Tax Harmonization and Tax Sovereignty of the Czech Republic

Tax Harmonization and Tax Sovereignty of the Czech Republic Presented by: Dr. Radvan Date: 15 February 2024 Role of Tax Law - Many policies of the state are dependent on tax revenues. - To ensure the management of the state and local self-government units, the state sets its tax policy to collect adequate incomes. - The position of tax law within the system of law is perceived in a variety of ways in the world and in the EU Member States. • In Western European countries (old EU Member States), tax law and tax law science have a longstanding tradition; tax law is considered an independent branch of law in this part of Europe • In new EU Member States (Central and Eastern Europe), according to the local legal sciences, tax law is (still) a sub-branch of financial law Tax Harmonization - With the development in the volume of international trade, globalization, growth in the number and importance of multinational companies and their subsidiaries, transfer of capital and persons (residents of a country who work in another country), the uniform rules in taxation (tax harmonization) are needed. - Governments have to cooperate in fighting tax avoidance and sharing information about taxpayers and their tax duties. - In Czech tax science, tax harmonization at the EU level represents the process of approximation of the tax systems of the Member States on the basis of common rules. - Tax harmonization can be understood as a mechanism used to eliminate tax provisions that either create obstacles to the functioning of the single internal market or distort competition. It is certainly true that tax harmonization is not aimed at achieving a single tax system but rather at the approximation and synchronization of the individual tax systems. Tax Coordination, Approximation and Harmonization - Tax coordination includes the conclusion of agreements or making recommendations to limit harmful tax competition. The objective lies in setting a minimum standard of transparency and exchange of information in tax administration rather than uniformity of tax systems. ems. Bilateral agreements, especially bilateral agreements for the avoidance of double taxation and agreements on the cooperation of tax administrations (exchange of information, tax distraints, etc.), are one example of tax coordination. Tax coordination may even be unilateral and spontaneous. A good example is the tax competition between EU Member States in the area of decreasing corporate income tax rates. - The second stage is tax approximation (approximation of tax systems but not their harmonization). - The tax harmonization process has three stages. First, it is necessary to identify the tax to be harmonized. In the second stage, it is possible to harmonize the tax base (and, if appropriate, other construction elements of the tax, e.g., a taxpayer). The third stage is the harmonization of the tax rate(s). As evident from the historical development at the EU level, reaching the third stage of tax harmonization is only sometimes necessary. EU Member States are left with discretion within the rates available, leading to a competitive environment. Tax Harmonization as a Process - Tax harmonization is not merely an objective a resulting condition, but also the actual process. This process may be positive or negative. - Positive harmonization means the process of approximation of the national tax systems by the implementation of directives and other legislative instruments. If the directives are correctly implemented, all EU Member States apply the same rules. - Negative harmonization results from the activities of the Court of Justice of the European Union: measures are taken in national laws (national tax systems) on the basis of the tax-related case law of the Court. Even if only the EU Member State, a party to the proceedings, must remove the defective provision concerned, the case law also pushes other countries to check their national regulation and possibly adopt necessary amendments. The case law also provides good interpretation guidance. Benefits of National Tax Sovereignty - Advocates of sovereignty highlight the power of the state to impose, collect, and subsequently enforce taxes while it can autonomously redistribute the proceeds of these taxes at its own discretion and need. - Every government needs to use tax rates as one of the instruments of domestic economic policy. - There are also historical consequences of the national tax systems. - Different economic backgrounds and development should also be reflected in taxation. - Last but not least, the competitiveness issues play a crucial role. While low corporate income taxes might be troubling for old and more prosperous EU Member States, and they tend to harmonize, for new and economically weaker states, tax competition might be a tool to catch up with economically more developed Western European countries. - It is necessary to harmonize the rules for the construction of tax bases in the EU because unification would mean significantly eliminating aggressive tax planning techniques, a level playing field where nominal tax rates would be equal to the effective tax rate, and reduction of costs of taxation, both on the part of taxpayers and on the part of the tax administration. - Harmonization can also be considered as a possible increase in the share of the EU Budget in the EU GDP and, in line with the subsidiarity principle, the creation of an interlinked budgetary hierarchy, where the different levels will be matched by the respective tax instruments. E.g., all environmental taxes would become compulsory revenue of the EU Budget, income taxes would remain at the level of the EU Member States, and, e.g., property taxes would be part of regional or municipal budgets. - European Union highlights the power to introduce, remove, or adjust taxes in the hands of the Member States: each EU Member State is free to choose the tax system it deems most appropriate, provided it complies with EU rules. "The main priorities for EU tax policy are the elimination of tax obstacles to cross-border economic activity, the fight against harmful tax competition and tax evasion, and the promotion of greater cooperation between tax administrations in ensuring control and combating fraud." - Additional topics are linked to the digital and green transitions and given several important EU and international tax developments: green taxation, digital transition and its effect on taxation systems, and business taxation in the 21st century. National Specifics – PIT - Different levels of taxation of employees and self-employed persons mean the motivation to run a business • Small businessmen with incomes up to CZK 2,000,000 can pay a lump-sum tax • Employed persons have no right to deduct any expenses from their incomes to get the partial tax base • - Svar system Relatively low tax rate, especially for high-income subjects: the tax rate is a percentual progressive of 15%, resp. - 23% for incomes higher than the average wage multiplied by 48/36 - Tax benefits for low-income subjects in the form of basic tax relief - No inheritance taxation - No gift taxation for relatives - Many "social" exemptions from taxation: e.g., no taxation of retirement and other pensions, alimony payments, social benefits, scholarships, incomes from the sale of an immovable property - Tax allowances motivating charitable gifts, pension insurance and life insurance, living in own apartment or house (interests on housing loans are deductible from the tax base) - Tax reliefs reflecting the social status of the taxpayer (spouse with limited income, disability, student, a child in kindergarten): the same effect has tax preferences for children that differ according to the number of children - Tax reliefs stimulating the employment of disabled employees National Specifics – CIT+ - Percentual linear rate of 19%. - The impulse for research and development activities is hidden in the items deductible from the tax base; in fact, costs for research and development can be deducted twice. - Tax reliefs for disabled employees. - Windfall taxes • Levy on electricity from solar radiation • Extraordinary tax on unexpected profits • Gambling tax National Specifics - Property Taxes - Czech immovable property tax is one of the lowest recurrent property taxes worldwide. - All transfer taxes in the Czech Republic were abolished in the last decade. • The inheritance and gift taxes were canceled at the end of 2013 with regard to the reform of civil law. Inheritance and gifts are nowadays liable to income taxes. Nevertheless, all inheritance and also gifts from relatives, and other small gifts up to a specific limit are exempted from taxation. • The immovable property transfer tax was abolished in September 2020 with retroactive effects back officially to 31 March 2020, practically for all property transfer tax obligations where the entry to the cadaster was made in December 2019 or later. National Specifics – Excise Taxes - Tax on rough tobacco in 2015 - Tax on heated tobacco products in 2019. Conclusions - The Czech Republic, local legal and economic experts, and politicians seem to prefer tax sovereignty. - With regard to the wording of the Treaty on the Functioning of the European Union, it is necessary to point out the differences in definitions of direct and indirect taxes. A good example of a different approach might be the taxation of motor vehicles: according to Czech science, it is a direct tax; however, for the European Union, it is environmental and, therefore, an indirect tax. - The Czech Republic fully follows the EU law and transposes all EU directives into the national (tax) law. This statement is valid in both substantive law (both direct and indirect taxes) and procedural law (mainly the area of international cooperation in tax issues to prevent tax evasion and double taxation). However, we are witnesses to the rebellion that the Czech Republic would like to amend the Eurovignette Directive so that there is no obligatory tax on motor vehicles. - De lege referenda, it is necessary to react to the increasing public budget deficits. Primarily, it is crucial to limit the Svarcsystem: to reduce the high tax differentials between entrepreneurs and employees (including social and health contributions) and to amend lum-sum expenses. It would also be helpful to limit the number of tax exemptions. The relaunch of the electronic revenue registry would make it possible to control the income of business entities. Other amendments are appropriate for property taxes: to increase recurrent property tax, to relaunch car taxation based on CO, emissions, and to relaunch property transfer tax.