Legal news Deloitte Czech Republic
Preparation of a Tax Evasion The Chamber of Deputies has recently passed a proposed amendment to the Criminal Code which defines the preparation of a tax evasion (or the evasion of another fee/similar obligatory payment) as a criminal offence. Let us take a look at what this change will mean for taxpayers in practice. What does the preparation of a criminal offence mean? The preparation of a criminal offence refers to an offender s intentional behaviour with the purpose of preparing the conditions for committing a crime. In the case of tax evasions, it means making preparatory steps before submitting offender s tax return with the aim of (i) paying no tax at all, (ii) paying a lower amount of tax, or (iii) gaining a benefit from the state to which the offender is not entitled (such as an excessive VAT deduction). In this context, it is necessary to distinguish between the individual stages of committing a crime, which are the preparation, attempt, and completion of a crime. Referring to tax evasions, this means the following. As mentioned above, when preparing for committing a crime, the offender is only preparing the conditions and has not yet begun committing the crime. This may mean, for example, obtaining fake invoices, fake contracts or other legal documents that proves claim for different taxation, ensuring of help of other people with committing the crime or setting of other artificial legal relations so that they meet the claim for different taxation). As soon as the offender fills in and submits a tax return, which does not correspond with the actual tax liability, we are dealing with an attempt of a crime. That means a situation when the offender has already begun committing the crime, but may not necessarily manage to complete it (for example, the tax authority may reveal the fraud before deciding on the tax liability, or the tax subject may submit a remedial tax return and pay the taxes due). Once the tax authority confirms the unlawfully lower tax or the unlawful claim for excessive tax deduction, we are dealing with completion of a crime. In respect of the potential punishment stipulated by the relevant provision of the Criminal Code, there is no difference between the individual stages of committing a crime. However, when punishment is imposed in concrete case, the judge must consider the stage of committing a crime as each of the stages brings a different degree of social harm to the crime, and, therefore, it must be taken into account whether the offender is being punished for preparing, attempt or completion of the crime. Offenders are never punished for all the three stages of the crime at the same time, but only for the latest stage committed. This means that the offender will be punished for preparation of a crime only, if an attempt (typically submission a fraudulent tax return) is never committed, and, at the same time, no conditions, which would cause extinction of the criminal liability for preparation of a crime, were met. The Amendment to the Criminal Code Up until now, only an attempted or completed tax evasion was considered a criminal offence; in other words, any steps taken in preparation for submitting a fraudulent tax return were not punishable (unless another crime was committed in the process, related e.g. to incorrect bookkeeping). From now on, it will be possible to punish offenders even for the preparation of a crime, although not every case of preparations will be considered criminal behaviour. This would be the case only when the offender faces the risk of a prison sentence, the maximum extent of which is at least 10 years. This means a preparation of a tax evasion will only be punishable if (i) the crime is intended to cause a difference 2
between the declared and the real tax liability in amount of at least CZK 5 million or (ii) the tax evasion is committed within an organised group operating on the territory of more than one state. According to the author of the amendment, its purpose is to combat tax frauds, in particular carousel VAT frauds. The change should primarily enable the police to intervene faster, especially by using operative methods such as wiretapping, surveillance, taking over and opening parcels, searches of business premises etc. It should also enable earlier prosecutions, during which the period for tax assessment do not run. However, the change may also present problems in context of interpretation and application of tax legislation. Even though the Supreme Administrative Court has repeatedly claimed that entrepreneurs do not have an obligation to carry out their businesses in a manner that would lead to them paying the highest taxes possible, and that tax optimisations not breaching the respective legislation or its purpose are legal, the dividing line between legal and illegal interpretation and application of tax legislation is thin, and will certainly prove problematic in respect of criminal liability for preparation of a crime in this field. This objection was raised when the amendment was debated in the Chamber of Deputies, however, the proposed change to the amendment was not passed. The amendment introducing the preparation of a crime as a criminal offence will be discussed in the Senate on 27 April 2016. If passed, it should become effective one month after its publishing in the Collection of Laws of the Czech Republic. Táňa Čapková +420 246 042 297 tcapkova@deloittece.com Jiřina Neumannová +420 246 042 430 jneumannova@deloittece.com 3
New active employment Contribution for the support of employee education Employers can once again apply for a contribution for employee education. The Employment Office has almost CZK 3.5 billion at its disposal, which it can distribute within the Operational Programme for Employment among employers who decide to invest in educating their employees. The Support of specialised employee education II (POVEZ II) will last until 30 November 2020. The aim of the project is to increase competitiveness and expand the qualifications of the work force in order to broaden the employers activities. POVEZ II is primarily intended to encourage employers to invest in the education of their employees. The purpose is to increase the specialised knowledge and skills of both existing and future employees. Employers pursuant to Section 7 of the Labour Code, including non-state non-profit organisations, self-employed persons (including those without employees) and newly-established companies, can join the programme through their employees. Employers with registered office on the territory of the Capital City of Prague, applicants who cannot be given contributions within active employment policy and those who are already receiving support for the same purpose are excluded from the programme. Employers can request financial support since 31 March 2016 and the granting of the contribution and its amount is determined by the regional branch of the Employment Office. The contribution can amount up to 85 % of real expenses and it is affected also by the fact whether the provided support can improve the situation on the job market or if it will have a positive impact on the employees themselves. The employers can receive support of up to CZK 500,000 per month and the total amount per year cannot exceed CZK 6 million. A new aspect of POVEZ II is its focus on the support of education of employees of over 54 year of age, who receive extra points compared to other applicants. These employees face the highest risk of long-term unemployment and there is therefore great demand for increasing their qualifications. Contribution for commuting The Employment Office further expands the tools and measures of the active employment policy by adding a contribution for the support of regional mobility. Since April 2016, this contribution can be requested by job applicants who will start working outside of the municipality of their permanent residence. Within the pilot project, the Employment Office will offer the contribution in five regions Ústí nad Labem, South Moravian, Olomouc, Moravian-Silesian and Karlovy Vary. The contribution will be provided primarily in order to increase the chances of job applicants who have been registered for a long time to find employment. Therefore, it can be requested by people who have been registered with the Employment Office for more than 12 months. Additionally, job applicants who have been registered for a shorter period of time can also apply if they lost or will lose their job due to mass redundancies. Another condition is the conclusion of an employment contract for an indefinite period or a definite period of more than 12 months. The employment contract also has to specify the place where work is to be performed, including the address. The contribution will range between CZK 1,000 and CZK 3,500 per month, depending on the commuting distance to the workplace. The commuting 4
distance has to be longer than 10 km, with the exception of cases where there is no regular public transport link between the workplace and the applicant s place of residence. The applicant s entitlement for the contribution will be assessed based on their work attendance and gross wage, which will have to be evidenced by the payslip. With the exception of the Moravian-Silesian Region, the contribution will not be granted to applicants who commute abroad or whose wage for the month exceeds the average wage in the national economy for the 1 st 3 rd quarter of the previous year. Jan Procházka +420 246 042 913 jprochazka@deloittece.com 5
Proposal to expand the Ukraine Pilot Project to include workers In November of last year, the government approved the Pilot Project: Special processes for employees from Ukraine ( the Ukraine Pilot Project ), which set special methods for the acceptance of highly qualified job applicants from Ukraine and the processing of their requests for employee cards and blue cards. At present, the Ukraine Pilot Project is limited to highly qualified applicants specialists who have at least a secondary education with school-leaving exams. Due to the continuing demand from Czech employers for Ukrainian workers without high qualifications, the Ministry of Foreign Affairs submitted a proposal to the government to expand the Ukraine Pilot Project by adding Part B, focused on job positions in technical and agricultural professions which require mid-level or low qualifications and which it has been difficult to fill with registered job applicants in the long term. The prepared part B expects employees to enter the expanded Ukraine Pilot Project with a specific job applicant in the following manner. The employer will report a job opening to the Employment Office while expressing their consent in the reporting form for the job opening to be included in the central register of job openings which can be filled by employee card holders. Then the employer will submit a request for inclusion in the project to one of the guarantors, (i.e. the Czech Chamber of Commerce, the Confederation of Industry of the Czech Republic, the Association of Small and Medium-Sized Enterprises and Crafts of the Czech Republic, the Confederation of Employer and Entrepreneur Associations of the Czech Republic, CzechInvest, Czech Agrarian Chamber or the Federation of the Food and Drink Industries of the Czech Republic). In order to be included in the expanded Ukraine Pilot Project, the employer will have to meet its conditions, e.g. to have been in business in the Czech Republic for at least two years, to report the job opening to the Employment Office and to be an income tax, health insurance and social security payer. An obligatory appendix of the application will also include, for example, a certificate of non-existence of outstanding obligations to the Czech Republic, solemn declaration of the employer that they have employed at least 5 persons on the territory of the Czech Republic in the two years preceding the application, or solemn declaration of the employer that they will conclude a full-time employment contract with the applicant for the period of at least one year. If the applicant meets all the set conditions, the relevant guarantor will issue a certificate of inclusion in the project. The embassy or consulate will then inform the applicant about the date when they should submit the request for an employee card. The expansion of the Ukraine Pilot Project is currently being discussed as part of an external comment procedure. If the government approves the project, it is expected to be launched within six months. The proposed expansion of the Ukraine Pilot Project is based on a yearly quota of 5,000 applications for inclusion in the project, and the number of applications per month will be limited to 500. Given the continuous failure to meet the demand of the Czech market for low-qualified workers and the fact that securing a date for the personal interview necessary to submit the application for an employee card is currently very difficult for Ukrainian citizens, we see the proposed expansion of the Pilot Ukraine Project as favourable. Jan Procházka + 420 246 042 913 jprochazka@deloittece.com 6
Carousel vat fraud may relate There has been recently much debate in the media about fraudulent chains of traders dealing in certain commodities which either make only fictitious deliveries of goods or keep selling the same goods within a closed chain of companies. However, carousel frauds, or more generally VAT frauds, also include deliveries of goods that follow one another in a chain in which one of the involved traders does supply the required goods as appropriate but does not declare and pay VAT on the goods and the other traders in the chain then make VAT deduction claims. These cases may apply to any businessmen irrespective of what commodity they deal in and even in circumstances where they process the relevant commodity but no longer sell it onwards. Current approach of the financial administration bodies in this area We have witnessed several trends in the efforts of financial administration bodies to detect carousel fraud that alter the view of the established perception of this type of fraud. In the first place, it holds that VAT fraud may occur in relation to the supplies of almost any goods. As such, it is not possible to believe that the duty to check one s business partners applies only to the companies that deal in risky commodities (the term was historically applied to refer to gold or fuel). After all, the concept of referring to certain commodities as risky was rejected even by the Supreme Administrative Court in one of its significant rulings on the case of EON Energie dated 10 June 2015, ref. no. 2 Afs 15/2014-59. It also applies that the responsibility for carousel fraud may be derived not only in respect of a company that did not declare and pay VAT or its direct business partner but also any company within the chain. There are often paradoxical situations where a suspicion of VAT fraud does not lead to an inspection of the company that committed the fraud but the company that had no direct relation to the businessman that did not pay VAT and does not even know that this company is part of the same customer-supplier chain. Least but not last, we have seen the growing tendency of the financial administration bodies to examine business decisions of the inspected company in detecting carousel fraud. In terms of the above-mentioned ruling of the Supreme Administrative Court in the EON Energie case, the financial administration bodies have been seeking to prove that the relevant transactions were concluded under such irregular terms that the company must have known that the supply had been subjected to this type of fraud. However, this procedure can be treated as fairly controversial since this intervention into the freedom of business is completely impermissible and the financial administration bodies do not possess sufficient expertise to examine business activities of tax entities. Prevention through the internal control system In order for a businessman to be liable for the tax not paid by another company within the same customer-supplier chain, the financial administration bodies need to prove that, in view of all the circumstances of the relevant transaction, the businessman was aware, or should and may have been aware, of the fact that this fraud may have occurred. Should this conclusion be proven, they will not uphold the company s claim for a VAT deduction generated in respect of such transactions. For a company to prove as part of a tax audit that it acted in good faith in conducting the audited transactions, it must have appropriate controls in place in relation to its business partners. 7
Our experience suggests that there is no strictly-defined list of measures to maintain good faith of a company in the proper nature of the business activities of its business partners. Established judicial practice indicates the requirement that companies take measures in response to the current development and available information. Only in circumstances where companies act with a sufficient level of caution while making ongoing assessments of the warning signals relating to both suppliers and customers, their good faith remains uncontested. A company wishing to prove it was not aware, and may not have been aware, of a fraudulent activity in the customer-supplier chain, should therefore include in its internal policies a standardised system of checking their business partners in terms of their tax compliance credibility. The results of such checks should be kept on record as appropriate for their use in a potential tax audit. The relating measures should be also reflected in the contracts with business partners and employment (or any other) contracts with business representatives being in contact with new suppliers. A set of such control measures should be part of each company s risk management endeavours. Jiřina Neumannová +420 246 042 430 jneumannova@deloittece.com Tomáš Brandejs +420 246 042 239 tbrandejs@deloittece.com 8
Contacts If you are interested in obtaining additional information regarding the services provided by Deloitte Czech Republic, please contact our legal specialists: Ambruz & Dark Deloitte Legal s.r.o., advokátní kancelář Nile House Karolinská 654/2 186 00 Praha 8 - Karlín Česká republika Tel.: +420 246 042 100 Fax: +420 246 042 030 www.deloittelegal.cz Subscribe to dreport and other newsletters and invitations here http://www.deloitte.com/cz/subscribe-en 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 www.deloitte.com/cz/about 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 225,000 professionals are committed to becoming the standard of excellence. 2016 Deloitte Czech Republic