Projects and plans of the Czech Ministry of finance

Projects and plans of the Czech Ministry of finance Andrej Babiš Regional Tax Conference 18. 5. 2017 of the Czech Republic, Letenská 15, 118 10 Prague 1, +420 257 041

2 Content MANAGEMENT OF PUBLIC FINANCES TAX SYSTEM OF THE INITIAL SITUATION FOR THE GOVERNMENT IN 2014 TARGETS OF TAX POLICY SEVERAL ADOPTED MEASURES COLLECTION OF TAXES NEW METHODS OF WORK PROJECT MY TAXES

3 bln. CZK 1 800 1 600 1 400 Dynamics of the state debt of the Czech Republic Decrease of 70 bln. CZK between 2013-12-31 / 2016-12-31 1 683,3 1 673,0 1 667,6 1 663,7 1 613,4 1 499,4 1 344,1 % 45% 40% 35% 1 200 1 000 800 600 400 200 0-200 395,9 345,0 289,3 228,4 158,8 157,3 154,4 155,2 173,1 194,7-0,9% -1,8% 0,5% 11,5% 12,5% 17,3% 26,7% 19,3% 14,8% 24,6% 493,2 20,2% 592,9 691,2 16,6% 892,3 802,5 16,1% 11,2% 999,8 12,0% 1 178,2 17,8% 14,1% 11,6% 11,2% state debt (bln. CZK) change of state debt (bln. CZK) change of state debt (%) (right axis) Reduction of the state debt to every citizen is 6.621 CZK 0,9% -1,2% 0,6% 30% 25% 20% 15% 10% 5% 0% -3,6% -5%

4 Development of the state debt of the Czech Republic bln. CZK 2 000 State debt with zero or negative yield of 193,2 bln. CZK, i.e. 12 % of debt % HDP 50 1 800 41,1 38,6 45 1 600 1 400 1 200 1 000 21,2 23,3 24,9 30,0 34,0 37,2 41,1 36,7 34,2 40 35 30 25 800 600 400 200 13,3 11,5 9,8 8,6 8,9 9,1 10,2 12,2 13,5 14,8 17,6 19,4 22,9 20 15 10 5 0 0 State debt (bln. CZK) State debt - zero/negative yield (bln. CZK) State debt (right axis, % GDP)

5 Results vs. budget 1 500 Development of the basic parameters of the state budget in years 2013 to 2019 (bln. CZK) (years 2018 and 2019 without EU) -100,0-112,0-100,0-70,0-60,0-50,0-30,0 1 400 1 300 1 200 1 100-81,3-77,8-62,8 +61,8 1 297,3 1 281,6 1 211,6 1 234,5 1 219,8 1 173,2 1 133,8 1 091,9 1 309,3 1 249,3 1 242,4 1 192,4 1 267,2 1 237,2 1 000 900 18. 5. 2017 800 2013 SK 2014 SK 2015 SK 2016 SK 2017 2018 2019 výdaje celkem příjmy celkem Budget 2016 Results 2016 Total revenue 1 181 1 281,6 Total expenditure 1 251 1 219,8 Surplus/deficit - 70 +61,8

6 Overview of the Czech Tax System Direct taxes Indirect taxes Property taxes Corporate income tax Value added tax Road tax Personal income tax Social security contributions Excise duties Energy taxes Ecological, local and administrative fees

7 Tax Revenues as % of Total Without SSC Other; 5% other; 3% With SSC PIT; 19% CIT; 18% Excise duties; 18% VAT; 40% SSC; 44% PIT; 10% VAT; 22% CIT; 10% Excise duties; 10%

8 Czech corporate tax system Corporate tax rate = 19 % Competing by low tax rate and if possible by few exceptions/special regimes Dividend taxation Withholding tax = 15 % (DTT = 0 %, no DTT/TIEA/Convention = 35 %) Capital gains taxation Corporations = 19 %, individuals = 0 % (after 3 years time test) Interest expenses deduction Thin capitalization rules (interest 1 : 4 equity) R&D expenses deductability 100 % R&D expenses + 10 % of difference compared to the previous year Rulings practise No general rule Investment incentives In form of tax credit 18. 5. 2017

Initial situation for the government in 2014 9 UNDECLARED SALES Estimated more than 160 bln. CZK. VAT GAP According to accessible statistics more than 70 bln. CZK. Previously unresolved problem of carousel frauds and fictitious invoices. Illegal competitive advantage. Unfair for payers who dully meet their tax obligations. AGGRESSIVE TAX PLANNING Tax evasion ranging from 6 to 15 bln. CZK. One of the objectives of the tax strategy prior to the economic crisis was to attract foreign investors on the basis of low corporate tax rates, investment incentives (including tax breaks), tax incentives for research and development. PREASSURE ON INCREASE OF TAX RATES Replacement of better collection of taxes by increase of tax rates is no systemic solution. It affects notably tax payers who duly meet their tax obligations. Non-payments of taxes cannot result in gaining of competitive advantage.

10 VAT gap 2010 2011 2012 2013 2014 CZE, bln. EUR 2,941 2,377 2,932 2,761 2,233 CZE, bln. CZK 74,354 58,453 73,745 71,73 61,487 CZE, % 22,01% 17,45% 20,49% 19,10% 16,14% Total EU 27, bln. EUR 134,806 152,237 162,537 161,442 159,46 EU 27 average, % 13,53% 14,41% 14,97% 14,75% 14,03%

11 15 10 Comparison of VAT gap 2013-2014 (%) 45 2014 2013 40 35 30 25 20 15,56 16,14 EU AVERAGE 14,67 14,18 11,88 12,16 12,94 11,27 12,49 12,43 9,94 8,14 8,39 8,67 8,88 9,42 9,58 9,78 10,14 10,17 10,9 10,37 10,4 11,12 8,93 6,92 6,57 5,69 3,8 3,24 1,24 1,24 0 5 0 39,2 38,61 37,89 35,32 36,84 34,49 33,51 32,08 29,97 29,27 27,55 27,99 25,69 25,38 23,42 24,08 22,24 19,83 19,1 17,95 SE LU FI SI BE HR ES IE EE DK UK AT DE NL PT FR CZ HU BG LV PL IT GR SK MT LT RO 16,23

12 Targets of tax policy FAIR AND EFFICIENT TAX COLLECTION No increasing of rates and increasing of efficiency of tax administration. Improvement of analytic work with gained information and targeted control activity. STABLE ENVIRONMENT Legal certainty and sufficient period before the law comes into force. Foreseeable conduct of tax administration. Changes have to be systemic and conceptual. SETTLEMENT OF CONDITIONS OF ENTREPRENEURIAL ENVIRONMENT Solution of illegal competitive advantage gained through tax evasion. Base for increase of justice of tax system for tax payers who want to meet duly their tax obligations. STABILIZATION OF REVENUES OF PUBLIC BUDGETS Fiscally responsible policy providing space for future decrease of rates.

13 Fight against tax evasion 18. 5. 2017 TAX COBRA Cooperation among tax administration, customs administration and police. Since the beginning of functioning in the year 2014 the asset over 7,8 bln. CZK. VAT CONTROL STATEMENT Communication of selected pieces of information from invoices in the system of VAT from the year 2016. Mapping and detection of chain and carousel frauds. Establishment of new analytical centre for identification of whole fraudulent chains. Asset for public finances in the amount of 12 bln. CZK for the year 2016. ELEKTRONIC RECORD OF SALES On-line record of sales with expected tax asset of 18 bln. CZK per year. Gradual introduction since December 2016. Pilot running of robust system from November 2016. REVERSE CHARGE Change of VAT system which dramatically reduces risk of tax frauds. Effort to obtain temporary derogation for the Czech Republic. OTHER MEASURES

14 Fight against aggressive tax planning DETECTION OF TRANSACTIONS WITHIN SUPRANATIONAL CORPORATIONS Since 1.1.2015 enclosure of tax return of big corporations. Obligatory pieces of information about transactions between related persons (transfer pricing) PREVENTIVE IMPACT WITH POSITIVE INFLUENCE ON COLLECTION OF INCOME TAX OF LEGAL ENTITIES JUMP IMPROVEMENT OF RESULTS OF CONTROLS Since 2014 based on controls subsequently assessed 1,4 bln. CZK. INTERNATIONAL COOPERATION IN THE AREA OF EXCHANGE OF INFORMATION Implementation of EU directives introducing exchange of information among tax administrations. Access of tax administrations to pieces of information gained for the purpose of fight against money laundering DAC 5 targeted at broader usage of already collected pieces of information. COUNTRY-BY-COUNTRY REPORTING DAC 4 targeted at supranational groups of enterprises with consolidated turnover minimally 750 mil. EUR. Exchange of information about tax rulings DAC 3 Global standard (GATCA) DAC 2 targeted at information about accounts of tax non-residents. ATAD Preparation of implementation of the Directive through which the EU reacts to Action Plan of OECD (BEPS). Avoiding abuse of tax systems, non-deductibility of excessive interests, taxation of subsidiaries in offshore territories (CFC), exit tax, prohibition of abuse of law. 18. 5. 2017

15 Tax revenues in 2013, 2014, 2015 and 2016 (bln. CZK) Tax 2013 Increase 2013/2014 Increase 2013/2015 Increase 2013/2016 Increase 4.2013/4.2017 Total increase VAT 308,5 14,4 23,4 41,3 17,6 96,7 PIT 141,6 5,2 12,7 30,7 14,3 63,0 Excise duties 143,4-2,1 7,1 14,8 2,2 22,0 Insurance 597,9 23,5 57,1 91,0 41,0 212,6 CIT 120,7 11,7 26,8 44,0 11,5 93,9 Other taxes 39,8 0,4-1,2 7,5 4,1 10,8 Total 1351,9 53,1 125,9 229,3 90,7 499,0 + annual growth of VAT revenue to the end of April 2017 was 10,9 %; i.e. 12 bln. CZK 2014/2013 2015/2014 2016/2015 Tax revenues Ann. growth (%) 3,9 5,2 7,0 GDP nominal Ann. growth (%) 5,3 5,6 3,5

16 Tax revenues 2016 vs. 2015 (bln. CZK) 2015 2016 Difference (bln. CZK) Difference (%) Insurance 655,0 688,9 +33,9 5,2 % VAT 331,8 349,7 +17,9 5,4 % PIT 154,4 172,4 +18 11,7 % Excise duties** 150,5 158,2 +7,7 5,1 % CIT 147,5 164,7 +17,2 11,7 % Other taxes 38,6 47,3 +8,7 22,5 % Total 1 477,8 1 581,2 103,4 7 % 18. 5. 2017

17 Working methods of contemporary governement 18. 5. 2017 FEEDBACK FROM SUBJECTS IN QUESTION We carry out consultation of newly prepared legislative and of its introduction into practice. We organize seminars and conferences. PILOT RUNNING AND SUFFICIENT PERIOD BEFORE THE LAW COMES INTO FORCE We respect sufficient postponement of laws coming into force from their approval. System of electronic record of sales had a month-long pilot running. INSPIRATION ABROAD Taking over of functional solutions introduced in other states. Benchmarking (electronic record of sales, control statement, etc.) MAXIMAL UTILIZATION OF ACCESIBLE DATA Preparation of new system of financial administration. Enhancement of quality of analytical work. Targeted controls on subjects with increased degree of risk. PROJEKCT MANAGEMENT AND SUPPORT OF COMPUTERIZATION New system of tax administration and client-friendly systems. Component of the project My taxes (i.e. modern and simple taxes).

18 MY TAXES = modern and simple taxes for citizens and businessmen PROJECT OF THE MINISTRY OF FINANCE PRESENTED IN THE YEAR 2016 After consolidation of public finances we work on modern and simple tax system. It includes following partial projects: SELF-ASSESSMENT NEW INCOME TAX ACT WEB PORTAL MY TAXES NEW IT SYSTEM FOR TAX ADMINISTRATION

19 MY TAXES = modern and simple taxes for citizens and businessmen SELF-ASSESSMENT Relief for tax payers and better targeting of control and space for revision of system of sanctions. Detention of only the disputed part of excess VAT deduction (not the whole amount). In this context there is opened a space for discussion as to the introduction of system favouring taxpayers who meet duly their tax obligations possibly the introduction of system of reliable taxpayers (discussions are currently being in the beginning). NEW INCOME TAX ACT Conceptual solutions and replacement of current Act (after nearly 200 amendments from the year 1993). Easier and client-friendly Act connected with simplification of tax return. Stress on stability and tax neutratiliy. WEB PORTAL MY TAXES Virtual tax authority whoever will be able to solve the taxes from his home. Complete overview of tax obligations, display of history, prepopulated tax returns. One-entry accounting or interface for accounting programs. NEW IT SYSTEM FOR TAX ADMINISTRATION Replacement of current non-effective system.

20 Thank you for your attention.