Government bill no. 502/2012 Coll., which amends Act no. 235/2004 Coll., on value added tax, as subsequently amended, and other related laws (hereinafter the “Amendment”) was submitted to the Chamber of Deputies last June. Following relatively radical changes proposed in the Senate it was passed by the Chamber of Deputies in its original form and signed by the president just before Christmas.

The Amendment was added to the Collection of Laws on December 31st, taking effect on January 1st, 2013. Clearly, this provided very little time to become familiar with the regulations.

The reason for passing the Amendment was obviously an attempt to combat the unfair practices of certain payers and toughen sanctions available to administrators of the value added tax. Prior to the Amendment, administrators could terminate the registration of certain payers, provided their turnover met required limits, but these payers would merely re-register in accordance with the law.

Defining an “unreliable payer”

In Section 106a, the Amendment introduces the concept of an unreliable payer. This is understood to be such payer which in a serious manner violates its obligations pertaining to the tax administrator and the tax administrator has therefore decided that this payer is an unreliable payer. Violations of obligations may refer to violation of obligations of the VAT Act, or also the tax code. An example may be the obligation of submitting a tax return, paying tax, or cooperating with tax administrators during tax audits or when verifying information provided in the tax return or during registration.

As far as the term “serious manner”, according to the explanatory report, the intensity of such behavior must threaten public interest in the due collection of value added taxes. This does not apply then to minor formal violations of payer obligations. As explained by the Ministry of Finance, this is an instrument to aid in the fight against the unfair practices of certain tax subjects, not an instrument to penalize regular payers which otherwise duly fulfill their tax obligations. It is at the discretion of the tax administrator to assess individual violations, particularly with respect to the payer, taking into account experience to date with this payer, and the level of risk for the public budget represented by a violation by this payer. The law does not contain any further specification of “serious”.

The problem of vagueness in defining an unreliable payer is not even helped by the instantiation mentioned in the explanatory report (and its adaptation over time) and the interpretative opinions of the General Tax Directorate. Even the drafters of the law share the opinion of this author that resolving the problem through sub-statutory regulations is against the principles of the rule of law and probably unconstitutional.

Compared to the regular procedure for unreliable payers, instead of a thirty day period for submitting an appeal the period is now only fifteen days. Appeals however, still suspend the process. After the decision takes effect, the particular tax administrator publicly lists the payer as an unreliable payer in a manner which may be accessed remotely. This information is available for example through the ARES application on the Ministry of Finance website.

If the particular subject would like to get rid of the unreliable payer “label”, it may not in a serious manner violate its tax related obligations for a period of at least 1 year. Then the tax administrator will decide whether it is no longer an unreliable payer, and will publish this information in the same manner, enabling remote access.

Subjects placed on the list are penalized by not being able to select their tax period, this applies to the affected payer for 1 calendar month.

Consequences for “reliable payers” – risk of obligation to pay tax for business partners due to liability

The concept of unreliable payer does not only affect those subjects against which the Amendment is primarily aimed, but also subjects which duly fulfill their tax obligations and decide to do business with an unreliable payer. In such cases, the Amendment introduces liability of the recipient of performance subject to VAT for unpaid tax, provided the recipient receives goods from a person designated as an “unreliable” payer. See Section 108a of the Amendment:

“The authorized recipient obliged to report and pay excise tax in connection with receipt of select goods from another member state, is liable for unpaid tax from the supply of these goods to a third person by the person which obtained these goods from another member state, unless it demonstrates that it has taken all measures which may be reasonably required of it to verify that this tax will be duly paid by the person which acquired the goods.”

The Ministry of Finance is of the opinion that in this manner, nobody will be interested in doing business with unreliable payers, and that they will thus be excluded from the VAT system. An entirely contrary position is taken by the Presidium of the Czech Chamber of Commerce – “the state hereby shifts the burden of its inability to collect taxes to law abiding businesses! Businesses must now check whether they are trading with an insolvent company and check whether they are on the list of unreliable VAT payers.”

Along with this need to check on business partners come other newly introduced obligations for VAT payers. Amended Section 96 of the VAT Act requires that the application for payer registration include the numbers of all accounts of the provider’s payment services, provided they are used for economic activity. With this provision, the liability of a recipient of taxable supply is extended, if payment was made by bank transfer to an account other than the account of the provider of taxable supply publicly listed by the tax administrator.

Ultimately, this Amendment intended to fight unfair practices will have a greater effect upon law abiding business, which at the very least will have a greater administrative burden in continually checking yet another register to monitor their business partners, to make sure the given partner has not become an unreliable payer, as well as the bank accounts listed with the tax administrator.

Reduction in income tax base from donations to the “non-profit sector”

In its session on April 17th, the government debated and approved, among other bills, the amendment of Act no. 586/1992 Coll., on income tax related to the adoption of Act no. 89/2012 Coll., of the Civil Code (hereinafter the “NCC”). Among other items in the amendment, there is a change in tax deductible expenditures in the form of donations to subjects in the non-profit sector.

Firstly, the amendment abandons the concept of “payers which were not founded or established for the purpose of enterprise” and replaces it with “publicly beneficial payers”. These are generally understood to be payers which, according to their founding legal act, statute, law or public executive body primarily perform a publicly beneficial activity, such as an organizational body of the state, a municipality, a state fund or charity. And unless demonstrated otherwise, a payer with public benefit status is also considered to be a publicly beneficial payer.

The general provisions are then followed by the amendments to Section 15 (tax allowances), which allow tax deductions for the value of gratuitous performance provided to publicly beneficial payers, with the exception of payers which might be eligible to obtain publicly beneficial status but have not done so. As far as giving gifts to natural persons, this remains practically unchanged. The same change occurs in Section 20 par. 8 (tax base and tax deductions), where it is possible to reduce the tax base pursuant to Section 34 by gratuitous performance provided to the same circle of subjects.

To maintain tax deductible expenses through donations to legal subjects, one must keep in mind that if the given subject does not have publicly beneficial status, then if this amendment is approved, they will not qualify for such tax deductible expense.

Conclusion:

Based on the above, it is clear that it will be possible to “stamp” tax evaders with the label of “unreliable payer”. This label may be removed if the tax evader improves its behavior over time. However, this stamp mostly affects the honest business partners of these unreliable payers, which become exposed to the risk of liability for unpaid tax. Such business partners will be faced with the choice of discontinuing what in many cases will have been long-term cooperation with the labeled partner (which may have a negative economic effect for them) or risk paying the tax due to their liability.

The change in the area of reducing tax in the non-profit sector is primarily concerned with tying tax breaks to the status of publicly beneficial. The first change in this regard is tying tax deductions for donations to legal subjects to this publicly beneficial status. It may be expected that additional changes will follow to provide tax benefits to the holders of publicly beneficial status.

For more information, please contact our office’s partner, Mgr. Jiří Kučera, e-mail: jkucera@kuceralegal.cz ; tel.: +420604242241.