The Selected Aspects of Tax Policy in the Field of Indirect Taxes in the Czech Republic and in the International Scale

The Selected Aspects of Tax Policy in the Field of Indirect Taxes in the Czech Republic and in the International Scale LIBUŠE SVOBODOVÁ, EVA HAMPLOVÁ, KATEŘINA PROVAZNÍKOVÁ Department of Economics University of Hradec Králové Rokitanského 62, 500 03, Hradec Králové CZECH REPUBLIC libuse.svobodova@uhk.cz, eva.hamplova@uhk.cz, katerina.provaznikova@uhk.cz Abstract: - In the submitted article the authors will focus on the development of VAT both in the world and in the Czech Republic. In the first part there will be presented the information about a gradual implementation of VAT in the world and the current amount of VAT in EU countries. In the second part concerning the Czech Republic the basic development of VAT rates will be introduced as well as the development of VAT collection and the analysis of its structure. It will be dealt with in connection with the branch, the applied rate and the selected macroeconomic ratios such as GDP, the rate of inflation or the final consumption expenditure. The scrutinized issues are the constituents of a wider context of the project called The Causalities of Tax Incidence that is being worked on within the frame of specific research at the Faculty of Informatics and Management, University of Hradec Králové. The aim of this project is to identify the key factors of tax incidence and their extend according to particular income groups. The project that is being done by our researching team is described in a separate chapter of this article. Key-Words: Development, Indirect Taxes, Questionnaire investigation, Tax Incidence, Value Added Tax 1 Introduction Developed economies should base on the fact that taxes are not just the source of income into the state budget but they also have important social and other functions. By means of tax collecting the desirable behaviour of consumers can be stimulated. If the tax imposition is too big, it can be expected that people will not be able to get a house, to bring up children, they will reduce their consumption and economies will get worse. Therefore it is important to find the optimal amount of taxation, so that people could cope with paying taxes and did not aim towards tax evasion. A bigger consumption can bring positive results. We can expect that more money will get into the economy, which will improve macroeconomic ratios, business environment and thanks to that businesses can increase their productivity. They will sell more products or provide more services. 1 The majority of tax burden analyses is focused on the incidence of direct taxes, but neither in tax theory nor in practice the impact and comparison of the rate change of indirect tax on respective income groups of population is sufficiently analyzed. The typical tax of this kind is the value added tax. For this reason the research team in the Department of Manuscript received July 19, 12. E. Hamplová, L. Svobodová are with the Department of Economics, K. Provazníková is with the Department of Applied Linguistics Economics at FIM UHK came up with the idea of the project "The Causalities of Tax Incidence", which they have been working on since 11. Value added tax as a classic representative of an indirect tax burdens in the final result the end-user, so the citizens. However its impact is often hidden to the general public in the methodology of its functioning as an indirect tax i.e. the taxpayer is not obliged to pay this tax personally at the appropriate revenue authority, instead this will be done by the respective VAT registered company. Hence this tax is becoming not only an important tool of the state budget income but also an important political tool, although its use in a political fight is more complicated due to the fact that the general public is often not able to perceive the benefits and negatives resulting from the change of the tax rate, unlike for example the income tax of natural persons. 2 Procedure of project solving Economic subjects (mainly households) are not able to determine precisely how the change of the tax rate will influence their standard of living as a payer only perceives the final price of goods and services often without being able to realize how much from the total price represents the value added tax. ISBN: 978-1-61804-124-1 293

A detailed market research together with the analysis and critical assessment of accessible materials will enable to identify the way how different income groups of the population divide their expenses in the consumer basket. Higher income groups prefer luxury goods (both dispensable and essential) to second-rate goods. On the other hand, lower income groups of the population are often dependent just on essential goods regardless the quality. Individual items of the consumer basket are burdened with the value added tax but this rate can be a standard one for some of the items, a reduced one for others and some items can be exceptionally quite free of this tax. The analysis of this initial state will consequently enable to identify key deciding factors influencing the tax incidence of individual income groups of the population. Afterwards it will be possible to form a questionnaire whose quality processing will be checked out in a pilot sample. This would enable to verify the hypothesis about the influence of the identified factors. From February to June 12 primarily secondary sources were used within the framework of the project. The secondary sources are represented by professional literature, information collected from professional press, legal regulations, websites, databases, discussions or previous participations in professional seminars and conferences relating to the chosen subject. Then it was necessary to select, classify and update accessible relevant information from the numerous published materials that would give the basic knowledge of value added tax, of possible impact of this tax on consumers, but also of other macroeconomic data and other information and statistics in the Czech Republic as well as abroad. From the given materials, knowledge and the researchers experience the pilot questionnaire was created during May and June. This questionnaire will be used for pilot questioning which will be going on in July and August. We expect to get back 330 filled-in questionnaires. The results will be processed in the following months and published in further professional articles. 3 VAT in the world and in the Czech Republic Although the term Value Added Tax is generally known, let us define it at the start. The value added tax, abbreviated as VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services bought and sold for use or consumption in the EU; goods sold for export or services sold to customers abroad are normally not subject to value-added tax. VAT is charged as a percentage of price, meaning that the actual tax burden is visible at each stage in the production and distribution chain [5]. Next we will focus on the development of VAT in the world and then also in the Czech Republic. 3.1 VAT in the world In the history Value Added Tax first appeared in one of the member countries of OECD - in Denmark. It introduced this indirect tax on 3 rd July 1967. The tax rate was assessed at 10% until 31 st March as a flat tax rate. It has grown in the course of time up to the present %. In 1968 the VAT was introduced in Germany and France and the year after in Sweden and the Netherlands [6]. In the Czech Republic the VAT was introduced as late as 1 st January 1993. Until that time turnover tax had been used. The following years of the tax implementation and the selected countries are stated in the table number 1. Table 1: Implementation of VAT in the world (selected countries) Country Year Denmark 1967 France, Germany 1968 Netherlands, Sweden 1969 Luxemburg, Norway 1970 Belgium 1971 Ireland 1972 Austria, Italy, United Kingdom 1973 Chile 1975 Israel 1976 Korea 1977 Mexico 1980 Turkey 1985 New Zealand, Spain, Portugal, Greece 1986 Hungary 1988 Iceland, Japan 1989 Canada, Estonia 1991 Czech Republic 1993 Poland, Slovak Republic 1993 Finland 1994 Switzerland 1995 Slovenia 1999 Australia 00 Source: [9] ISBN: 978-1-61804-124-1 294

The European Union tries to exercise the principles of a single internal market and free movement of capital in the tax policy. However, the European community realizes that this is not possible without a unified adjustment of VAT. Therefore VAT as the only tax is subject to harmonization. VAT harmonization is based on the foundation agreement of the EC and the final unification of this system was completed on 1 st January 1973. But to assess a unified tax for all the member countries is not possible. For this reason national regulations were gradually unified concerning this tax to support the development of European economy. The object of harmonization of this tax is not only its adjustment but also its administration. The unification of this tax is primarily going on by means of directives, so that the member countries could define the form of the final legal regulation. Till 06 this tax was regulated by the so called Sixth Directive n. 77/388/EEC which was replaced by so called Recast n. 0112/EC about the common system of the value added tax. The most significant change that was brought by Recast is assessing the minimum amount of VAT standard rate at 15% and the reduced rate at 5%. The maximum amount however was not determined [7]. The taxes had to be adjusted by 31 st December 10 at the latest. The VAT revenue is usually the biggest income of the Treasury. At the same time, when indirect taxes are increased, the business environment does not deteriorate to such an extend as when the direct taxes grow. Countries are aware of the fact that taxpayers will pay indirect taxes when making a purchase and VAT registered companies will also pay them, while both natural and legal persons tend not to pay direct taxes and thus avoid tax liability. In the last five years most EU member countries have seen an increase in indirect taxes, both the VAT and the excise tax. In the following table we can see the tax rates of particular EU member states from 08 to 12, towards 1 st January 12. First the reduced rates and then standard rates of VAT are stated. It is evident from the table n.2 that 7 EU countries have not changed the tax rate during the period of the last 5 years. The lowest tax burden is exercised in Cyprus (15% of standard rate), the highest in Denmark (% of standard rate). In Cyprus, Belgium and Sweden two types of the reduced rate are exercised, which is also true for some countries from the table n.3. Table 2: VAT rates development in EU member countries (in %). The situation is indicated towards 1 st January of the respective year. Country 08 09 10 11 12 Cyprus 5/ 8; 5/ 8; 5/ 8; 5/ 8; 5/ 8; 15 15 15 15 15 Netherlands 6; 19 6; 19 6; 19 6; 19 6; 19 Germany 7; 19 7; 19 7; 19 7; 19 7; 19 Slovenia 8.5; 8.5; 8.5; 8.5; 8.5; Belgium Sweden Denmark Source: [4] It is evident from the table n. 3 that there was a change of the VAT rate in countries of the European Union. Luxemburg, Malta, France, Bulgaria, Austria and Italy changed the VAT rate as late as in the last year of the monitored period. If there is a change of VAT rate, it is an increase in a standard rate ranging between 1 3 %, exceptionally 4 5 % in Latvia, Greece and Romania. Among the EU countries Hungary shows the most considerable growth within five years, that is of 7%. Another change manifests itself by the increase in the reduced rate. The most substantial changes 5-7% were in the Czech Republic or Latvia. 13 countries of the European Union have two reduced rates declared in the system of VAT. Spain, Austria and Italy have unified the system for the year 12 and two reduced rates changed into one. While Italy and Spain have chosen a higher rate of the reduced tax, Austria has kept the lower rate of the reduced tax. On the other hand, Malta, Romania and Hungary have divided the original one reduced rate into two. In comparison with the other states of the East European region of the EU the Czech standard rate of VAT is on the lower level as well as the Slovak and Bulgarian, that is %. On the contrary, a higher rate of VAT is declared in Poland, Romania and Hungary. In order to be complete the average standard rate of VAT for all the EU countries is added at the end of the table n.3. ISBN: 978-1-61804-124-1 295

Table 3: VAT rates development in EU member countries (in %). The situation is indicated towards 1 st January of the respective year. Country 08 09 10 11 12 Luxembourg 3/ 15 3/ 15 3/ 15 3/ 15 15 Malta 5; 18 5; 18 5; 18 5; 18 5/ 7; 18 Spain 4/ 7; 16 4/ 7; 16 4/ 7; 16 4/ 8; 18 8; 18 France 2.1/ 5.5; 19.6 2.1/ 5.5; 19.6 2.1/ 5.5; 19.6 2.1/ 5.5; 19.6 5.5/ 7; 19.6 United Kingdom 5; 17.5 5; 15 5; 17.5 5; 5; Bulgaria 7; 7; 7; 7; 9; Estonia 5; 18 5; 18 9; 9; 9; Austria 10/ 10/ 10/ 10/ 10; Slovak Republic 10; 19 10; 19 10; 19 10; 10; Czech Republic 9; 19 9; 19 10; 10; 14; Latvia 5/ 9; 18 5/ 9; 19 5/ 9; 5/ 9; 5/ 9; Italy 4/ 10; 4/ 10; 4/ 10; 4/ 10; 10; Latvia 5; 18 10; 10; 22 22 Greece 4.5/9; 19 4.5/9; 19 4.5/9; 19 6.5/ 13; 23 6.5/ 13; 23 Ireland 4.8/ 13.5; 4.8/13.5;.5 4.8/ 13.5; 4.8/ 13.5; 9/ 13.5; 23 Poland 3/ 7; 22 3/ 7; 22 3/ 7; 22 5/ 8; 23 5/ 8; 23 Portugal 5/ 5/ 5/ 13; 23 13; 23 Finland 8/ 17; 22 8/ 17; 22 8/ 22 9/ 13; 23 9/ 13; 23 Romania 9; 19 9; 19 9; 19 5/ 9; 24 5/ 9; 24 Hungary 5; 5; 5/ 18; 5/ 18; 5/ 18; 27 EU 27 19.4 19.8.4.7.0 Source: [4, pp. 23 27; 12, pp. 28] 3.2. VAT in the Czech Republic The VAT in the Czech Republic was legally introduced in the concept of the new tax system on 1 st January 1993 by the law n. 588/1992 Sb., about the value added tax, as subsequently amended. The tax then replaced the turnover tax and since its introduction it has undergone through a lot of changes. Originally the standard rate of the tax was set at 23% and the reduced rate of the tax was 5%. Since 1993 there have been 30 amendments of the VAT law [10]. The development of VAT rates in the Czech Republic is clearly presented in the table n.4. The VAT in the Czech Republic is charged at two rates. The standard rate of % applies on the sale of goods and services; the reduced rate of 14 % applies on the sale of certain goods such as food products, pharmaceuticals products as well as on some services. Certain services (e.g. postal, broadcasting, banking, insurance, financial, health and social welfare, transfer and lease of land and buildings or structures, provision of lotteries and similar games of chance and education) are exempted without credit for input tax [12]. On 1 st January 12 the reduced rate of the VAT was increased considerably up to the current 14% on the basis of the law n. 370/11 Sb. so called rate amendment. Table 4: The change of VAT rates in the Czech Republic in 1993-13 Date of effect from-to Standard rate of VAT Reduced rate of VAT 01. 01. 1993 23 % 5 % 31. 12. 1994 01. 01. 1995 22 % 5 % 30. 04. 04 01. 05. 04 19 % 5 % 31. 12. 07 01. 01. 08 19 % 9 % 31. 12. 09 01. 01. 10 % 10 % 31. 12. 11 01. 01. 12 % 14 % 31. 12. 12 01. 01. 13 % 15 % passed by the Parliament Source: [3] The unification of VAT is also included in this amendment. The trend of the rates getting closer to each other should result in the termination of the two rates towards 1 st January 13. From this date on we should have the only rate, that is 17.5%. The expected termination of the two rates may not happen as on 13 th July 12 the Parliament of the ISBN: 978-1-61804-124-1 296

Czech Republic passed another amendment of the VAT law for the year 13. It means the increase in the standard and reduced rates by 1%, i.e. the reduced rate will be 15% and the increased %. Apart from Denmark that has a unified tax rate % (although there are a number of tax exemptions) we will have the highest reduced rate of the value added tax within the EU. The VAT revenues are a significant part of the state budget of particular countries. Thus the change of the rates brings apart from inflation and other factors also the change of revenues in the respective years. The following graph shows the overview of the development of VAT collecting in the years 1993-11 in the Czech Republic. It is evident at first sight from the figure n.1 that the collected amounts show a rising trend apart from the only exception in 09, when the tax collection could be influenced by the economic crisis (GDP and other macroeconomic ratios were also affected). Fig. 1: The development of VAT collection 300 000 0 000 0 000 150 000 100 000 50 000 0 77 104 1993 85 849 1994 Source: [1] 94 801 1995 109 313 1996 117 573 1997 119 358 1998 138 282 1999 145 908 00 151 886 01 155 9 02 164 856 03 184 3 04 8 413 05 7 784 06 236 385 07 5 190 08 3 612 09 269 547 10 277 889 11 Fig. 2: The development of gains and declines of the basic macroeconomic ratios and VAT collection (%) in 00-11. 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0-2,0-4,0-6,0 Source: [2]; own processing GDP real terms CPI avrg. Final consumption expenditure VAT collection 00 01 02 03 04 05 06 07 08 09 10 11 The VAT collection has almost doubled since 00. Despite a considerable decline in the standard rate of the tax in 04, that is from 22% to 19%, staying at this level until 07, the volume of the collected VATs is growing. This growth is connected with the macroeconomic ratios growing GDP, growing final consumption expenditure and inflation (figure n. 2). Simultaneously the internal change of the structure of value added taxes is taking place. The category of goods and services in the reduced rate are transferred into the standard rate that is from the 5% rate into the 19% rate. This situation has proven to be the most evident in the building industry and the real estate business. In the building industry the reduced rate of the tax was used in a housing construction up to 31 st December 07, in nonresidential construction only until 30 th April 04. Since 07 only the category of the reduced rate has been changing. After 15 years of the declared reduced rate (since 1993 5%) there has been an adjustment since 08 by 4%. Also this fact is reflected in the higher absolute collection of VAT but the change is in 08 accompanied by the growth of GDP by 3.1% and inflation rate 6.3%, consequently in 09 the decline in GDP by 4.7% and inflation rate 1%. Thus the importance of VAT collection is apparent concerning the circumstances mentioned above (figure n.2). In 10-11 there was an adjustment of both standard and reduced rates by + 1%, which again brings the increased VAT collection by 6.2% and 3% [1], also GDP is growing by 2.7% and 1.7%, inflation by 1.5% and 1.9% [2]. The last adjustment in 12 is based on the increase of the reduced rate from 10% to 14%. The burden mainly concerns food and soft drinks, very narrowed assortment of goods and services ISBN: 978-1-61804-124-1 297

connected with home and social care, accommodation, transport, waste collection, etc. A more detailed analysis of statistical data about the taxes collected, which was carried on by the Ministry of Finance, shows that ¼ of the volume of the collected value added tax is collected by means of the reduced rate of the tax and ¾ of the volume of the collected value added tax is collected by means of the standard rate [8]. Manufacturing industry, wholesale and retail, repair and maintenance of motor vehicles and construction industry are the branches that bring in both the standard and reduced rate of the value added tax the biggest volumes of the collected tax. 4 Conclusion While the EU member countries are striving to get the tax rate of the reduced VAT low, the Czech Republic is following the opposite trend. Not only it is not lowering the reduced rate in order to get closer to the percentage taxation abroad, but on the contrary the parliament members have passed the increase of the reduced rate by another percent coming into effect from 1 st January 13. With the increase in the value added tax we can expect that people will be considering the ways of cutting down paying taxes or avoiding it. These issues are widely discussed in media. Using the thorough analysis of all the accessible sources our researching team have decided to prepare the questionnaire that will be dealing with the tax incidence. The questionnaire will be filled in July and August and in the following months the obtained data will be carefully analysed. The results will be published in further professional articles. In conclusion it is important to mention that the value added tax cannot the only concern in the tax burden but there are other taxations which influence the consumer. In the first place it is the income tax of natural and legal persons. The ratio of tax revenue to GDP in the Czech Republic is below the average of the EU-27. While the average of the EU-27 accounts for 39.6%, in the Czech Republic we have the 33.8% taxation. The highest rate is in Denmark (48.5%) and on the other hand the lowest shares were recorded in Bulgaria and Lithuania (both 27.4 % of GDP) and Latvia (27.5 % of GDP) [11]. Acknowledgements: This research has been supported by a specific project "The Causalities of Tax Incidence", at the University of Hradec Králové. References: [1] CZECH TAX ADMINISTRATION. Údaje z výběru daní. [online] [cit. 30.3.12]. URL: <http://cds.mfcr.cz/cps/rde/xchg/cds/xsl/13879.html?year=0>. [2] CZECH STATISTICAL OFFICE. Makroekonomické údaje [online] [cit. 18.6.12]. URL:<http://www.czso.cz/csu/redakce.nsf/i/st atistiky>. [3] ČERNOHAUSOVÁ, P. Vývoj DPH od roku 1993 do roku 13, [online] [cit. 30.3.12]. URL:<http://www.danarionline.cz/blog/detail- prispevku/articleid-824-vyvoj-dph-od-roku- 1993-do-roku-13/>. [4] European Commission, Taxation and Customs Union, VAT Rates Applied in the Member States of the European Union, 12, [online] [cit. 1.7.12]. URL:<http://ec.europa.eu/ taxation_customs/resources/documents/taxatio n/vat/how_vat_works/rates/vat_rates_en.pdf>. [5] GLOSSARY: Value added tax (VAT) URL:<http://epp.eurostat.ec.europa.eu/statistics _explained/index.php/glossary:vat>. [6] GOLA, P. Daň z přidané hodnoty [online] [cit. 30.3.12].URL:<http://www.danarionline.cz/ archiv/dokument/doc-d9493v12364-dan-zpridane-hodnoty-ve-svete/>. [7] KOZIEL, M. EU: Harmonizace právní úpravy DPH [online] [cit. 4.4.12]. URL: <http://www.finance.cz/zpravy/finance/ 2085-eu-harmonizace-pravni-upravy-dph/>. [8] MINISTRY OF FINANCE OF THE CZECH REPUBLIC. Daňová statistika 05-09 [online] [cit. 18.6.12]. URL:<http://www.mfcr.cz/cps/rde/xbcr/mfcr/ Danova_statistika_05-09_pdf.pdf>. [9] OECD, Tax Database, D. Taxes on consumption, 1. Value added taxes 12, [online] [cit. 30.3.12]. URL:<http://www.oe cd.org/document/60/0,3746,en_2649_33739_1 942460_1_1_1_1,00.html#vat>. [10] ŠINDELKA, V. Charakteristika a vývoj DPH [online] [cit.. 3. 12]. URL: <http://www.finance.cz/zpravy/finance/ 17297-charakteristika-a-vyvoj-dph/>. [11] Tax revenue statistics, Eurostat. [online] [cit. 1.7.12].URL:http://epp.eurostat.ec.europa.e u/statistics_explained/index.php/tax_revenue_ statistics [12] Taxation trends in the European Union [online][cit.1.7.12].url:http://epp.eurostat.e c.europa.eu/cache/ity_offpub/ks-du-12-001/en/ks-du-12-001-en.pdf ISBN: 978-1-61804-124-1 298