Accounting news. Tax news. Risk management. ICT news. Deloitte Czech Republic December Big Data and Research into Insurance Digital Maturity

Transcription

1 Deloitte Czech Republic December 2013 Accounting news Czech Accounting, IFRS and US GAAP Tax news Direct, indirect and other taxation Risk management Risk-adjusted forecasting ICT news Big Data and Research into Insurance Digital Maturity

2 We support young talents in the arts Deloitte - major partner of the Jindřich Chalupecký Award Accounting news Czech Accounting, IFRS and US GAAP December 2013, Deloitte Czech Republic 02 Czech Accounting What is and What is Not the Correction of Prior Period Errors? Invitation - seminar News in Czech Accounting 03 IFRS IFRS Tips IFRS EU Endorsement Process IASB published amendment to IFRS 9 Financial instruments - General Hedge Accounting New IFRS Publication by Deloitte 05 US GAAP Accounting for the Franchise Agreement

3 Czech Accounting What is and What is Not the Correction of Prior Period Errors? In the March issue of Accounting News, we analysed accounting issues of the amendment to Regulation No. 500/2002 Coll., specifically corrections of prior period errors, which took effect on 1 January Let us briefly remind new accounting approach for accounting for prior period accounting errors: If an error is not material in terms of financial statements, the correction arising from incorrect recognition or non-recognition of expenses and income in prior years is accounted for (the same way as before 1 January 2013) by type using the relevant expense and income accounts, ie through the accounts to which the transaction relates, as was the usual practice to date. But if the error is material the correction is made against the equity account ( Other profit or loss of prior years ). In this situation, the correction of errors does not have any effect on the profit or loss for the current reporting period. aterial misstatement is an incorrect or omitted disclosure of information that may, individually or cumulatively, impact the decision-making of a sufficiently informed user of the financial statements. The company is required to adjust comparative information for the prior reporting period and complete/justify it using notes to the financial statements. The company should also submit an additional tax return and take the adjusted profit or loss into consideration at the General Meeting s decision making in the following period. In practice, we encounter several different interpretations of the term prior period error. The most frequent accounting errors are caused by human error and include: an incorrectly-posted document (different amount, incorrect period, incorrectly-selected account account entries), omitted document (non-received invoice) or a document that was posted twice. If the entity identifies such an error, and if the error is material, it will make a correction in the profit or loss of the reporting period or prior period. Corrections of prior period errors do not have to relate to physical documents that we are missing/that are redundant in the accounting records. These may include accounting entries that are subject to estimates of the company s management, such as reserves or estimated payables/receivables, and that the company will have to settle sometime in the future or that will be settled to the company. And here let us move more into practice. In 2012, a company recognised estimated receivables with the anticipation that the supplier will pay CZK 5 million as a bonus for the purchased quantity in the future. In 2013, the company identified that the estimated receivable was overstated and that the payment will not be made. Is this example a correction of a prior period error? The answer is both YES and NO: it depends on other circumstances. The presentation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the balance sheet date and the reported amounts of revenues and expenses during the reporting period. Management of the Company has made these estimates and assumptions on the basis of all relevant information available to it. Nevertheless, pursuant to the nature of estimates, the actual results and outcomes in the future may differ from these estimates. If the company recognised estimated payables at the end of the reporting period, however, it deliberately or unintentionally omitted to include all types of costs, or it did not take into consideration all information available before the financial statements date, the difference is the reason for accounting for prior period errors and reporting in the Other profit or loss of the prior period line. A different accounting treatment is taken when the company or its management defends the recognition of estimated receivables as current income resulting from future negotiations with the supplier. A typical example may be the negotiation on the bonus granted for 2012 for the purchased quantity, eg where no contract is concluded or the interpretation of the contract is unclear Anticipated payment Negotiation 2013 Agreement 2013 Recognition Given the time sequence of individual steps of the granted bonus and the above statement of the company, it is necessary to take into account the substance of the incorrectness of the estimated balances. When recognising estimated receivables, the company had all available and relevant information; however, the result of the negotiation was not in favour of the company. For this reason, it is not a correction of a prior period error; it is rather the impact of the negotiations for For this reason, the estimated receivables will be released with an impact on the profit or loss of Summary As every entry in the accounting records requires consideration, it is also necessary to consider the corrections of errors. Corrections of errors may significantly impact the profit or loss of the reporting period if they are not made correctly. The Czech legislation has defined two possible accounting treatments, where the sole perspective is the level of materiality. The reality is not just black and white, it is necessary to analyse and examine the substance of individual transactions. 02

4 Czech Accounting IFRS Invitation Seminar News in Czech Accounting Prague, Brno, Ostrava As in prior years, we have prepared a popular seminar on the news in Czech accounting, this year providing a summary in accounting legislation and the legal and tax news having an impact on companies financial statements. The seminar is predominantly intended for accountants, economists and financial managers preparing or involved in the preparation of financial statements under Czech accounting legislation and the related tax and legal regulations and for all of you who want to learn more about Czech accounting and the latest tax and legal developments. Seminars will be held in Czech in November and December in Prague, Brno and Ostrava and will be delivered by our professionals. Timing Prague: 12 December 2013 Ostrava: 11 December 2013 More information on: IFRS Tips Today, IFRS Tips cover questions from our clients relating to IAS 16 Property, Plant and Equipment. In June 2012 the Annual Improvements to IFRSs ( Cycle) were issued which, among others, brought also a minor amendment to paragraph 8 of IAS 16 which deals with the recognition of spare parts and servicing equipment. Paragraph IAS 16.8 effective for annual periods beginning prior to 1 January 2013: Spare parts and servicing equipment are usually carried as inventory and recognised in profit or loss as consumed. However, major spare parts and stand-by equipment qualify as property, plant and equipment when an entity expects to use them during more than one period. Similarly, if the spare parts and servicing equipment can be used only in connection with an item of property, plant and equipment, they are accounted for as property, plant and equipment. Paragraph IAS 16.8 effective for annual periods beginning on or after 1 January 2013: Items such as spare parts, stand-by equipment and servicing equipment are recognised in accordance with this IFRS when they meet the definition of property, plant and equipment. Otherwise, such items are classified as inventory. An entity shall apply this amendment retrospectively in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. For the sake of completeness, we also include other relating paragraphs of IAS 16. Definition of property, plant and equipment is stated in IAS 16.6 they are tangible items that: a. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b. are expected to be used during more than one period. Paragraph IAS 16.7 requires that the cost of an item of property, plant and equipment shall be recognised as an asset if, and only if: a. it is probable that future economic benefits associated with the item will flow to the entity; and b. the cost of the item can be measured reliably. We will now demonstrate the application of these requirements on practical examples. Example 1 Stand-by-equipment Background An entity has installed two turbines. One turbine produces energy for the plant, and the other is used as a backup in case the first turbine fails or is otherwise rendered out of service. The probability that the spare turbine will be used is very low. The spare turbine is necessary, however, to ensure the continuity of the production process if the first turbine fails. The useful life of the stand-by turbine will equal the life of the plant, which is the same as the useful life of the primary turbine. Question How should this stand-by equipment be accounted for? 03 continues on next page

5 IFRS Answer IAS 16.8 states that stand-by equipment qualifies as property, plant and equipment when it meets the definition of property, plant and equipment, i.e. tangible items that a. are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and b. are expected to be used during more than one period. Although this definition requires that the entity should expect to use the turbine during more than one period, it does not state that such use should be regular. Therefore, the spare turbine is classified as property, plant and equipment and should be depreciated from the date it becomes available for use (i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by the management). The useful life of stand-by equipment should be determined by the useful life of the equipment for which it serves as a back-up; in this example, the turbine should be depreciated from the date it is made available for use (i.e. when it is in the location and condition necessary for it to be capable of operating in the manner intended by management) over the shorter of the life of the turbine and the life of the plant of which the turbine is part (assuming the turbine cannot be removed and used in another plant). Note that, if the residual value of the stand-by turbine is estimated to be significantly higher than the residual value of the primary turbine (because it is expected to be in a better condition at the end of the asset s useful life due to lower usage), this will affect the depreciation charged over that useful life. The accounting for stand-by equipment is different from the accounting for spare parts which are also considered to be property, plant and equipment but that are 'not available for use'. Refer to example 2 regarding the accounting for spare parts. Example 2 - Spare Parts Classified as Property, Plant and Equipment Background An entity buys five new machines for use in its production facility. Simultaneously, it purchases a spare motor to be used as a replacement if a motor on one of the five machines breaks. Question Should the spare motor be classified as property, plant and equipment and, if so, when should depreciation commence? Answer Items such as spare parts, stand-by equipment and servicing equipment should be recognised as property, plant and equipment when they meet the definition of property, plant and equipment. Otherwise, they should be classified as inventories in accordance with IAS 2 Inventories. [IAS 16.8] In the circumstances described, the motor will be used in the production of goods and, once brought into service, will be operated during more than one period. It is therefore classified as property, plant and equipment. The motor does not qualify as stand-by equipment (see example 1 above) because it will not be ready for use until it is installed. Therefore, the useful life of the motor commences when it is available for use within the machine rather than when it is acquired. It should be depreciated over the period starting when it is brought into service and continuing over the lesser of its useful life and the remaining expected useful life of the asset to which it relates. If the asset to which it relates will be replaced at the end of its useful life and the motor is expected to be used or usable for the replacement asset, a longer depreciation period may be appropriate. During the period before the motor is available for service, any reduction in value should be reflected as an impairment loss under IAS 36 Impairment of Assets at the time impairment is indicated. IFRS EU Endorsement Process On 24 November 2013, the European Union endorsed Investment Entities (Amendments to IFRS 10, IFRS 12 and IAS 27). The amendments were published by the IASB in October They provide an exemption from consolidation of subsidiaries under IFRS 10 Consolidated Financial Statements for entities which meet the definition of an 'investment entity', such as certain investment funds. Instead, such entities would measure their investment in particular subsidiaries at fair value through profit or loss in accordance with IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement. You can find more information about amendments to IFRS 10 in our Accounting news from November Effective date of these amendments in the European Union is the same as the effective date of document issued by the IASB - 1 January The European Financial Reporting Advisory Group (EFRAG) updated its report showing the status of endorsement of each IFRS, including standards, interpretations, and amendments, most recently on 21 November As of 24 November 2013, the following IASB pronouncements are awaiting European Commission endorsement for use in the EU: Standards IFRS 9 Financial Instruments (issued in November 2009) and subsequent amendments (amendments to IFRS 9 and IFRS 7 issued in December 2011 and amendment to IFRS 9 General hedge accounting issued in November 2013) Amendments Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets (issued in May 2013) Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (issued in June 2013) 04 Interpretation IFRIC 21 Levies (issued in May 2013) Click here for the Endorsement Status Report

6 IFRS US GAAP IASB published amendment to IFRS 9 Financial instruments - General Hedge Accounting On 19 November 2013 the International Accounting Standards Board (IASB) published an amendment to IFRS 9 Financial Instruments incorporating its new general hedge accounting model. This represents a significant milestone as it completes another phase of the IASB s project to replace IAS 39 Financial Instruments: Recognition and Measurement. The new general hedge accounting model provides more opportunities to apply hedge accounting. We will bring more information about this amendment to IFRS 9 in the next issue of Accounting news. I New IFRS Publication by Deloitte IFRS Compliance, Presentation and Disclosure Checklist for 2013 This checklist prepared by Deloitte is developed is to assist the users in determining whether they complied with : the recognition, and measurement requirements, and presentation and disclosure requirements set out in the IFRSs in issue as of 30 April The items in this questionnaire are referenced to the applicable sections of the IFRSs. The checklist is in Excel, formatted to allow the recording of a review of financial statements, with a place to indicate yes/no/irrelevant for each recognition, measurement, presentation and disclosure item. Accounting for the Franchise Agreement Franchise has recently become preferred business model and especially in the Central European environment it represents almost ideal approach of the multinational companies to the local markets. Today s article therefore summarizes the key principles of the accounting for the franchise agreement under US GAAP to provide comprehensive understanding of the entire concept. ASC 952 establishes accounting and reporting standards for franchisors. It addresses franchise fee revenue from individual and area franchise sales and when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. It also establishes accounting standards for continuing franchise fees, continuing product sales, agency sales, repossessed franchises, franchising costs, commingled revenue, and relationships between a franchisor and a franchisee. Our article however focuses on the most important areas mentioned above: Overall principles; Franchisors Deferred Costs; Commitments; Revenue Recognition; and Other Expenses. Overall principles ASC 952 applies to all entities that meet the definition of franchisor, that is, the party that grants business rights (the franchise) to the party (the franchisee) that will operate the franchised business. As far as the transactions are concerned, it applies to the following ones: Franchise fee revenue that is obtained through a franchise agreement; Costs associated with franchising activities; and Transactions between the franchisor and franchisee. In order to understand the language used by ASC 952 let us have a look a closer look on the terms. Area franchise stands for an agreement that transfers franchise rights within a geographical area permitting the opening of a number of franchised outlets. Under those circumstances, decisions regarding the number of outlets, their location, and so forth are more likely made unilaterally by the franchisee than in collaboration with the franchisor. A franchisor may sell an area franchise to a franchisee who operates the franchised outlets or the franchisor may sell an area franchise to an intermediary franchisee who then sells individual franchises to other franchisees who operate the outlets. Continuing franchise fees are the considerations for the continuing rights granted by the franchise agreement and for general or specific services during its life. You can download IFRS Compliance, Presentation and Disclosure checklist 2013 for free. 05 continues on next page

7 US GAAP Franchise agreement then represents written business agreement that meets the principal criteria: The relation between the franchisor and franchisee is contractual; The continuing relation has as its purpose the distribution of a product or service, or an entire business concept, within a particular market area; Both the franchisor and the franchisee contribute resources for establishing and maintaining the franchise; The franchise agreement outlines and describes the specific marketing practices to be followed; The establishment of the franchised outlet creates a business entity that will, in most cases, require and support the full-time business activity of the franchisee; and Both the franchisee and the franchisor have a common public identity. The payment of an initial franchise fee or a continuing royalty fee is not a necessary criterion for an agreement to be considered a franchise agreement. Bargain purchase is a transaction in which the franchisee is allowed to purchase equipment or supplies for a price that is significantly lower than the fair value of the equipment or supplies. Initial franchise fee stands for a consideration for establishing the franchise relationship and providing some initial services. Occasionally, the fee includes consideration for initially required equipment and inventory, but those items usually are the subject of separate consideration. Initial service represents common provision of a franchise agreement in which the franchisor usually will agree to provide a variety of services and advice to the franchisee, such as assistance in the selection of site, obtaining facilities, advertising, training, bookkeeping, etc. Franchisors Deferred Costs The deferred costs incurred by franchisors respect the underlying accrual concept of accounting and need to be treated as follows: Direct (incremental) costs relating to franchise sales for which revenue has not been recognized shall be deferred until the related revenue is recognized; Deferred costs shall not exceed anticipated revenue less estimated additional related costs; and Costs yet to be incurred shall be accrued and charged against income no later than the period in which the related revenue is recognized. Commitments Similar to ASC 440 the nature of all significant commitments and obligations resulting from franchise agreements, including a description of the services that the franchisor has agreed to provide for agreements that have not yet been substantially performed, shall be disclosed. Revenue Recognition Initial franchise fees Franchise fee revenue from an individual franchise sale shall be recognized, with an appropriate provision for estimated uncollectible amounts, when all material services or conditions relating to the sale have been substantially performed or satisfied by the franchisor. Substantial performance for the franchisor means that all of the following conditions have been met: The franchisor has no remaining obligation or intent by agreement, trade practice, or law to refund any cash received or forgive any unpaid notes or receivables; substantially all of the initial services of the franchisor required by the franchise agreement have been performed; and No other material conditions or obligations related to the determination of substantial performance exist. If the franchise agreement does not require the franchisor to perform initial services but a practice of voluntarily rendering initial services exists substantial performance shall not be assumed until either the initial services have been substantially performed or reasonable assurance exists that the services will not be performed. Sometimes, large initial franchise fees are required but continuing franchise fees are small in relation to future services. If it is probable that the continuing fee will not cover the cost of the continuing services to be provided by the franchisor and a reasonable profit on those continuing services, then a portion of the initial franchise fee shall be deferred and amortized over the life of the franchise. The portion deferred shall be an amount sufficient to cover the estimated cost in excess of continuing franchise fees and provide a reasonable profit on the continuing services. However, at the area franchise sales if the franchisor's substantial obligations depend on the number of individual franchises established within the area, area franchise fees shall be recognized in proportion to the initial mandatory services provided. Revenue that may have to be refunded because future services are not performed shall not be recognized by the franchisor until the franchisee has no right to receive a refund. The substance of an area franchise agreement shall determine when material services or conditions relating to a sale have been substantially performed or satisfied. 06 continues on next page

8 US GAAP Commingled revenue The franchise agreement ordinarily establishes a single initial franchise fee as consideration for the franchise rights and the initial services to be performed by the franchisor. Sometimes, however, the fee also may cover tangible property, such as signs, equipment, inventory, and land and building. In those circumstances, the portion of the fee applicable to the tangible assets shall be based on the fair value of the assets and may be recognized before or after recognizing the portion applicable to the initial services. In case the actual transaction prices are not available for the specific portions, the franchise fees should not be allocated or recognized before all services have been substantially performed. Although a franchise agreement may specify portions of the total fee that relate to specific services to be provided by the franchisor, the services usually are interrelated to such an extent that the amount applicable to each service cannot be segregated objectively. The fee shall not be allocated among the different services as a means of recognizing any part of the fee for services as revenue before all the services have been substantially performed unless actual transaction prices are available for individual services; for example, through recent sales of the separate specific services. Continuing franchise fee Continuing franchise fees shall be reported as revenue as the fees are earned and become receivable from the franchisee. Continuing product sales The franchisee may purchase some or all of the equipment or supplies necessary for its operations from the franchisor. Sometimes, the franchisee is given the right to make bargain purchases of equipment or supplies for a specified period or up to a specified amount, when the initial franchise fee is paid. If the bargain price is lower than the selling price of the same product to other customers or if the price does not provide the franchisor a reasonable profit on the equipment or supply sales, then a portion of the initial franchise fee shall be deferred and accounted for as an adjustment of the selling price when the franchisee purchases the equipment or supplies. The portion deferred shall be either of the following: The difference between the selling price to other customers and the bargain purchase price; or An amount sufficient to cover any cost in excess of the bargain purchase price and provide a reasonable profit on the sale, as appropriate. Other Expenses Costs relating to continuing franchise fees shall be expensed as incurred. Indirect costs of a regular and recurring nature that are incurred irrespective of the level of sales, such as general, selling, and administrative costs, shall be expensed as incurred. Conclusion Accounting for franchise operations may vary an agreement to agreement. This article summarizes the basic assumptions and the most common concepts of the franchise accounting. In case you need detail analysis of the franchise related accounting issue do not hesitate to contact Deloitte for further assistance. 07

9 If you have any questions regarding any of the articles in this publication, please contact one of the following audit experts: Czech Accounting IFRS and US GAAP Stanislav Staněk: Martin Tesař: Soňa Plachá: Jiří Šauer: Deloitte Advisory s.r.o. Nile House Karolinská 654/ Prague 8 - Karlín Czech Republic Tel.: Fax: This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, any of its member firms or any of the foregoing s affiliates (collectively the Deloitte Network ) are, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your finances or your business. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication. *** Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte's approximately 200,000 professionals are committed to becoming the standard of excellence Deloitte Czech Republic

10 Have you considered all the options well? Tax news December 2013, Deloitte Czech Republic 02 Direct Taxes 04 Indirect Taxes 06 Grants & Research & Development 07 Appendix Real Estate Contributions from 1 January Cancellation of the Exemption of Real Estate Transfer Tax The Cayman Islands and UK Sign FATCA -type Agreement Social Security and Health Insurance Information of the General Financial Directorate on the Issue Involving Unrealised Foreign Exchange Rate Differences Information of the General Financial Directorate Coordination Committees of the Chamber of Tax Advisors of the Czech Republic and the General Financial Directorate Ruling of the Court of Justice of the European Union regarding C 431/12 SC Rafinăria Steaua Română EU Legislation Upcoming deadline for the submission of grant applications Ruling of the Court of Justice of the European Union regarding C 431/12 SC Rafinăria Steaua Română EU Legislation Tax Liabilities in December 2013 and January 2014 The Court of Justice of the EU has decided in the Sabou case concerning the evidence proceedings in tax matters in another EU member state

11 Direct Taxes Real Estate Contributions from 1 January Cancellation of the Exemption of Real Estate Transfer Tax The Cayman Islands and UK Sign FATCA -type Agreement The current status is that real estate contributions, whether they be made separately or as a component of a business part, are exempt from real estate transfer tax if this real estate is contributed to the share capital of the business company (cooperative) and if the contributing entity will have held a share in this business company (cooperative) for more than five years from the date of the contribution till a disposal. Assuming that the relevant share is not expected to be sold, the contribution of real estate or a business part including the real estate is considered to be an appropriate alternative to a transformation since the contribution (likewise for the transformations) does not generate any additional tax implications and is less intensive in terms of time and cost as opposed to transformations. However, starting from 1 January 2014, the contribution of real estate or a business part including real estate will be given a notably less-favourable treatment relative to transformations since this real estate transfer will no longer be exempt from real estate acquisition tax (not even with certain conditions being fulfilled) but will be subject to 4% real estate acquisition tax. The tax base in respect of real estate contributions will be generally determined on the basis of the real estate value established by an expert for contribution purposes in the event that the value of the real estate for contribution purposes reflects debts that are taken over by the receiving entity as a part of the contribution; for the purposes of the real estate acquisition tax, these debts will not be taken into account. If you are considering making changes in your real estate portfolio or are planning to restructure your group whereby consideration would be given to making a real estate contribution or contribution of a business part, we recommend that the underlying planning reflect the fact and making the relevant changes through the end of On 5 November 2013 the Cayman Islands and the UK signed a FATCA -type intergovernmental agreement (IGA), preparing the way for Cayman to automatically share financial information with the UK government on UK taxpayers who hold Cayman Islands accounts. For information, FATCA is a US law designed to prevent tax evasion by US citizens using offshore banking facilities. It introduces reporting requirements for foreign financial institutions with respect to accounts held by US residents, irrespective of national privacy laws. Institutions which do not collect and report this information can be subject to a 30% 'withholding tax' on US source income and proceeds from the sale of US securities and further unfavourable provisions. Japan, Switzerland, Denmark, Ireland, Mexico, the UK, Germany, Norway and Spain have already signed bilateral agreements on FATCA co-operation with the US and negotiations with other sovereign states are ongoing. Furthermore, in September, the G20 supported the Organization for Economic Co-operation and Development (OECD) in presenting a single global standard for automatic information exchange by February 2014, and in finalising the technical implementation aspects by mid The UK government has stated that it will look to sign further Agreements with other jurisdictions as part of their commitment to combat tax evasion. The Crown Dependencies (Isle of Man, Guernsey and Jersey) and the British Overseas Territories (the Cayman Islands, the British Virgin Islands, Bermuda, Anguilla, Turks and Caicos Islands, Montserrat and Gibraltar) have all agreed to enter into automatic tax information exchange agreements with the UK. Additional collaboration of sovereign states in reporting tax relevant data of foreign citizens must be expected and further interstate or even multilateral agreements are going to improve future international tax compliance. 02

12 Direct Taxes Social Security and Health Insurance The New Year will bring significant changes in the area of employee participation in the social security system, as well as the related obligation to pay the respective contributions. The definition of an employee for the purposes of pension and sickness insurance will be based (similarly to health insurance) on the performance of an activity from which income referred to in the Income Tax Act as income from dependant activities arises. Thus, for payment of the contributions, it will no longer be important whether the employee and the company have entered into labour relations. In reality, this means that the company where the employee performs his work duties is obliged to register for paying the social security contributions. In cases of an International Hiring Out of Labour, the foreign company is obliged to terminate its registration and the payment of the Czech social security contributions as of 31 December The Czech company will have to register the hired employees as of 1 January and pay their contributions. If the foreign company continues to pay the social security contributions, the relevant authorities may sanction the Czech company for neglecting its obligations. Newly, the obligation to pay social security contributions may arise in situations that have so far been excluded from such payments. Companies providing any supplies to persons with whom they have not entered into labour relations are advised to check whether they will be obliged to pay the contributions from January. No changes occur for the purposes of health insurance. From the point of view of the Czech authorities, the Czech company remains responsible for paying the health insurance contributions in case of the International Hiring Out of Labour. The maximum basis of assessment for social security contributions changes slightly, as it remains based on the 48 multiple of the average salary, which amounts to CZK 1,245,216 in Contrarily, health insurance contributions remain unlimited and thus, employers are obliged to pay 9% of the salary for high-income employees, who then contribute by 4.5%. However, the employer s costs will be lowered by shortening the period for salary compensation in the event of sick leave or quarantine. Instead of the present period of 21 calendar days, employers will be obliged to compensate an employee s salary for only 14 days (excluding the first three days in set cases), after which sickness benefits will be paid by the Czech Social Security Administration. The sickness insurance rate paid by the employer remains 2.3%. These and other changes relating to employers will be discussed during the webcast (on-line seminar) on 4 December from 10 am to 11 am. More information are available here. Information of the General Financial Directorate on the Issue Involving Unrealised Foreign Exchange Rate Differences The General Financial Directorate published the information relating to unrealised exchange rate differences on its website. With effect from 1 January 2014, the provisions of Section 23 (1) of the Income Taxes Act will be amended. This new amendment clearly stipulates that the tax treatment of unrealised foreign exchange rate differences will be based directly on the accounting regulations, ie will be included in the income tax base. It thus responds to the ruling of the Supreme Administrative Court dating from May 2012 which determines that foreign exchange rate differences (included in profit or loss according to accounting regulations) are not taxable income in terms of income tax. The information of the General Financial Directorate additionally indicates what conditions should be met by the payers who decided to proceed according to the above conclusions of the Supreme Administrative Court in taxing unrealised foreign exchange rate differences (however, this treatment can be followed only for taxation periods starting in 2013). Starting from 1 January 2014, the treatment of including unrealised foreign exchange rate differences in the tax base will be applied according to the amended Income Taxes Act, ie it will be based on the accounting regulations. 03

13 Direct Taxes Indirect Taxes The Court of Justice of the EU has decided in the Sabou case concerning the evidence proceedings in tax matters in another EU member state Information of the General Financial Directorate In the reference for preliminary ruling made by the Supreme Administrative Court (the SAC ), an issue was discussed concerning the procedural rights of a tax entity as part of the cooperation and exchange of information between the tax administrations of EU member states. Based on its tax audit findings, the tax authority for Prague 10 additionally assessed the personal income tax for the year 2004 for the taxable person Jiří Sabou, who was a professional footballer. In his tax return for 2004, Jiří Sabou treated as tax deductible, inter alia, expenses incurred in several states with a view to his possible transfer to a football team in one of these states. After carrying out the tax proceedings, the tax administrator contested the credibility of these expenses, namely referring to the information from the tax administrations of France, the United Kingdom and Spain/the local teams concerned that claimed, when questioned, that none of the clubs the footballer had allegedly negotiated with knew Mr Sabou or his agent. In the course of the tax dispute that followed, the matter reached the SAC, which came to the conclusion that the dispute involved the interpretation of EU law. The SAC then presented to the Court of Justice of the EU the following reference for preliminary ruling aimed to interpret EU law regulating the administrative cooperation between member states in the area of tax: Does a tax entity have the right to be informed of the tax administrator s decision to file a request for data to be provided in accordance with the respective EU regulation? Does a tax entity have the right to take part in the formulation of such a request or, as the case may be, to participate in the interrogation of witnesses in the requested state? Is the requested tax administrator obliged to adhere to a certain minimal content of the reply? In response to these questions, the Court of Justice of the EU stated that EU law does not grant tax entities the right to be informed of a state s request for help addressed to another member state, or the right to participate in the formulation of such a request or in the interrogation of potential witnesses. The respective regulation does not provide for any conditions or special requirements as to the contents of such a request for information to be provided. This conclusion runs counter to the existing domestic decision-making practice of the SAC, under which not granting a tax entity the right to take part in the exchange of information and particularly to participate in the interrogation of witnesses in other countries would lead to an unacceptable narrowing of its procedural rights. With this decision, the Court of Justice of the EU has given more freedom to Czech tax administrators, who are now able to use information gained through a witness testimony done by a cross-border tax administration as evidence in carrying out domestic tax proceedings. In its most recent published information, the General Financial Directorate has described how it is possible to reduce the risk of guaranteeing VAT not paid by a supplier when the receivable is ceded to a factoring company (ie its payment is not made to the supplier s published account). While it is relatively difficult to meet all the requirements arising from the information, we believe that in practice Financial Administration will tolerate its broader application and will not require the VAT guarantee when factoring companies are involved. In addition, the information relates to, among other things, the issue of a guarantee upon payments made by payment cards or by conducting business in an association. The General Financial Directorate has additionally published anonymised responses to selected questions for the application of an exemption in respect of assistance services in the insurance sector. In our opinion, the attitude of the General Financial Directorate corresponds to both requirements of the VAT Act and the practice in the insurance sector. Financial Administration has also published information highlighting the new obligations effective from 2014 (electronic filing of VAT returns, VAT registration applications and announcement on the change in the payer s registration details). This change arises from the amendment to the VAT Act adopted in late 2012 which, effective 1 January 2014, introduces the obligations referred to above in respect of all corporate entities and individuals with turnover exceeding CZK 6 million per annum. 04

14 Indirect Taxes Coordination Committees of the Chamber of Tax Advisors of the Czech Republic and the General Financial Directorate Guarantee for an Unsettled Tax In accordance with the VAT Act, the recipient of a taxable supply provides a guarantee for an unpaid tax if information on whether the provider is an unreliable payer is published as of the date when the taxable supply is rendered. The presenters conclude that the obligation to provide a guarantee should not originate in the event of prepayments made before the taxable supply date, if the supplier was not an unreliable payer at the time of the payment. The contribution was completed with this conclusion. Commodity Futures The recently presented contribution relating to the use of VAT in commodity futures (issue of the nature of supplies and determination of the tax base when the futures are physically settled and in the event that the settlement is made only through the clearing centre of a stock exchange) has been postponed to the following coordination committee s meeting. Nevertheless, the presenters and the General Finance Directorate concur in the principal issues. Ruling of the Court of Justice of the European Union regarding C 431/12 SC Rafinăria Steaua Română In this ruling, the Court of Justice of the European Union has confirmed that the payer should be entitled to seek default interest on an excessive deduction refunded after the expiration of an adequately long period (without defining what the adequate period should be). Since the Czech legislation does not grant default interest, the only possible defence against the tax administrator s procedure of delaying the refund of deductions primarily involves referring to EU law. EU Legislation The Council Implementing Regulation (EU) No. 1042/2013 has finally been adopted. Starting from 1 January 2015, the regulation will set out detailed rules to be followed in determining the place of supply in telecommunication services, services of radio and television broadcasting and electronically provided service to final customers (B2C services). The regulation contains, among other things, practical examples of such services, who is obliged to declare VAT in which situations or defines the position of mediators of services in the telecommunication sector. The EU Commission has introduced a draft Directive that is expected to establish a single VAT return form starting from The draft is at the very beginning of the approval process. On Sections 56 and 56a of the VAT Act in the Wording Effective from 1 January 2014 The contribution interpreting the provision on the VAT exemption applicable to real estate transactions has also been postponed for another meeting; however, we have received information that the presenters had preliminary agreed in principal conclusions. Services Relating to Insurance and Reinsurance In the contribution relating to services in the insurance sector, the presenter provides arguments why it believes that certain technical/advisory/coordination/administrative services in insurance could be also exempt from VAT. The opinion of the General Finance Directorate has not been positive so far; however, the contribution has yet to be concluded. 05

15 Grants & Research and Development Upcoming deadline for the submission of grant applications Innovation Programme - Extension of the Deadline for Filing Grant Applications Significant Changes in Tax Deductions on Research and Development Effective from 2014 The receiving of grant applications for the ICT and Strategic Services programme will end on 17 December The subsidy is intended for companies developing software solutions and for the establishment / development of shared service centres or centres for the repair of high-tech products and technologies. In addition, 20 December 2013 is the final date for the submission of grant applications under the ALFA programme. The programme aims to support applied research and experimental development in the field of advanced technologies, materials and systems, energy resources, protection and creation of the environment and the sustainable development of transport. CzechInvest has extended the deadline for submitting grant applications under the Innovation programme. Receipt of registration applications and full applications has been extended until 16 December 2013, 13:00 and 14 February 2014, 13:00, respectively. On 5 November 2013, a Senate s Ordinance was published in the Collection of Laws which will be effective starting from 1 January 2014 if approved at the foundation meeting of the Czech Chamber of Deputies. It involves an amendment to the tax deduction on research and development. As a result, taxpayers could newly use the services acquired from a public university or research organisation, rental under a finance lease with a subsequent purchase of leased tangible assets relating to a research and development project or costs of intangible results of research and development acquired from a public university or research organisation for a research and development tax deduction. In addition, it would be possible to use 110% from an increase in costs as compared to the prior taxation period if the research and development costs increase year-on-year. 06

16 Appendix Tax Liabilities December 2013 January 2014 Monday 2 Income tax Payment of the tax withheld under a special tax rate for October 2013 Real estate tax Real estate tax duty for 2nd payment ( all tax payers with tax liability more than CZK 5,000) Tuesday 10 Excise duty Excise duty for October 2013 (except for the spirit excise duty). Friday 13 Intrastat The Intrastat statement for November Monday 16 Income tax Quarterly or semi-annually advances are due. Road tax Advance for October and November 2013, event. maturity of one tax advance (minimum of 70% annual tax liability) in case of taxpayer, if he is the operator of trucks including tractors, trucks, trailers and semi- -trailers, trucks with MPW of more than 12 tons, which according to 6 paragraph 10 of the Road Tax Act the road tax is reduced by 48%. Friday 20 Income tax Monthly deducted advances for personal income tax from dependent activities and fringe benefits. Insurance Submission of a report to the advances on the pension savings for November 2013 and maturity of advances on pension savings. Friday 27 Excise duty Excise duty for November 2013 (only the spirit excise duty). Tax return to claim a refund of the excise duty on heating oils, green oil, and other technical petrol for November 2013 (if the title exists). Excise duty for November 2013 (only the spirit excise duty). Value added tax Environmental taxes Tax return and tax for November EC sales lists for November Extracts of the records for November Tax return and tax from gas, solid fuel, and electricity for November Tuesday 31 Income tax Payment of the tax withheld under a special tax rate for November Thursday 9 Excise duty Excise duty for November 2013 (except for the spirit excise duty) Friday 17 Intrastat The Intrastat statement for December 2013 Tuesday 21 Income tax Monthly deducted advances for personal income tax from dependent activities and fringe benefits Friday 24 Excise duty Excise duty for November 2013 (only the spirit excise duty) Monday 27 Excise duty Tax return for December 2013 Value added tax Environmental taxes Tax return to claim a refund of the excise duty on heating oils, green oil, and other technical petrol for December 2013 (if the title exists) Tax return and tax for the fourth quarter and for December 2013 Extract of the records for the fourth quarter and for December 2013 EC sales lists for the fourth quarter and for December 2013 Tax return and tax from gas, solid fuel, and electricity for December 2013 Friday 31 Income tax Payment of the tax withheld under a special tax rate for December 2013 Real estate Tax return (full) or partial tax return for 2014 Biofuel Return according to Section 19 (9) of Act No. 201/2012 Coll Road tax Tax return and tax for 2013 Source: