Tax System of the Czech

Republic

2012

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 (Brief discussion of Points of Tax

Impact in Circular Flow)– 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

31

32

33

34

35

36

37

38

Total Taxes (including SSC) as % of GDP

CZ EU-27 averages aritm.

For the Union, both the simple arithmetic average and the GDP-weighted average are shown in the An-nex A tables. The approach followed in the report is to focus on the GDP-weighted average when comparing the EU as a whole with third countries;

The arithmetic average is instead used in comparing individual Member States with the EU as it seems preferable to compare countries with a benchmark that relates only to the policy stance of each country independently of its size. In general, unless otherwise indicated, the arithmetic average is used.

Czech

OLD NEW

These differences not only reflect1/social policy choices such as public or private provision of services, e.g. old-age and health risk protection, but also2/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 (18); both of these choices affect the level of the tax-to-GDP ratios.

Taxation of transfers mechanically pushes the tax-to-GDP ratio up, compared to countries that pay transfers on an exempt basis. In addition, countries with a relativelyhigh tax-to-GDP ratio often impose higher taxes on social transfers, perhaps because this is more congruent with pure horizontal equity considerations.

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.

Member States towards the centre of the EU, namely Belgium, Austria, Italy, and France, all of which had a tax ratio inexcess of 40 % in 2009. Neighbouring Germany, Hungary, and the Netherlands are just below this level at 39.7%, 39.5%,and 38.2% of GDP respectively. With the exception of the Nordic Member States the geographically more peripheralcountries tend to show lower tax ratios, particularly in Central and Eastern Europe. Cyprus, whose tax ratio hadincreased rapidly until 2007, witnessed a sharp drop in the last two years in the series, nearly six percentage points,bringing it back down to below the EU average.

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 22 %

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/OR

implicit 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 cca 23 % 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) - nominal tax reduction = allowance* (tax rate)− 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 (nominal tax reduction = tax credit)

− basic (1xaverwage)− 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 slightly differ

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

• Research and development allowance (strong measure to reduce tax base)

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 for selfemployer

• 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 was increased to 14 % in 2012

(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 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

The VAT and excises in the Czech Republic

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.

Incidence Analysis of Pension Security

in the Czech Republic

Pension security scheme - annual view

• is a compulsory public insurance scheme

• it is a „paygo“ system:= today employees and self-employed

contribute to the fund= yesterday employees and self-

employed = today retirees draw pensions

Individual lifetime participation

• when works, an individual pays a share of his earnings to the fund

• when retired, an individual receives a pension

↓• what is his net benefit over the life?

= lifetime pension – lifetime tax

• how the pension security changes lifetime income inequality?

Data for the lifetime incidence analysis

• panel data for a long period are necessary

• absence of the real panel data in CR→ modelling of pseudo panel data

• Information System on Average Earnings → coverage of 1,3 mil. employees→ data on income and various personal characteristics → data on their employers

Model of the lifetime income

fictional individual = group of real individuals of different ages (when they start – when they stop working)

lifetime income of fictional individual == sequence of average incomes of real

individuals

lifetime income = earnings from employment

Lifetime income of fictional individual

Age Average monthly earnings in CZK Number of real employees Standard deviation in CZK

29 21 784 441 5 683

30 21 974 481 5 849

31 22 158 526 5 691

32 22 117 529 6 054

33 22 555 558 6 434

34 21 655 432 5 586

35 22 225 423 6 975

36 22 007 403 5 811

37 22 279 361 5 776

38 21 755 391 5 765

39 21 732 386 5 684

40 21 499 401 5 830

Modelling of data: Assumptions

1. sufficient number of real individuals of different age but the same characteristics related to income

2. minimal variance in incomes in age groups

3. stability of individual´s income profile over time

Creation of fictional individuals

• One-factor ANOVA and regression analysis → characteristics with effect on income: gender, education, location, occupation

• excluded from the sample: - part-time employees- working in the country´s capital - working in „financial services“

industry

Lifetime profile - example I.

ay = -39,616x2 + 155412x - 2E+08

R2 = 0,0382

0

50 000

100 000

150 000

200 000

1930194019501960197019801990

Lifetime profile – examle II.

ay = -21,352x2 + 83906x - 8E+07

0

50000

100000

150000

194019501960197019801990

resulting 331 fictional persons

= men and women of different education and occupation working outside the capital

+ • working from the end of schoolling

(18-23) until the legal age of retirement (62 x 59)

• without any break (illness, unemployment, child care etc.)

• with the same life expectancy (17 x 23)

Estimate of lifetime tax

• 2006 law (2006 is the last working year)

• present value of lifetime tax =

• employee´s rate = 6,5 %• employer´s rate = 21,5 %

Estimate of lifetime pension

• 2007 law (2007 is the first retirement year)

• present value of lifetime pension = • [(earnings x rate) + lump sum] x

months

• „months“ for women = 23 x 12• „months“ for men = 17 x 12

Updating of the past earnings

• reality: indexation by a growth of wages:

earnings2001 x index

index = avrg wage2006 /avrg wage2001

• simulation: earnings2001 = earnings2006 of 56-years

old

Results

1. distribution of net benefits

2. distribution of rates of return

welfare measure for ranking of individuals =

= lifetime average earnings/national average wage

Pension – Tax (tax rate = 6,5 %)

Pension/Tax (tax rate = 6,5 %)

Pension/Tax (tax rate = 28 %)

Conclusions I.

• considering the 6,5 % rate all the fictional individuals benefit more than they paid

• however, considering the 28 % rate especially lower-income women benefit

• rate of return decreases with well-being

• income is redistributed from higher-income to lower-income individuals or from men to women

Conclusions II.

• the pension security reduces the inequality of lifetime income

• lower-income individuals are better-off

↑• regressive pension formula• later earnings are relevant in

calculation• shape of lifelong earnings function

Thank You for Your Attention

end of presentation

• Terminology – E27 …• http://europa.eu/rapid/

pressReleasesAction.do?reference=STAT/11/100&format=HTML&aged=0&language=en&guiLanguage=en

Taxation of SME in the Czech Republic

Taxes with the hardest impact on enterprises

Corporate income tax limited and incorporated companies

Personal income tax public company limited, unincorporated enterprisers, special limited partnership

Value added tax

Tax support of SME

The tax system of the Czech Republic does not support SME directly

The support of SME through subsidies, bank credits, loans (guarantee by state) etc.

Corporate income tax CIT

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 CIT

Reducing of the tax rate in time - 1993: 45 % - 2006: 24 % - 2009: 20 % - 2010: 19 % losses can be carried forward for the 5

following tax periods and it is up to the taxpayer when he actually utilises them against his profits within this 5-year period

Corporate income tax CIT

The liability to pay Advance tax – based on the amount from the last tax declaration

Small enterprises usually do not pay tax in advance

Last tax declaration (LTD) Advance tax (AT) Nr. of AT per year

Up to 30 000 CZK - -

30 000 CZK up to 150 000 CZK 40% LTD 2

More than 150 000 CZK 25% LTD 4

Personal income tax PIT Is levied on the all incomes of self-employed persons and employees

Single tax rate 15 % (effectively about 23 %)History – four bracket system with tax rates

from 12 % to 32 %The minimum tax base for self–employed

persons was abolished in 2008

Personal income tax PITApplicable toSalaries and wages Income from business activities Income form capital assetsRental incomeOther income

The liability to pay Advance tax – based on the amount from the last tax declaration (the same conditions as for advance tax of CIT)

Personal income tax PIT

The self-employed persons have liability to conduct accounting

Small enterprisers have opporunity to conduct so called „Tax evidence“ – simplified accounting

The Tax evidence contains only information (records) about incomes and expenditures, amount of assets, amount of debts

Personal income tax PIT

Another opportunity how to show expenditures is to approve expenditures as a percentage part of income (percentage lumps set by the law - differently for each business activities)Reducing of administration burdenRecording of expenditures is aboslished in this

caseThe amounts of lumps differ from 60 % up

to 80 %

Value added tax VAT

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

Two ratesStandard rate: 19 %Reduced rate: 9 % (foodstuff, medicaments,

books, dwelling etc.)

Value added tax VAT

Small enterprisers with turnover up to 1 mil. CZK do not need to registrate to VAT

In this case enterprisers do not have right to deduction of VAT

Obligatory registration vs voluntary registration to VAT

Value added tax VAT

Small enterprisers with turnover up to 1 mil. – obligatory registration to VAT

Tax periodQuarter period for small enterprises

with turnover up to 10 mil. CZKMonth period for bigger enterprises

National anti-crisis plan

In 2009, in connection with current financial crisis any advance taxes for all small enterprisers with up to 5 employees were abolished by the Ministry of Finance

Future outlook - ICP

Project of Integrated collecting place – for all public incomes

ICP will collect incomes from Taxes Custom duties Social insurance Medical insurance

Integrated collecting place (ICP)

Consolidation of institutions collecting different incomes to only one institution

Improvement in client access and reducing of administrative burden for taxpayers and for tax administrator also

Unified tax and insurance baseOne declaration, one payment, one control

New tax measures in 2010

In force since 2010To reduce deficit of public finance Increase in VAT rates, excise rates, PIT

and real estate tax ratesEffort to reduce the impact on SME

TAX LEGISLATIVE PROCEDURE OF PARLIAMENT

• Czech Parliament has two chambers• Chamber of Deputies (200 members)

– elections every four years

• Senate (81 members)– elections of one third (27) of Senators

every two years– thus, every Senator serves six years

TAX LEGISLATIVE PROCEDURE OF PARLIAMENT

• Legislative process usually begins in the government

• It is the same for all kinds of legislation

• Act on the state budget - specific procedure

TAX LEGISLATIVE PROCEDURE OF PARLIAMENT

• Government – preparation of the new law starts within the

responsible ministry– internal comments

• tax administration (central and regional levels) takes part in the internal comments

– external comments• other ministries• other stakeholders – Highest Court, Czech Central

Bank, trade unions, employer unions, various associations etc.

• sometimes general public

TAX LEGISLATIVE PROCEDURE OF PARLIAMENT

• Government cont‘d– Legislative Council of Government– governmental approval

• if there are disagreements among various ministries and/or other stakeholders, governemnt has to decide

– the law is then presented to the Parliament

DRAFTING AND REVIEWING OF TAX LAW IN PARLIAMENT

• Chamber of Deputies– The rules of procedure of the Chamber of Deputies

are given by law– Every new law has to go through the three readings– 1st reading

• general debate• may be rejected or returned to the government for

reworking• steering Comittee specifies a rapporteur• the new law is introduced by the sponsoring ministry• committees to deal with the particular law are assigned• tax legislation always assigned to Budgetary Comittee• more committees may be assigned to one law

DRAFTING AND REVIEWING OF TAX LAW IN PARLIAMENT

• Chamber of Deputies cont‘d– Work in the committees

• committee shall consider the proposed law• pass a resolution with recommendations • present it to the whole Chamber• there may be an opposing reports if at least one-fifth

of all members agree• other committees or all individual Deputies may state

opinion– 2nd reading

• more specific debate follows• committees‘ recommendation discussed• amendments may be presented

DRAFTING AND REVIEWING OF TAX LAW IN PARLIAMENT

• Chamber of Deputies cont‘d– 3rd reading

• law can be rejected• if not, amendments presented durign the

second reading are voted• after that there is a final vote on approval of

the law

– the law is then submitted to the Senate

TAX LEGISLATIVE PROCEDURE OF PARLIAMENT

• Senate– 30 days to express their view– they can pass or defeat the law or

propose an amendment• if it is passed it is sent to the President of

the Republic• if the law is defeated, Chamber of Deputies

gets a second vote, they can outvote the Senate‘s rejection

• if amendments are proposed, Chamber of Deputies has to vote to agree with them

Blanka Marzuki

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