Tax news. Tax news. January Deloitte Czech Republic

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1 January transactions starting from from February Amendment to the VAT Act May Tax news Deloitte Czech Republic

2 January transactions starting from from February Amendment to the VAT Act May What impact will the reporting of financial The Basis of the Common Standard for the Reporting of Financial Accounts The Common Reporting Standard (the CRS ) is a global platform that will facilitate an automatic exchange of information with the aim of preventing tax evasion. In the Czech Republic, the CRS will be governed by the Amendment to Act No. 164/2013 Coll., on international cooperation in tax administration, as amended, the wording of which is currently debated by the Chamber of Deputies. The basic principle of the CRS involves acquiring information about the accounts of the tax non-residents - a physical person or entity and sending the information to relevant countries of residence via local financial institutions and tax administrations. The CRS primarily applies to deposit accounts (current, savings or term accounts), custodial accounts and insurance contracts with capital value (life insurance). The CRS is a global concept in which over 50 countries worldwide will participate as of 1 January, including the entire EU. Other countries are to join in the CRS gradually over the coming years. What are the Implications for the Financial Institutions Clients? The CRS adopts a different approach to the accounts opened by 31 December 2015 ( pre-existing accounts ) and those opened after this date ( new accounts ). If the physical person or entity owns a pre-existing account in the Czech Republic, the financial institution will review certain details received earlier (such as the permanent residence address) and based on this review process, the account owner may be identified as a person that is to be reported to the tax administrator (in other words, evidence suggests that the account owner s country of residence is other than the Czech Republic). Only in the event that the Czech Republic is confirmed as the country of residence are the required details not reported to the tax administrator. If the physical person or entity opens a new account, they are to report their country of residence upon the account opening process. This implies that, as part of the verification process, financial institutions will verify tax residence again and if the client of a Czech financial institution is identified as a foreign tax resident, they will be, in general, liable to be reported to the tax administrator who will share this information with relevant countries that participate in the CRS. A similar approach will be adopted by financial institutions in the other countries that participate in the CRS. That is to say, if a Czech tax resident opens (or had previously opened) a bank account in one of the CRS countries and is identified, in the respective country, as a tax non-resident, the information on their account will be subsequently reported to the local tax administration and, eventually, to the Czech tax administrator. The details that are to be reported (and subsequently made available to the tax administrator) are namely the following: the account owner s ID, their country of tax residence, the account number, the balance as of the last day of the relevant calendar year and the gross interest amount or other income paid or credited to the account in the given year. 2

3 January transactions starting from from February Amendment to the VAT Act May As part of reporting, information on the actual owner of the entity may be reported this may occur if the entity in question is a passive entity. If this is the case, the financial institution will report, in the manner indicated and to the extent given, not only the entity that is a foreign tax resident in itself, but it will also report the passive entities, the actual owners of which are not the tax residents of the country in question. One of the examples of passive entities is holding companies that generate most of their revenues from dividends or interest. This means that if, for example, a Czech physical person owns a holding company of this sort (ie it is its actual owner) in Luxembourg, the Luxembourgish bank that maintains the holding company s account will be obliged to report the account and the information about it regarding the actual owner of the entity to the local tax administrator that will, in turn, pass the information on to the Czech tax administrator. The first round of CRS reporting will take place by 30 June 2017 and will apply to the year. 3

4 January transactions starting from from February Amendment to the VAT Act May Automatic Exchange of Information The upcoming automatic exchange of information on income will provide the tax authorities with additional tools for reviewing tax compliance. Even the current instruments give rise to situations where the Czech tax authorities receive notification on a tax payer s income, for example, from the French, Canadian, US or Korean inland revenue services. The tax payer then must clarify why he or she failed to report the income in his or her Czech tax return or correct the tax return and pay an additional tax. Frequently-omitted income includes bank account interest income (often owing to its minimal amount; however, the law does not recognise any non-taxable minimum of interest income), foreign dividends, rental proceeds as well as profit shares from mutual funds or foreign employment income. It is definitely worth declaring all income that should be taxed; failing to do so may result in a significant additional tax assessment and difficulty in clarifying the situation to the tax authorities. 4

5 January The most significant VAT change is here two thirds of companies rely on the transactions starting from from February Amendment to the VAT Act May Less than a month before the introduction of the local purchases/sales list, there is a relatively high percentage of companies that are not quite ready yet for the introduction of one of the most significant changes as regards communication with taxation administration. One of the reasons behind this lack of preparedness is the fact that the testing environment for electronic communication with the taxation authority has been available to the companies only since early December. On 4 December 2015, the financial administration published the final version of instructions on completing the local purchases/sales list. The XML file definition was also fine-tuned in December. Almost two thirds (64%) of the companies surveyed in the Czech Republic rely on their existing to assist them in communicating with taxation authorities with regard to local purchases/ sales reporting. Less than one fifth (17%) of the companies develop their own software and only 13% of the companies plan to purchase a program that would help them fill in the local purchases/sales list. Only 7% of the companies plan to report data using the portal of the taxation administration. Such are the results of Deloitte s survey carried out among 244 entrepreneurs and companies during November 2015 The local purchases/sales list may become a very effective instrument that, if used correctly, could result in a far more efficient identification of fraud in the area of VAT deductions. The results of our annual survey focused on tax certainty show that the area of VAT has been in the long term one of the key areas to which taxation authorities have paid a great deal of attention. We believe that the introduction of the local purchases/sales list will eventually lead to a lower number of tax inspections for which less time will be required. Simultaneously, taxation administration would have sufficient documentation to suppress tax evasions and thus ensure a competitive environment. What is the local purchases/sales list? The primary objective of local purchases/sales reporting is to combat VAT fraud. This reporting requirement has been set out in the VAT Act since December 2014; however, its effectiveness has been deferred. Tax payers and tax administration have had the entire year 2015 to make appropriate preparations for complying with the reporting requirement. The tax administration has been publishing information relating to the new form, guidance and XML files on an ongoing basis since May Starting from 1 January, all VAT payers will have an obligation to report in detail individual transactions in the local purchases/sales list of VAT records. The tax administrator will have a very efficient instrument for the tax inspection, as it will have plenty of information in electronic form. The newly formed IT analytic centre will have the task of analysing this information on a continuous basis. As a result, the tax administrator may, for example, compare the trends, compare the data and find variances in the reports of the particular payer as compared to similar companies and identify the entities for a better focus of tax inspections. The reporting of data in the local purchases/sales report has significant requirements for their quality in accounting systems. This primarily includes the tax ID of a business partner, reference number of a tax document, date of the tax liability, code of the mode of supplies under the reverse charge, etc Let us summarise the key changes taking place in December: Tax documents worth exactly CZK 10,000 these documents will be reported in aggregated sections together with documents worth less than CZK 10,000. Please note that in assessing the value of the document, the total value of the invoice is newly taken into account, ie including VAT, not only the value of taxable supplies stated in the document. 5

6 January transactions starting from from February Amendment to the VAT Act May With regard to local instalment schedules, it is necessary to take into account the total amount of the instalment schedule, ie not the amount of the individual instalment, in assessing whether the relevant document should be reported in detail or in aggregate. If the tax payer has a data box, the data box will be the preferred option for the VAT reporting, irrespective of whether the tax payer will also include its address in the local purchases/sale list form. With regard to a notice from the tax authority ( výzva ), the tax payer will have the possibility to use Rychlá odpověď na výzvu (in English: quick reply to the notice ) with the option: Potvrzuji správnost naposledy podaného kontrolního hlášení (KH) (in English: I confirm the correctness of the most recently filed local purchases/sales list ). In addition to the changes from December, attention should be given to checking the correctness of the following information in preparing the local purchases/sale list: Correct VAT number in the Vendor and Customer master data, it is important to have a correct VAT number and to perform regular checks of the validity of the number in on-line registers and VIES. Newly, it is required to have the tax number for all taxable persons although they are not yet VAT payers (for example sole traders) VAT dates in accounting for received tax documents, it is necessary to record the date of taxable supply ( DUZP )/the date of the obligation to declare tax ( DPPD ). In other words, the tax administrator will require that you determine in which tax return of your supplier the relevant tax document is to be found for cross-check purposes. The stated date is not typically entered in posting documents. Document evidence number in accounting for received tax documents it is necessary to type up the document evidence number as accurately as possible as stated in the document. We note that the evidence number of the tax document can differ from the variable symbol, ie including all alphanumeric signs. You run the risk of being exposed to an unnecessary tax inspection as a result of reporting inaccuracies. The tax administrator has not yet indicated what level of inaccuracy will be tolerable Batch accounting in accounting for business travels, the common practice is to post one aggregate document. In a situation where there would be a document that needs to be reported separately in the Local Sales/ Purchases List, it will be necessary to post it individually so as not to lose the information on the tax document. A similar problem occurs where a different system processes tax documents and posts one aggregate batch of the documents to the main accounting system, for example, on a daily basis Self-billing - in reporting documents issued under self-billing, the Local Sales/Purchases List needs to include information from the documents that were issued by your customer on your behalf The above information indicates that the introduction of the Local Sales/ Purchases List will have a significant impact on the entire VAT agenda not only in terms of the accounting system, but primarily in relation to accounting procedures, processes and methodology. It is not possible to rely on the fact that the supplier of the accounting system will fully address local sales/purchases reporting through the installation of a new version of the accounting system. For more information on the local sales/purchases list and the possibility of preparing for its filing refer to 6 We have prepared a tool, which covers the VAT agenda in full scope, including the Local Sales/Purchases List. More on

7 January Local Sales and Purchases Reporting transactions starting from from February Amendment to the VAT Act May In the first week of December, the General Financial Directorate issued final instructions for the completion of local sales and purchases lists ( kontrolní hlášení ). Three weeks before the end of the year, the taxpayers and software companies received the necessary instructions on how to deal with the information recorded in ERP systems starting from 1 January. However, certain requirements of the General Financial Directorate do not comply with the data processing procedures; for this reason, it is likely to be demanding to modify the accounting procedures and ERP systems at short notice. In addition, it appears that certain parts of the instructions are unclear and allow for various interpretations. Various groups of deputies (through a proposed amendment to the act) and senators (through a constitutional complaint) have been attempting to postpone or even cancel the obligation to file the local sales and purchases list. We believe that these efforts have a small chance of success. 7

8 January Instructions of the General Financial Directorate on the VAT treatment of real estate transactions starting from transactions starting from from February Amendment to the VAT Act May Starting from, the VAT Act will contain an entirely reworked test to determine whether it is necessary to tax the transfer of the building or land and when they can be exempt from tax. For this purpose, it introduces new terms such as significant modification to a building and administrative act. The General Financial Directorate prepared another version of the methodological guidance designed to explain and clarify the procedures for the correct application of the VAT Act. After comments are made by the VAT section of the Czech Chamber of Tax Advisors, this version will be further adjusted; as a result it is unlikely that the final version of the guidance will be issued this year. The treatment of prepayments received in 2015 (or in prior years) for transfers of land, which will be treated as land for construction starting from, remains unclear. 8

9 January transactions starting from from February Amendment to the VAT Act May Another extension of VAT reverse-charging from February The Finance Ministry has introduced another proposal for changing the rules for the application of the reverse charge mechanism. Among other things, it has proposed introducing the reverse charge mechanism to supplies of electricity and gas among dealers. In addition, the possibility of applying the reverse charge voluntarily upon supplies of goods worth less than CZK 100 thousand, which presently only because of the limit not being exceeded need to be mandatorily invoiced under the normal VAT regime (cereals, metals, etc.), is expected to be put in place. The changes are scheduled to take place as of 1 February. 9

10 January transactions starting from from February Amendment to the VAT Act May Amendment to the VAT Act May The Czech Government has been presented with a proposed amendment to the VAT Act (extension of the reverse charge mechanism to the supply of goods that are supplied in the Czech Republic by a person non-residing in the Czech Republic and the customer is a taxpayer; cancellation of the possibility of the tax exemption for the supply of the goods in free zones; change on the local allegiance of persons registered for Czech VAT who do not reside in the Czech Republic from the Territorial Office for Prague 1 to the Taxation Authority for the Moravian and Silesian Region). This version already contains transitory provisions that clarify how the financial administration will treat a possible deregistration (or change in the local allegiance) of taxpayers non-resident in the Czech Republic. 10

11 January transactions starting from from February Amendment to the VAT Act May Amendment to the Foreign Nationals On 18 December 2015, the amendment to the Asylum Act, the Foreign Nationals, the Act on the Temporary Protection of Foreign Nationals and other related legislation will come into effect. The purpose of the amendment is namely to transpose the EU asylum legislation, whereby the status of an asylum-seeker in the immigration system and asylum proceedings is specified. In this article, we focus on the main changes introduced by the amendment with respect to the Foreign Nationals. The most important change that will affect most foreign nationals residing in the territory of the Czech Republic is the new regulation of applications for long-term residence permits and the extension of their validity. Foreigners are obliged to file applications for long-term residence permits or for the extension of their validity prior to the expiration of their visa for a stay of over 90 days or of their long-term residence permit; however, these must be filed 120 days prior to the expiration of their validity at the earliest. Applications for the extension of employee card validity must be filed by foreigners no earlier than 120 days and no later than 30 days prior to the date on which the validity of the card expires. Guidance is also newly provided for applications for different-purpose long-term residence permits. Foreigners are obliged to file the application no later than prior to the date on which the validity of their existing longterm residence permit expires. A significant change applies to the regulation of the issuance of bridging visas, which are long-term visas that enable foreign nationals to travel outside of the Czech Republic after the validity of their existing residence permit has expired, provided that they file an application for its extension within the deadline stipulated by law. The visa will be newly issued after the validity of the existing residence permit has expired, and it will not be possible to obtain it if the foreigner applies for their first residence permit in the territory or for a change of the purpose of the existing residence permit. Changes will also affect the manner in which sufficient income is substantiated as part of the application for long-term residence permits. If required, foreign nationals are also newly obliged to submit a statement on the full release of the tax authority from the non-disclosure obligation for the purpose of verifying the family s total monthly income. If the foreigner accompanies the application with a proof of a family member s income, they are also obliged to submit, upon request, a statement on the full release of the tax authority from the non-disclosure obligation that is issued by said family member. 11

12 January transactions starting from from February Amendment to the VAT Act May With respect to the regulation of employee cards, it will be newly possible to issue employee cards to foreigners who are residing in the territory based on a long-term residence permit. In addition, the processes of changing employers and extending the employee card validity will be simplified. If the employee card holder applies for approval of a change of employer or staff level 120 days prior to the expiry of employee card s validity and if the foreigner s employment exceeds the validity of the employee card, the application is also regarded as an application for the extension of employee card validity. Should this be the case, the foreigner will be obliged to substantiate the requirements set out with respect to the application for extending employee card validity, unless they inform the Ministry in writing that they do not wish to apply for the extension of employee card validity. The amendment also extends the maximum validity of the visa for a stay of over 90 days to one year and unifies the approach to visa validity for stays of over 90 days and the period during which it is possible to reside in the territory, based on the visa given through which it is newly possible to extend its validity. Deloitte s recommendation: First and foremost, it is necessary to ensure that applications for extending residence permits are filed in time. 12

13 January Penalty as a punishment: pursuant to the ruling of the Supreme Administrative Court transactions starting from from February Amendment to the VAT Act May It will be likely impossible in the future to prosecute persons for potential tax evasion if they were assessed additional tax and penalty payments as a result of a completed tax inspection. In its recent ruling the Supreme Administrative Court has stated that a penalty imposed in line with the Tax Code is, in substance, a criminal sanction similarly as, for example, a criminal monetary penalty or imprisonment. While the Supreme Administrative Court has not made a direct comment in this respect, one of the possible implications of the ruling is that, taking into account the ban on sanctioning one action twice, it will be impossible to prosecute persons that were imposed a penalty on an additionally-assessed tax as part of tax proceedings. In the relevant ruling, the Supreme Administrative Court (SAC) specifically assessed the case of a company which, as part of an additional tax assessment (disallowance of tax losses), was imposed a penalty under the old legal regulation, which was five times higher than the penalty under the new legal regulation but without the possibility of waiving such imposed penalty which the old legal regulation contained. In this regard, the company sought the application of the principle common in criminal law under which the more recent legal regulation is applied if is more beneficial for the relevant person. The same conclusion reached by the European Court for Human Rights The SAC s conclusion that a penalty is a punishment is not surprising. The European Court for Human Rights has reached the same conclusion on a number of occasions whereby the imposition of a tax penalty amounts to a criminal charge and therefore needs to be seen as a criminal sanction. Any subsequent condemnation for the crime of tax evasion is thus not admissible in view of the ban on sanctioning one action twice. Abolishing the penalty? The stated ruling may considerably change the current practice where a penalty is primarily imposed and subsequently a criminal prosecution for tax evasion is initiated with regard to the most serious cases. The new practice would be that once taxable persons receive a penalty from the tax administrator, it will no longer be possible to criminally prosecute them in the relevant matter. The first verdict in this regard has been issued by the District Court for Prague 4. This will apply for both the individuals and the companies with exception to the statutory body of the company; the penalty will be imposed directly to the company while the liability for tax evasion will rest predominantly with the members of its statutory body or employees. 13 In this context, the SAC had to address the issue whether it is admissible to treat the penalty as a criminal sanction, the imposition of which would follow the criminal law principles. The SAC stated that, while a tax penalty is not classified and systematically categorised as part of criminal law but rather tax law, in the Czech law system, imposing the tax penalty has a penal nature since the purpose is not to seek compensation for evaded tax but to inflict a severe punishment on the relevant person with the objective of discouraging him/her from engaging in similar activities in the future. Legislative changes can be expected in response to the SAC s ruling. The options available include either abolishing or revising the conditions for imposing a penalty or amending criminal and tax regulations to the effect that penalties will be imposed only in respect of less serious cases while criminal prosecution will be initiated with regard to the most serious cases.

14 January Short News transactions starting from from February Amendment to the VAT Act May European Union The European Parliament has approved a report from the TAXE committee calling for the implementation of mandatory CbC reporting and a compulsory EU-wide common consolidated corporate tax base (CCCTB) and has asked the European Commission to table the necessary measures. European Commission state aid decisions and investigations update on recent developments: Starbucks the Dutch cabinet is appealing the Commission s decision based on its opinion that the Commission has not convincingly demonstrated that the Dutch Tax Authority deviated from the statutory provisions and hence it follows that there is no state aid involved. Fiat Luxembourg s Ministry of Finance has announced that it will appeal the decision, arguing that the Commission has put into jeopardy the principle of legal certainty. McDonalds the Commission has opened a formal investigation into a tax ruling granted by Luxembourg. The Commission s preliminary view is that the ruling, which resulted in McDonalds paying no tax on their European royalties either in Luxembourg or in the US, may have been in breach of EU state aid rules. France - amended finance bill for 2015 has been updated to include an amendment that would revise the tax group consolidation regime to comply with the decision issued by the Court of Justice of the European Union in the Groupe Steria case in September. The scope of the proposal is more limited than had been anticipated, since the benefit it would introduce would be available only with respect to dividends received by French companies that are members of a tax consolidated group from other French companies within the same tax group or from qualifying 95%-owned EU/European Economic Area subsidiaries. UK announces change in interpretation of residence article in 16 tax treaties - it now takes the view that the better interpretation of the company residence tie-breaker in the 16 double tax treaties is that the clause is included to decide where a company is to be treated as resident for the purposes of the relevant treaty. Previously, the view was that a dualresident company was not a resident of either jurisdiction under the terms of the provisions and hence outside the scope of the treaties. UK issues updated diverted profits tax guidance it provides added explanations on and new examples of several key concepts, as well as more detail regarding procedural and administrative issues. UK corporation tax instalment payments for very large companies - regulations, technical guidance and explanatory notes on new rules requiring earlier payments from companies whose annual taxable profits exceed 20 million has been issued. Other countries Hong Kong the Secretary for Financial Services and the Treasury has indicated that Hong Kong is working to implement automatic exchange of tax information by the end of 2018 and considering legislation to implement BEPS reforms. Australia - bills addressing three major areas were introduced into the House of Representatives concerned with: a foreign resident capital gains tax (CGT) withholding tax regime; the CGT treatment of earnout rights and the introduction of Attribution Managed Investment Trust rules. 14

15 January Tax liabilities January transactions starting from from February Amendment to the VAT Act May Monday 11 Consumption tax tax maturity for November 2015 (except the consumption tax on alcohol) Friday 15 Intrastat the Intrastat statement for December 2015, paper version Tuesday 19 Intrastat the Intrastat statement for December 2015, digital version Wednesday 20 Income tax monthly payment of deducted advance payments on personal income tax from employment Premium submission of statement for advance payment of premium on pension savings for December 2015 and maturity of advance for pension savings Monday 25 Value added tax Energy taxes Consumption tax tax return and tax for December recapitulative statement for December statement from register for December tax return and tax maturity on gas, solid fuels and electricity for December 2015 tax maturity for November 2015 (only the consumption tax on alcohol) tax return for December 2015 tax return for claiming of refund of consumption tax for example on fuel oil and other petrol (benzine) for December 2015 (if applicable) 15 Source:

16 January February transactions starting from from February Amendment to the VAT Act May Monday 1 Biofuel return according to Section 19 (9) of Act No. 201/2012 Coll. Road tax tax return and tax for 2015 Real Estate tax tax return (full) or partial tax return for Income tax payment of withholding tax according to the special rate for January Monday 8 Consumption tax tax maturity for December 2015 (except the consumption tax on alcohol) Friday 12 Intrastat the Intrastat statement for January 2015, paper version Monday 15 Income tax Taxpayers to sign annual tax settlement on employment and fringe benefits for 206 tax year and the annual settlement advance tax and tax relief for 2015 tax year. Thursday Value added tax Energy taxes Consumption tax tax return and tax for January recapitulative statement for January control statement for January tax return and tax maturity on gas, solid fuels and electricity for January tax return for January tax return for claiming of refund of consumption tax for example on fuel oil and other petrol (benzine) for January (if applicable) Source: application for the annual tax settlement Tuesday 16 Intrastat the Intrastat statement for January, electronic version Monday 22 Income tax monthly payment of deducted advance payments on personal income tax from employment Wednesday 24 Consumption tax tax maturity for December 2015 (only the consumption tax on alcohol)

17 January transactions starting from from February Amendment to the VAT Act May Contacts If you have any questions concerning the items in this publication, please contact your regular Deloitte Tax contact or one of the following experts: Jaroslav Škvrna Zbyněk Brtinský Miroslav Svoboda Marek Romancov LaDana Edwards Tomas Seidl Adham Hafoudh Radka Mašková Local Sales / Purchases Report Jaroslav Beneš jbenes@deloittece.com Subscribe to dreport and other newsletters and invitations here Deloitte Advisory s.r.o. Nile House Karolinská 654/ Prague 8 - Karlín Czech Republic Tel.: Fax: Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee ( DTTL ), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as Deloitte Global ) does not provide services to clients. Please see for a more detailed description of DTTL and its member firms. Deloitte provides audit, tax, consulting, financial advisory and legal services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries and territories, 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 more than 200,000 professionals are committed to becoming the standard of excellence Deloitte Czech Republic