Commission Report (2002): Czech Republic

• Progress since last Regular Report
• Overall assessment
• Conclusion

Chapter 10: Taxation

Progress since last Regular Report

Since the last Regular Report, the Czech Republic has made limited further progress in the field of taxation.

No legislative progress can be reported in the field of indirect taxation or in the field of direct taxation. As of April 2002 a VAT rate of 10% on bus transport operated by Austrian companies has been introduced.

As regards administrative co-operation and mutual assistance, a Central Liaison Office (CLO) was set up in February 2002 within the tax administration. The unit currently has 5 staff,. The implementation of the VAT Information Exchange System (VIES) started in January 2001, and a test platform has been developed, so as to allow a pilot test in 2002.

As regards administrative capacity, preparations have continued for the transfer of administration of excise duties to the customs authorities. An excise duty unit has been established at the General Directorate of Customs, the human resources responsible for excise duty administration at local, regional and central level have been allocated, and various training initiatives are underway. However, the necessary concrete legislative steps still remain to be taken. A new Code of Ethics for Tax Administration officials has been developed and incorporated into the Administration`s internal procedures. As part of the process of transferring the administration of excise duties to the Customs Administration an excise unit has been established within the General Department of Customs, which is responsible for the whole preparatory process and for co-ordination of all activities.

Overall assessment

As regards VAT, the Czech Republic needs to align the scope of reduced and the standard VAT rates respectively, as well as the scope of VAT exempt transactions and to introduce the relevant provisions for intra-Community transactions. In the field of excise duties, further alignment is needed in particular as regards duty rates for mineral oils. The establishment of tax warehouses needs to be completed. As a result of delays incurred in the process of gradual alignment on the level of rates, alignment of both VAT and excise rates has not yet taken place.

As regards direct taxation, the Czech Republic will need to align its legislation further with the acquis. Action will have to be taken to amend the legislation to eliminate potentially harmful tax measures, so as to comply upon accession with the Code of Conduct for Business Taxation to the same extent as current Member States. The Commission`s initial technical assessment of potentially harmful measures applied in the Czech Republic is ongoing.

The VAT rate for restaurant services, which was decreased from 22% to 5% in April 2000 (as reported in the last Regular Report), remains out of line with the acquis. The VAT rate of 10% on bus transport operated by Austrian companies is not in line with the acquis, as the VAT rate is applied only against Austrian bus operators and not in a general manner on such transport transactions, and may therefore constitute a discrimination.

Duty free shops at land borders remain to be closed.

As regards administrative capacity, the Czech Republic has strengthened and modernised its tax administration, both regarding VAT and direct taxation, which appears to have adequate legislative and administrative structures as well as adequate resources to ensure effective tax collection, enforcement and controls. The transfer of the administration of excise duties to the Customs administration is progressing according to plan, but the Czech Republic should ensure that the remaining actions are carried out as planned to ensure that it will be able to meet all the requirements upon accession. In the field of information technology the Czech Republic is progressing at a satisfactory pace and provided that progress proceeds according to plans, the country should be in a position to meet its obligation upon accession.

Conclusion

In its 1997 Opinion, the Commission concluded that the acquis in respect of direct taxation should present no significant difficulties and that as regards indirect taxation, the Czech Republic should be able to comply with the acquis on VAT and excise duties in the medium-term, provided that a sustained effort was made. The Commission added that it should be possible for the Czech Republic to start participating in mutual assistance as the tax administration developed its expertise in this respect.

Since the Opinion, VAT legislation, and to a lesser extent excise legislation, have been brought broadly into line with that of the Community. With regard to administrative capacity, the Czech Republic has made progress in modernising and strengthening its tax administration. Overall, the Czech Republic has achieved a good level of alignment, but it needs to be completed in important areas of VAT and excise. Strengthening of administrative capacity is on track.

Negotiations on this chapter have been provisionally closed. The Czech Republic has been granted transitional periods as regards the continued application of the reduced VAT rate on the supply of construction work for residential housing (until 31 December 2007) and on the supply of heat energy used for heating and hot utility water preparation, for householders and small entrepreneurs who are not registered for VAT (until 31 December 2007). The Czech Republic was also allowed to apply a VAT exemption and registration threshold of EUR 35 000 for small and medium-sized enterprises. In the field of excise duties, the Czech Republic was granted a transitional period regarding a delayed implementation of the excise duty rates on cigarettes and other tobacco products (until 31 December 2006) and a permanent derogation to continue to apply its excise duty rate scheme for small fruit growers' distillation, provided that the quantity does not exceed 30 litres of fruit spirit per year per household and that the reduced excise rate is not less than 50% of the standard national duty rate for ethyl alcohol. The Czech Republic is meeting the majority of commitments it has made in the context of the accession negotiations. However, delays have occurred in transposing the acquis, in particular in respect of the alignment of both excise and VAT duty rates (where the Czech Republic had committed itself to a gradual three-year alignment). Furthermore, the closure of duty free shops at land borders, originally planned for December 2001, has now been postponed until the end of 2003, contrary to the Czech Republic's earlier commitment. These issues need to be urgently addressed.

In order to be ready for membership, the Czech Republic should focus further efforts on completing transposition as a matter of urgencyoe except for areas where transitional arrangements were agreed -- in the areas of VAT and excise duties, including intra-Community transactions. Current preparatory work on new legislation as regards VAT and excise duties should be stepped up so as to ensure alignment with the acquis. The Czech Republic should also pursue the reinforcement of the tax administration in order to ensure its effective functioning upon accession. Ongoing efforts to strengthen administrative capacity in this area should be vigorously pursued.

---

Next: Chapter 11: Economic and Monetary
Up: 3.1. The chapters of the
Previous: Chapter 9: Transport policy