causes and factors behind changes in tax legislation is far from straightforward. Nevertheless, we will attempt to outline some of these factors, which, in our opinion, exert a decisive influence on the dynamic development of tax legislation. Some of these factors are general in nature, while others are characteristic only of a specific period of time. General factors include political influences, fiscal interests, the fight against tax fraud and tax evasion, and the Europeanisation and internationalisation of tax law. Among the factors influencing tax law only in recent years, we can notably include the pandemic and digitisation. Although these causes may act in isolation, it is usually their simultaneous action that leads to changes in tax laws.

Political factors rank among the important determinants of changes in tax legislation, not only at the national level but often at the local level as well. As has often been observed in the past, political parties frequently outline their visions for tax law in their election programmes, often presenting competing visions (e.g., linear versus progressive income tax rates). This is also evident in municipal politics, where pre-election debates frequently centre on candidates’ differing views on local taxes, including their rates, exemptions, and reductions—issues that fall within the competence of municipalities and towns.

Fiscal interests are another significant factor. Tax revenues represent a crucial component of public budget revenues in a market economy. In Slovakia, for the financial year 2024, tax revenues account for over 82% of all state budget revenues (Act No. 534/2023 Coll). The financing of state tasks and functions from budgetary resources is thus another determinant of changes in tax legislation.

The effective fight against tax fraud and tax evasion can be regarded as a permanent phenomenon. The scale of tax evasion and fraud has necessitated a series of legislative measures aimed at combating them. Since 2012, when the Action Plan to Strengthen the Fight against Tax Fraud and Tax Evasion was introduced, numerous changes to tax rules have been implemented, driven by efforts to effectively prevent these negative phenomena. However, it should be noted that hypertrophy of legislative activity in the field of tax law can also lead to incomprehensibility, ambiguity, and even confusion. This does not contribute to the stability of tax law and can potentially foster tax evasion.

The Europeanisation and internationalisation of tax law have been ongoing for more than two decades. The harmonisation of indirect taxation, implementation of legally binding EU acts, and consideration of the case law of the Court of Justice of the EU are all factors fundamentally influencing tax legislation, not only in Slovakia. Although attention has been paid mainly to VAT and excise duties in the area of harmonisation, major initiatives have also emerged in recent years in the area of direct taxation.

The COVID-19 pandemic led to significant changes in tax legislation, generally with a negative impact on the tax revenues of public budgets. One of the first laws adopted in response to the initial wave of the COVID-19 pandemic was the so-called Lex Covid in the financial area (Act No. 67/2020 Coll). Parliament passed several measures that temporarily favoured taxpayers in tax administration, such as suspending tax audits, postponing tax enforcement during the pandemic, and extending the deadline for filing income tax returns until after the pandemic. However, some measures were rather symbolic, such as the temporary zero VAT rate on FFP2 and FFP3 respirators.

Another important factor influencing tax law is the digitisation of the economy, which introduces new trade models that national legal systems had not previously accounted for. Consequently, the digital revolution is beginning to be perceived as a material source of law, raising questions related to the principle of tax fairness in the digital age. In this context, these issues include regulations on the taxation of digital services, the sharing economy, and virtual currencies.

To move beyond a general level, we will highlight one unsuccessful attempt to amend tax regulation in the field of virtual currency taxation in Slovakia. The taxation of income from the sale of virtual currencies was introduced by Act No. 213/2018 Coll., which amended the Income Tax Act. This change provided a definition of the term “sale of virtual currency” and classified income from the sale of virtual currencies as “other income” for taxation purposes. The issue with this regulation was the absence of a legal definition of virtual currency within the Income Tax Act. Additionally, scholarly literature repeatedly highlighted problematic aspects of this regulation and proposed a comprehensive reform of the taxation concept for virtual currencies.

Parliament in Slovakia responded to these concerns by approving an amendment to the Income Tax Act (Act No. 315/2023 Coll.) in summer 2023, which was set to enter into force on 1 January 2024. This amendment introduced fundamental changes in virtual currency taxation. The most important changes included: (i) the legal definition of virtual currency as well as stablecoin, (ii) a value test associated with tax exemption for exchanges of virtual currencies for property or services up to EUR 2,400 per year, and (iii) a time test whereby income from the sale of virtual currency after one year from its acquisition would be taxed at a reduced rate of 7%. The primary objective of this regulation was to reduce the tax burden associated with the sale of virtual currencies and thus simplify their use in everyday life.

The results of the parliamentary elections and the formation of a new government majority in autumn 2023 led to numerous legislative changes. Several of these aimed to consolidate Slovakia’s public finances, which, according to the independent Council for Budget Responsibility, were in an objectively dire state. The Slovak government had to implement several measures to halt the growth of the deficit and government debt, focusing primarily on the revenue side of public budgets. Just before the end of 2023, the so-called Lex Consolidation was adopted (Act No. 530/2023 Coll.), which entered into force on 31 December 2023. This law increased court and administrative fees and, for example, raised tax rates on tobacco and cigarettes.

At the same time, however, other changes also took place, notably in the concept of virtual currency taxation. Through Lex Consolidation, all positively perceived changes in the taxation of income from virtual currency sales (legal definition, time test, value test) were reversed, and Slovakia returned to the legal status of 2018.

What can be concluded from this? Perhaps it is simply that nothing in tax legislation is immutable or certain.