Tax System of the Czech Republic

2011

A brief comparison…

• economical and• political system• others…• Taxes_at_a_Glance_2011cCZ-UZB.pdf• http://maps.google.com/maps?q=Mustaqillik+Maydoni,+Tashkent,+%D0%A2%D0%B0%D1%88%D0%BA%D0%B5%D0%BD%D1%82%D1%81%D0%BA

%D0%B0%D1%8F+%D0%BE%D0%B1%D0%BB%D0%B0%D1%81%D1%82%D1%8C,+Uzbekistan&hl=cs&ie=UTF8&ll=41.31443,69.269003&spn=0.003816,0.008256&sll=41.316433,69.26675&sspn=0.007631,0.016512&t=h&z=18

CZECH TAX SYSTEM• Income taxes

– personal income tax– corporate income tax– social security contributions

• Consumption taxes– value added tax– excise duties

(mineral oils, tobacco, as a residual for example beer, wine, alcohol,)

– energy taxes (electricity, solid fuels, natural gas)• Property taxes

– real property tax, real property transfer tax, inheritance tax, gift tax, road tax

• Environmental - green, local and administration taxes / fees

Czech and Uzbekistan(% of all tax revenues)

http://www.mf.gov.uz/en/gos-budjet.html

PIT CIT

INCOME TAXES VAT

EXCISE

S

CUSTOMS

TAXES

ON CONSU

PTION

SOC

ROAD TAX

IMMOVABLE

PROPERTY

TAX

INHERITA

NCE TAX

GIFT TA

X

TRANSF

ER TA

X

PROPERTY

AND RESOURCE T

AX0%

10%

20%

30%

40%

50%

60%

70%

19% 19%

38%

0% 0% 0%

39%

20%

0%

59%

0% 0% 0% 1% 1% 0% 0% 1% 3%0%

16%12%

28%

0% 0% 0%

28%

21%

2%

51%

0% 0% 0% 0% 0% 0% 0% 0%

21%

0%

2010 CZECH 2006 UZBEK

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 200930.0

31.0

32.0

33.0

34.0

35.0

36.0

37.0

38.0

Total Taxes (including SSC) as % of GDP

CZ EU-27 averages aritm.

Czech

OLD NEW

Total Taxes (including SSC) as % of GDP can sometimes be tricky…

Some differences not only reflect

1/social policy choices such as public or private provision of services, e.g. old-age and health risk protection, but also

2/technical factors: some Member States provide social or economic assistance via tax reductions (lower indicator) rather than direct government spending (higher indicator, if not DEBT), OR while social transfers are exempted from taxes (lower) and social contributions in some Member States but not in others.

CZECH TAX SYSTEM

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 2008 2009 2010

Year

VAT

Excises

CIT

PIT

Prop. tax

Shares of different taxes in the total tax revenue

SSC added…

PIT12%

CIT15%

VAT20%

EXC11%

other0%

SSC41%

property1%

New

New

Denmark

SSC in CZECH REP.

Czech Denmark

Denmark

Czech

15 % in Czech Rep. is a bit tricky, should be higher, circa 20 %

Uzbekistan – 22 %

47%44%

43%40%40%40%40%

32%32%32%32%32%32%32%32%

15%15%

0% 10% 20% 30% 40% 50%

1993

1995

1997

1999

2001

2003

2005

2007

2009

19 % in Czech Rep.

Uzbekistan – 9 %15 % for comm. banks

Reduction of tax rate24 % in 200721 % in 200820 % in 200919 % in 2010The rate for all withholding taxes is unified at 15 %

Uzbekistan – 6, 10, 20 %

The tax-to-GDP ratios AND/ORimplicit tax rates

• The tax-to-GDP ratio and the breakdown of tax revenues (% of the total tax burden) into standard categories such as

– direct taxes,– indirect taxes and– social contributions

provide a first insight into cross-country differences in terms of tax levels and its composition in terms of tax type.

• Other approach additionally provides a broad classification of taxation in three economic functions –

– consumption,– labour and– capital.

• The implicit tax rates or ITRs are calculated as TAX/potential tax base., i.e. average effective tax burden indicators; unlike simple measures of the tax revenue, these take into account the size of the potential tax base, which often differs substantially from one country to the other.

• The term 'implicit tax rates' is used in order to distinguish the backward looking approach (we know TAX and BAZE and calculate ITR) from forward looking average effective tax rates calculated (derived) on the basis of the tax code.

• Other different concept is nominal tax rate (TAX/tax base udjusted)

the taxes levied on (employed) labour income, which are usually withheld at source (i.e. personal income tax levied on wages and salaries income plus social contributions), represent themost prominent source of revenue, contributing almost 50 % of overall receipts on average, followed by consumption at roughly one third and then capital at around one fifth.

PERSONAL INCOME TAX

• Tax rate: 15 % (effectively 20 % from the gross wage)• In force since 2008• Until 2007: four bracket system with tax rates from

12 % to 32 %• Applicable to:

Salaries and wages,

Income from business activities,

Income from capital assets,

Rental income

Others…

PERSONAL INCOME TAX

47%44%

43%40%40%40%40%

32%32%32%32%32%32%32%32%

15%15%

0% 10% 20% 30% 40% 50%

1993

1995

1997

1999

2001

2003

2005

2007

2009

History - development of the highest tax rate

PERSONAL INCOME TAX• The tax base for any employee includes the gross salary

increased by the employer’s health and social insurance contributions

• Self-employed persons are not be able to deduct their social and health insurance from their tax base.

• Taxed on month basis (12 tax advance payments) and summary (salary roll, clearing) at the end of the year

• Various tax allowances (per year)− mortgage interest (till 12xaver.wage per households)− private pension insurance and life insurance (till

2x0,5aver.wage)− charity (min. 1/24xaverwage till 10 % of tax baze), !!! is not

expenditure for tax purposes (example later)• Tax credits

− basic (1xaverwage = 25000 CZK)− wastable for dependent partner (1xaverwage)− non-wastable for children (0,5xaverwage per child)

Main non-standard tax reliefs

• Charitable donations allowance: A tax allowance of up to 10 per cent of taxable income is available for donations made to municipalities or legal entities for the financing of social, health, cultural, humanitarian, religious, ecological and sport activities. The minimum limit for donations is the lesser of 2 per cent of taxable income or CZK 1 000.

• Interest payments: Taxpayers may claim an allowance of up to CZK 300 000 for mortgage interest payments or other interest payments related to the purchase or the improvement of their house. If more than one individual living in the same household apply for this allowance, the sum of their annual deductions is subject to the abovementioned ceiling, i.e. CZK 300 000.

Main non-standard tax reliefs

• Supplementary pension scheme contributions: Taxpayers who are members of a registered supplementary private pension scheme are entitled to deduct the individually paid (i.e. paid by employee) annual contributions to a registered pension scheme reduced by CZK 6 000 from the earned income. The maximum allowance is CZK 12 000 a year.

• Private life insurance premiums: Taxpayers may claim an allowance of up to CZK 12 000 for premiums paid according to a contract between the taxpayer and an insurance company if the benefit (lump sum or recurrent pension) is paid out 60 months after the signature of the contract and in the year in which the taxpayer reaches the age of 60.

CORPORATE INCOME TAX

• CIT is levied on income from the worldwide operations of Czech tax residents and on Czech-source income of Czech tax non-residents

• The Czech tax residents - entities with their seat or the place of management in the Czech Republic

• Tax base is calculated from the accounting profit/loss (according to the Accounting Act and Czech accounting standards)

• The accounting profit/loss is further adjusted by non-deductible costs, non-taxable revenues etc.

• The tax period may be a calendar year or fiscal year

CORPORATE INCOME TAX• Reduction of tax rate

– 24 % in 2007– 21 % in 2008– 20 % in 2009– 19 % in 2010

• The rate for all withholding taxes was unified at 15 %• Losses can be carried forward for the 5 following tax periods• Extended binding rulings help to reduce administrative burden

and uncertainty of firms• Investment incentives: tax holidays for up to 5 years

(in some cases even 10 years)

PIT x CIT

• adjustments of taxable income slightely differ

• charity (10 for PIT contra 5 percent for CIT)

• Research and development alowance (strong measure to reduce tax baze)

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

8%

9%

10%

11%

12%

13%

14%

15%

16%

PITCITLaffer effect

Example - Gifts as an allowance measure…gift 1 to the hospital A = 6000

gift 2 to the hospital B = 3000 gift 3 to the secondary school A= 3000

gift 4 to the secondary school A= 300 !!!!RandD alowance = 5000

Profit = 100000

PIT

• tax baze = – 100000 + all gifts = 112000– 112000 is caled tax baze– MINUS RandD– MINUS gifts (max 10% of

112000, so only 11200, not 12000)

• adjusted tax baze = – 112000-5000 -11200= – 958000 is adjusted tax

baze

CIT is disadvataged usually

• tax baze = – 100000 + all gifts = 112000– MINUS RandD– 107000 = intermediate tax

baze– MINUS all gifts (max 5% of

intermediate tax baze, 5350)

• adjusted tax baze = – 112000-5000-5350 = – 101700 is adjusted tax

baze

SOCIAL SECURITY CONTRIBUTIONS

Type of insurance

Paid by employer

(%)

Paid by employee

(%)

Total (%)

Social insurance

25.0 6.5 31.5

Health insurance

9.0 4.5 13.5

Total 34.0 11.0 45.0

VALUE ADDED TAX

• A general, broadly based consumption tax assessed on the value added to goods and services

• Taxable person: an individual or corporation in case of economic activity

• Obligatory registration x voluntary registration• Tax rates:

– 20 % standard rate,– 10 % reduced rate

(foodstuffs, residential construction, accommodation and transport)

– The reduced rate was increased from 5 % to 9 % in 2008• Since 2010 the both rates have been increased by 1

percentage point (austerity package)

VAT reduced rate and base indicator

• VAT = t-statutory * tax base adjusted by tax code

• VAT = ITRvat * full final consumption

• we derive so called indicator of VAT reduced rate and base as

• standard VAT rate - ITRvat

VAT reduced rate and base indicator in CZECH REP

• low and• will be lower (expectations based on

elimination of reduced rate)• VAT tax burden is going to be higher

VALUE ADDED TAX

• Exemption with the right of deduction• Exemption without the right of deduction• Fiscal period - calendar month or calendar quarter

EXCISES

• Fully harmonised with EU directives• Mineral oils

– Petrol – 12 840 CZK (505 EUR) /1 000 l– Diesel – 10 950 CZK (431 EUR) /1 000 l– Heating oils – heavy – 472 CZK (19 EUR) /t– LPG – 3 933 CZK (155 EUR) /t

• Beer– 5 rates – acording to amount of production – from 32 CZK (1,26

EUR) to 16 CZK (0,63 EUR) /hl/degree Plato• Wine

– just sparkling 2 340 CZK (92 EUR) /hl– still wine not taxed

EXCISES

• Alcohol– 2 rates – 28 500 CZK (1121 EUR) /hl etanol; 14 300 CZK (563 EUR) /hl etanol– The lower one – ethyl alcohol produced by fruit growers´ distilleries

• Tobacco products– Cigarettes – minimum tax rate – 2,01 CZK (0,08 EUR) /item– Tobacco – 1 340 CZK (53 EUR) /kg– Cigars and cigarillos – 1,15 CZK (0,05 EUR) /item

• Environmental (green or energy)– Coal – 8,50 CZK (0,33 EUR) /GJ gross caloric value– Gas – the basic rate – 30,60 CZK (1,2 EUR) /MWh gross caloric value– Electricity – 28,30 CZK (1,11 EUR) /MWh– in force since 2008

• All excises rates except wine and environmental have been increased since 2010 (austerity package)

PROPERTY TAXES

• Real property tax– paid annualy from

• land

• buildings

– Farm land can be exempt from the real estate tax

– Municipalities are allowed to set the local coefficients

(1 to 5) which determine the rate of real estate tax imposed on

buildings• Since 2010 most of the property rates have been increased to

double (austerity package)

PROPERTY TAXES

• Inheritance and gift tax

− only between non-relatives

− i.e. all inheritances and gifts within the family

and other relatives are exepmt

• Real property transfer tax

− tax rate of 3 % of the value

Road tax • is payable on vehicles registered and operated for

business purposes• tax rates are (year period)

– 1,200 - 4,200 CZK (47 – 165 EUR) for passenger cars (according to engine size for passenger cars)

– 1,800 - 50,400 CZK (71 – 1983 EUR) for trucks (according to weight and number of axles).

• Some vehicles with an electric, hybrid engine or use LPG, CNG as a fuel are exempt from the tax (green tax policy issue).

• Foreseen changes in the future:– exemption of passenger cars (national reasons),– increase of the tax rate for trucks (EU reasons).

TAX TO GDP RATIO

0

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

OECD average Czech Rep.

Total tax revenue as a percentage of GDP

TAX ADMINISTRATION

• 199 tax offices

• 8 regional financial directorates

• Ministry of Finance

− Central Financial and Tax Directorate

− part of Ministry of Finance to 2010 – since 2011

new independent agency General Directorate of

Finance

TAX ADMINISTRATION

• Other agencies collecting public revenues

− customs administration

− social security administration

− health insurance companies

TAX REVENUE SHARING

• PIT, CIT, VAT among central, regional and local level

− central government: 70 %

− regions: 9 %

− municipalities: 21 %• Real estate tax goes to municipalities• All other taxes go to the state budget or other central

government‘s funds

PACKAGE OF AUSTERITY MEASURES

• Has been in force since 2010• Purpose – to reduce deficit of public

finance• Contains rate increase in VAT (19 to 20, 9

to 10), excises, real property tax and PIT (lower expense allowances for some minor kind of enterpreneurs – agricultural and handicraft activities 80%, other minor activities 60 % and 40 %)

Progressiveness of the VAT and excises in the Czech Republic

based onKLAZAR, Stanislav. Progressiveness of the VAT and Excises in the Czech

Republic – Empirical Analysis. International Review of Economics & Business, 2008, č. 12, s. 99–112. ISSN 1331-5609.

online see klazar.blogspot.com

The VAT and excises in the Czech Republic

Taxes on goods and services

Value added taxes

75,64%

On beer0,88%

On wine0,05%

On alcohol and liquor1,27%

On tobacco products

5,47%

On mineral oils16,69%

Global tax mix

Social SecurityContribution - 43 %

PIT – 12 %

CIT – 13 %

VAT – 23 %

Excises – 7 %

* breakpoint 1. 5. 2004

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 200511

12

13

14

15

16

17

18

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

*

2005

2006

2007

2008

0

5

10

15

20

25

VAT rates in Czech Republic

standard rate

reduced rate

%

Two ways of distributional tax analysis

All distributional analyses are based on measurement of impact on the poor and on the rich subjects (i.e. subjects on different part of well-being scales).

So the crucial question is: what should be selected as appropriate measure of well-being (of household).

• annual framework– Well-being = f (annual income)– Theoretically not so appropriate – Easily measurable (appr. 90 % of distributional analyses used this

approach)

• lifetime framework– Well-being = f (lifetime income)– Theoretically more appropriate because the lifetime incidence

approach tries to eliminate temporary fluctuations in income

Measures of lifetime income

• Well-being = f(lifetime income)• Estimation of lifetime income is the most

exciting and challenging issue in up to date distributional research.

• Lifetime income can be measured (see Slintakova (2006); Metcalf (1994)) as:– the present discounted value of earned income

plus bequests (gifts) received– the present discounted value of consumption plus

bequests made• used in this analysis.

Modified lifetime income

• Due to the lack of appropriate information we had to modified definition of lifetime income. We measured lifetime income as:

• Current consumption (money expenditures PLUS natural consumption MINUS social

insurance)– Bequests were ignored (Metcalf (1994)

supported this exclusion)

Tax burden calculation

• choose the average (typical for the selected part of income scale) households and calculate their tax burden

• calculate the burden for all (and every) individual households, it means to calculate relevant tax burden for every households in the survey, and then study the differences in tax burdens.– We used microsimulation model to calculate individual

tax burdens

Advantages of microsimulation model

• analyse not only the averages for the ex-ante defined (social) groups of households, but also its variability within these groups

• identify unusual behaviour of certain households or groups, which can otherwise be hidden (some kind of outliers)

• try to find other, not so obvious relevant variables determining the taxation of households

• use the impact of taxation itself as a classification variable (and study the characteristics of the groups with lowest/highest tax rates on expenditure)

Microsimulation model

Where• SCIni means money expenditures on a statistical consumption item n in

year i• tn (in %) is a tax rate assigned to the statistical consumption item;• the base which is used for the tax liability calculation is in fact paid prices of

goods or services including the VAT so that the tax rate was converted accordingly.

Application of the taxation algorithm on individual households

Output – the average result on the sample of

households

Results for individual households

Example of statistical consumption item• for n = 01.1.1.X• Classification of expenditures in SRU (Czech

Household budget survey (HBS))

01 . 1 . 1 . X

COICOP: division, group, class here: bread and cereals

Individual item in SRU

The aim of empirical analysis

• to compare the distribution impact of the VAT and excises under both well-being measures.

• The presupposed result that the consumption taxation can be considered as progressive under lifetime income framework can be interesting for the policy makers.

Results of VAT analysis

K V A RT IL C ; LS Means

Curren t e ffec t: F(4 , 3031 )=65 ,687 , p=0 ,0000

E ffec ti ve hypo thes is dec om pos i tion

V ertic a l ba rs deno te 0 ,95 c on fidenc e in te rva ls

a b c d e

Qu in ti les by Cgros s

0 ,106

0 ,108

0 ,110

0 ,112

0 ,114

0 ,116

0 ,118

0 ,120

0 ,122

0 ,124

0 ,126

0 ,128

et_

va

tC

K V A RT IL Y ; LS Means

V ertic a l ba rs deno te 0 ,95 c on fidenc e in te rva ls

a b c d e

Qu in ti les by Y gros s

0 ,009

0 ,010

0 ,011

0 ,012

0 ,013

0 ,014

0 ,015

0 ,016

0 ,017

0 ,018

et_

va

tY

Annual framework (annual income)

Lifetime income (annual consumption)

Results of excise analysis

Annual framework (annual income)

Lifetime income (annual consumption)KVAR TIL C ; LS M eans

C urrent effect: F (4, 3031)= 2,2677, p= ,05961

Effective hypothesis decomposition

Ver tical bars denote 0,95 confidence intervals

a b c d e

Quinti les by C g ross

0,0022

0,0024

0,0026

0,0028

0,0030

0,0032

0,0034

0,0036

et_e

xcis

esC

KVAR TIL Y; LS M eans

Ver tical bars denote 0,95 confidence intervals

a b c d e

Quintiles by Yg ross

0,00020

0,00025

0,00030

0,00035

0,00040

0,00045

0,00050

0,00055

et_e

xcis

esY

Conclusions• design of the VAT is generally progressive,

but the propensity to consumption outweighs this design effect and causes the VAT to be regressive under the annual income framework (on the contrary to lifetime approach)

• design of excises is generally proportional and so excises seem to be rather regressive or proportional then progressive under both the frameworks

Conclusions 2

• some level of progressivity of the Czech VAT is caused especially by application of the reduced rate on selected goods and services (especially necessities, i.e. goods expenditures on which represent higher portion of total consumption for lower income households)

• Czech VAT looks progressive if we use the consumption expenditure for allocation of households to quintiles (and for calculation of the relative tax burden). On the contrary the tax is regressive under the annual income framework.