Fiat in Serbia: Business deal or business fraud of the century?

Many economy experts have been protesting for almost a decade now about the government giving up to 10,000 EUR per each new job a foreign investor creates.

NIN weekly estimates that, by the end of 2018, i.e. when the 10-year-contract with Fiat expires, this Italian company would have been given a total of 150 million EUR from the Serbian state, or 478,000 EUR per each of the 2,405 employees.

After almost three weeks, Fiat’s workers ended their strike and agreed to have their salaries increased not by 18%, as they had demanded, but only by 2.2% this year, and 4.5% next year, in line with the project inflation rate. Considering that 63 dinars out of every 100 dinars of gross salaries goes towards taxes and contributions, it turns out that Fiat’s workers with the lowest salaries will now receive only 27,600 dinars (or just under 230 EUR). Their previous salary was 23,300 dinars.

According to the calculations done by NIN, the average net salary in Fiat Chrysler Automobili Srbija (FCA) last year was lower than the Serbian average, i.e. around 44,000 dinars (gross 71,556 dinars) but this average also includes the salaries received by the company’s management.

The total financial assistance given to Fiat by the Serbian state of 1.15 billion dinars includes various things. As the owner of a 33.33% share in the company, Serbian government had to provide a founding capital in the amount of 101 million EUR either in cash or in assets. Fiat has also received 302 million EUR through various state subsidies, as well as another 161 million EUR which the government paid for utility services, i.e. fixing the factory’s roof, environmental protection, building a supplier park, local fees etc.

The secret agreement between Fiat and Serbia also entails the government providing 75 million EUR towards “asset restructuring”, and Serbia is also a guarantor of a loan granted to Fiat in the amount of 169.5 million EUR by the European Investment Bank. Based on this, Fiat saved around 50 million EUR on loan interest rates alone, plus there is a saving of 30 million EUR because Fiat is exempt from paying income tax in the amount of 15% unlike other companies. Additionally, the government has generously given up on its part in profit distribution which basically means that Fiat will pocket the entire profit it generates. The state will also have to pay at least 20 million EUR on the account of building a motorway from Kragujevac to Batocina because it undertook to do so in the agreement. According to the 2017 Budget Law, the government needs to build this five-kilometre-long segment by 2018 which is, coincidentally, the year when the contract with Fiat also expires.

The blame for the contract still being kept confidential first falls on the Serbian government back at the time when Mirko Cvetkovic was a PM and Boris Tadic was the president. The prime ministers that came after Cvetkovic – Ivica Dacic, Aleksandar Vucic and Ana Brnabic – seem not to be too keen on pressuring the chairman of Fiat Chrysler Automobili, Alfredo Altavilla to publicly release the details of the agreement.

Although, the agreement is still kept confidential, it is a known fact that the money that Fiat pays on the account of salary taxes and contributions is subsequently refunded to it by the Serbian state which, in effect, means that Serbian taxpayers are actually paying taxes and contributions on the salaries of Fiat’s workers.

NIN also had access to the company’s financial reports from 2010 to 2016. Based on these reports, in the observed period, Fiat received from the Serbian government over 130 million EUR on the basis of premiums, subsidies, donations and tax returns, plus there is 302 million EUR paid on the account of “capital subsidies”.

Even before the workers’ strike, something odd was happening with the salaries in the company. Although, in 2012, the number of employees in the company was 50% higher than the year before (1,798 and 1,167 respectively), NIN has calculated that the amount of money paid towards their salaries went up only between 7% and 8%. So, as the number of workers grew, their salaries were reduced. Fiat had the biggest number of workers in 2013 (a total of 3,668) which is the year when the production of the company’s new model, Fiat 500L, was at its height. Oddly enough, the workers’ salaries that same year were the lowest.

Back in 2013, the Serbian government, with Ivica Dacic at its helm, decided to pay Fiat 3,000 EUR on the account of each Fiat 500L it sold while, before that, the government paid out 1,000 EUR in subsidies for people replacing their old Fiat Puntos with the new Fiat cars. Even the EU protested against this, but the rationale that the Serbian government gave them that this was “stimulating creation of new jobs”.

If Fiat were to operate like this in any other country, it would have to pay profit tax to that country. In 2013, Fiat Serbia generated net profit of 10 million EUR, the next year, this profit was doubled to 21 million EUR, while in 2015, it was 17 million EUR. Last year, the company’s net profit amounted to 17 million EUR. So, in the past four years, there was 68 million EUR worth of net profit. If Fiat paid the profit tax, the Serbian budget would have been richer by 10 million EUR. Additionally, and according to the relevant agreement, all of the profit that Fiat generates stays in Fiat, i.e. not a penny of it goes to the Serbian state.

Transfer prices

Since the strike heightened the public’s awareness about the situation in Fiat, doubts arose about Fiat also earning good amount of money on the so-called transfer prices. There is a suspicion that Fiat from Italy or from the company’s branches in other countries sold car parts to Fiat Serbia at higher prices than usual, only to sell the finished 500L model at the price that was lower than the market one, thus keeping the profit outside Serbia. It is not clear why Fiat did this since it does not pay any profit tax in Serbia.

It doesn’t come as a surprise then that Alfredo Altavilla, the CEO of Fiat Serbia, would say that the factory in Kragujevac “is a rare example of successful cooperation between public and private sector”.

Economy expert, Dragovan Milicevic has analysed Fiat Serbia’s 2015 balance sheet and has calculated that the company (which is, by the way, the fourth biggest company in Serbia according to its revenue) paid 14.3 million EUR into the Serbian budget, i.e. only 0.12% of its business revenue.

The same can be said for only one other state-funded project – Air Serbia – which, in 2015, paid only 0.27% of its business revenue into the Serbian budget. All of this means, Milicevic says, that these two companies get more from the state budget than they actually pay back. For instance, Petroleum Industry of Serbia (NIS) has paid 82.4% of its business revenue to the Serbian budget on the account of fuel excise and other levies.

“If Fiat withdraws from Serbia in 2018 that would be considered a sort of fraud, bearing in mind what the company got from the Serbian state”, a professor at the Faculty of Economy, Milojko Arsic says. Furthermore, as mentioned before, the Serbian government is a guarantor of the two loans, in the amount of 169.5 million EUR, that Fiat was granted by the European Investment Bank. The last installment of the first loan should be paid by 31st December, 2019, while the last installment of the second loan on 13th June, 2021, which means that the Serbian government remains the guarantor for these loans for two years after the agreement with Fiat expires.

Politicians’ role

On 29th September, 2008, the then head of the SNS parliamentary caucus, Djordje Milicevic criticised Serbian president Boris Tadic for signing a secret agreement. However, what Tadic’s critics seem to forget is that, only two months ago, the now Serbian President, Aleksandar Vucic said in Kragujevac that “Fiat contributes to the national GDP growth with 3%”, and that “it participates in Serbia’s overall export with 8%”. Vucic also commended those officials who “launched this project”, and went on to say that “the government will work hard on concluding a new agreement with Fiat”.

Only a month later, Fiat’s workers went on strike while the Serbian government appealed to them to “show a little bit of care and concern for Serbia”. Additionally, Serbian PM, Ana Brnabic accused the workers of “having ill intentions”. But what if the intentions of someone else (read decision makers) were even more ill?

(NIN, 01.08.2017)



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