IMF Study Urges Serbia to Track Hidden Costs of Tax Breaks and Improve Transparency

Serbia is taking a major step toward improving fiscal transparency by building a system to track the true cost of tax breaks. A new technical assistance report prepared by the International Monetary Fund's Fiscal Affairs Department, with financial support from the European Union and the Swiss Secretariat for Economic Affairs, explains how the country can develop a framework to measure and report tax expenditures. The study was authored by IMF experts Mario Mansour, Martin Grote, André Patry, Fayçal Sawadogo, and Charles Vellutini.

Tax expenditures refer to revenue losses that occur when governments provide special tax treatments such as exemptions, reduced tax rates, tax holidays, or special deductions. These policies are often used to support businesses, encourage investment, or reduce the tax burden on households. However, because they operate within the tax system rather than the national budget, they are often less visible than traditional government spending. Serbia's new initiative aims to bring these hidden fiscal costs into clearer focus.

Why Serbia Wants Better Tax Transparency

The Serbian government launched this project in 2025 as part of a broader effort to improve fiscal management and policymaking. Authorities want to better understand how tax incentives affect government revenues and who benefits from them. By measuring these effects more accurately, policymakers can evaluate whether tax incentives are working as intended and whether they are worth the cost.

The framework focuses on Serbia's three main taxes: personal income tax, corporate income tax, and value-added tax. Together, these taxes generate more than 70 percent of the country's tax revenue. Because of their importance, even small tax breaks within these systems can lead to significant revenue losses.

To design the framework, IMF experts worked closely with Serbia's Ministry of Finance, the State Tax Administration, and the Statistical Office of the Republic of Serbia. The approach follows international best practices and is similar to systems used in many European countries.

Measuring Tax Breaks Using Benchmark Systems

A key part of the project was defining what economists call "benchmark tax systems." A benchmark represents the standard tax structure that would exist without special exemptions or incentives. Any rule that reduces taxes compared with this baseline is treated as a tax expenditure.

For personal income tax, Serbia's benchmark reflects a system that combines taxes on different income sources with a progressive surtax. Allowances and exemptions within this system reduce tax liabilities and are therefore considered tax expenditures.

For corporate income tax, the benchmark assumes the standard 15 percent tax on company profits. Any deviations from this baseline, such as tax holidays or special deductions designed to attract investment, are classified as tax expenditures.

For value-added tax, the benchmark assumes a uniform tax on final consumption at the standard rate of 20 percent. Reduced VAT rates and exemptions on certain goods and services are treated as tax expenditures under this approach.

What the Estimates Reveal

Using these benchmarks, the report provides the first preliminary estimates of Serbia's tax expenditures. The analysis suggests that tax expenditures amount to roughly 3.1 percent of the country's gross domestic product.

VAT-related tax expenditures make up the largest share, estimated at about 1.9 percent of GDP. These are largely driven by reduced tax rates applied to goods such as food and health products. Although these measures are often meant to help lower-income households, the study shows that higher consumption households tend to benefit more because they spend more overall.

Personal income tax expenditures account for around 0.85 percent of GDP. These mostly come from general allowances and exemptions within the surtax system. The benefits are spread across income groups, although some relief measures provide larger advantages to higher-income earners.

Corporate income tax expenditures are estimated at around 0.4 percent of GDP. One of the most significant incentives is a ten-year tax holiday offered to large investment projects. Additional revenue losses also come from exemptions related to interest income from public debt holdings. As a result, these benefits are concentrated among a relatively small number of large companies.

Building a Long Term Reporting System

The report also highlights the importance of reliable data and cooperation between government institutions. Accurate measurement of tax expenditures requires strong data sharing between the Ministry of Finance, the tax administration, and the national statistical office. Without detailed data, some estimates may remain uncertain.

To improve analysis, IMF experts developed microsimulation models that can estimate the impact of tax policies using available administrative and survey data. These models allow analysts to compare actual tax payments with what would have been paid under the benchmark system.

Looking ahead, the report recommends that Serbia publish an annual tax expenditure report. This document would provide clear estimates of revenue losses and explain how different tax incentives affect households, businesses, and the economy.

The Ministry of Finance is also encouraged to establish a dedicated working group that includes experts from the tax administration and the statistical office. This group would maintain analytical models, update estimates, and support policy analysis.

By introducing regular reporting and improving data systems, Serbia hopes to make the costs of tax incentives more transparent. In the long run, this could help policymakers design more effective tax policies and ensure that public resources are used more efficiently.