With the coming end of the summer, we are going to focus again on selected news in connection with the tax package, we will look into the VAT input deduction adjustment mechanism, consider means of mitigating adverse consequences in case of incorrect tax submissions and summarize all the other planned tax changes.
TAX PACKAGE – INCOME TAX
In the last issue of the Tax News, we already covered the tax package extensively. In this issue, we would like to provide you with a summary of the selected changes.
1) The most important changes effective for tax periods started in year 2017
- Tax bonus for children
- In 2017, it is possible to utilize the new amount of tax bonus for the second (CZK 19,404) and any other (CZK 24,204) child.
- Lump sum tax
- In 2017, it is newly possible to determine the tax as lump sum also for those taxpayers who have employment income in addition to the business income, as well as to taxpayers with business income and employees.
- Monetary gift provided for the purpose of purchasing tangible assets
- Income in the form of a gift designated for the purchase of a tangible asset or its technical improvement in accordance with Article 29 Section 1 of Income Taxes Act (“ITA”) reduces the purchase price of the tangible asset regardless of the fact whether it was exempt from tax, was not subject to tax or it did not increase taxable income in accordance with the provision of Article 23, Section 3, Subsection a Point 16 of ITA.
- Lump sum expenses for self-employed individuals – 2017
- In connection with the utilization of lump sum expenses, self-employed individuals have the option to claim the lump sum provided for by the amendment (which is reduced by half compared to the prior amount) and claim the tax credit for a spouse under care as well as tax bonuses for children (until now, this was not possible when lump sum expenses were claimed). The other option is to claim lump sum expense in 2017 based on the legacy tax law prior to the amendment.
2) Changes effective when the amendment came into force (from 1 July 2017)
- Depreciation of intangibles
- The tax amendment provides that the amount of time for depreciation of intangibles that had previously been fixed should now be considered as only the minimum period required. The taxpayers will thus be able to depreciate intangibles over a longer period of time, based on their own considerations. The conditions stipulated in Article 32a ITA (e.g. linear depreciation) are preserved.
- Technical improvements of leased assets
- Article 28 Section 3 ITA extended the number of taxpayers that are entitled to depreciate technical improvements made on assets of others. Apart from lessees and users of assets under financial lease, the depreciation will now be claimable also by sub-lessees.
- Deduction of fuel costs
- Deduction of fuel costs for business travel with a motor vehicle used on the basis of a lease contract concluded with a creditor for the time when a debt is to be secured through transfer of ownership to the motor vehicle will now be possible. Until now, the fuel costs were claimed through a lump sum compensation.
- Liquidation of buildings as part of new construction
- Until now, when a building had to be liquidated as part of new construction, the net book value of the building being liquidated entered the purchase price (tax base) of the new construction. Newly, the net tax value shall enter the purchase price. This means that new constructions will newly show different purchase prices for tax and accounting purposes.
3) Changes applicable as of 2018
- Tax bonus
- Starting in 2018, it will no longer be possible to reach the limit triggering the tax bonus (six times the minimum wages) with income from capital gains or from lease. Newly, the tax bonus for children under care will only be provided to taxpayers with income from employment or from business.
- Tax refund
- ITA now has a new provision concerning the request for a tax refund. If a taxpayer files the tax return together with a request for a tax refund before the deadline for the tax return has elapsed, the request is considered as having been filed on the last date for the filing of the tax return. This will eliminate situations when the taxpayer filed a tax return including the refund request e.g. as early as January (i.e. more than 60 days before the tax return deadline) and then had to repeat the refund request in March due to the fact that a request made more than 60 days before the tax refund arose was not to be accepted.
- Lump sum expenses for self-employed individuals – 2018
- As of 2018, the maximum lump sum expense amounts will be reduced in half. However, the taxpayers claiming them will be able to utilize the tax credit for a spouse under care as well as the tax bonus for children.
- Withholding tax
- Newly, withholding tax will generally apply to income from employment in situations where the taxpayer does not sign the special tax declaration form and the gross monthly income with one taxpayer does not exceed CZK 2,500. Until now, the rule has applied to one-off job agreements of up to CZK 10,000 (for which the current procedure remains in force).
VAT NEWS – INPUT VAT CORRECTION AND ADJUSTMENTS
1 July 2017, an amendment of Act No. 235/2004 Coll., on VAT, as further amended (“VAT Act”) has introduced the obligation to perform a correction of input VAT in accordance with Article 77 Section 2 Subsection c) and an obligation to adjust the input VAT deduction entitlement in accordance with Article 78e of the VAT Act upon non-substantiated cases of loss, theft or destruction of business assets.
In a situation where business assets are destroyed, lost or stolen and this fact is properly substantiated, the input VAT deduction is not subject to correction. In a reverse scenario, the input VAT deduction needs to be adjusted via “correction” or “adjustment” of the input VAT entitlement. Whether to correct or adjust the input VAT is provided for by Articles 77 and 78 of the VAT Act whereby correction of input VAT applies to tangible assets and adjustment applies to other business assets (e.g. inventory).
The key aspect is the substantiation of the above facts so that the input VAT need not be adjusted for. In case of destruction of business assets through fire, a report by the state fire authority or by a fire investigation authority is requested. In case of storm, information about the storm characteristics needs to be obtained (from a reputable source such as the Czech Hydrometeorological Institute) and in case of destruction of business assets in a flood, a confirmation by a flood committee that the given area was subject to a flood needs to be obtained.
When substantiating loss of business assets, it is important to distinguish whether the shrinkage was within or above a specified norm for natural shrinkage. The former needs to be substantiated via internal directives of the taxpayer. The latter needs to be substantiated by e.g. statement issued by an insurance company or through a receivable against a third party which caused the loss.
In a situation when a taxpayer is unable to receive damage compensation from an insurance company or a third party, the tax authority may consider the loss of business assets as being intentional and conclude that the taxpayer did not satisfyingly substantiate the loss of assets in the first place. This leads to an obligation to adjust the prior input VAT entitlement. Correction (adjustment) should be made from the amount of the original input VAT deduction. If the taxpayer cannot ascertain the amount of the originally claimed input VAT deduction, the method to ascertain it should be the same as the one generally used for accounting purposes (FIFO or simple average).
Correction (adjustment) of the prior input VAT deduction is performed with respect to assets for which the period to claim the input VAT deduction (or its adjustment) has not yet elapsed.
Theft of business assets should also include situations where the taxpayer has obtained a decision on deferral of the matter by the Czech Police, decision on commencement of criminal proceedings or a decision on their suspension.
In a situation where a loss, destruction or theft of assets is identified and the taxpayer is not capable of satisfyingly substantiating this fact through evidence, the taxpayer is obliged to correct or adjust the originally claimed input VAT deduction in respect of business assets in the tax period in which the situation occurred or in the tax period during which the taxpayer could or should have been informed about the occurrence. In cases where the taxpayer was not or could not have been informed, the taxpayer is obliged to correct or adjust the input VAT deduction as of the day of stock taking at the latest. If the taxpayer does not perform the correction or adjustment, the latter will be performed by the tax administration during a tax audit.
Conditions to apply the VAT correction or adjustment mechanism are further detailed under the following link: http://www.financnisprava.cz/assets/cs/obrazky/d/Informace-par77_ZDPH.pdf .
DIGITAL FILINGS UPON REQUEST
The tax administration decided to mitigate consequences of failing to communicate with the tax administrator digitally in case of certain submission. As of 1 August 2017, paper submissions of personal income tax returns and real estate tax returns that were supposed to be filed digitally will no longer attract any sanctions.
When digital communication with tax authorities via data boxes was implemented, a list was drawn up of submissions that were supposed to be carried out in a digital form only. Upon non-fulfilment of this obligation, the taxpayer was automatically assessed a fine of CZK 2,000 and subject to another fine of CZK 50,000 if the tax administration considered that the non-fulfilment of the digital submission significantly impaired the act of tax administration. The taxpayer was not notified about the filing mistake and was not requested to correct it.
As of 1 August 2017, an exemption is being introduced for personal income tax returns and real estate tax returns. These submissions are excluded from the list of digital submissions and an automatic sanction will not be applied. In practice, this means that the taxpayer will first be notified about the oversight and only if they fail to make the submission digitally will they be assessed a fine for the wrong submission. Through this decision, the tax administration mitigated the consequences for those personal income tax and real estate taxpayers who set up their data boxes in the past and, upon filing, did not realize that they were obliged to use them or lost access information thereto.
The list of submissions that need to be made solely in digital form includes regular and amended tax returns (to income tax, VAT, from lottery winnings and similar games), registration forms, notifications on changes in registration details, applications for deregistration as well as various other tax reports. All individuals with an active data box, entities with an obligation to have financial statements audited and all VAT payers are obliged to make their filings digitally.
THE FUTURE OF THE CONTROL STATEMENT IS STILL UNCERTAIN
The government only has 3 months to react to the legislative insufficiencies of the provisions on Control Statements that we informed you about in our last issue of Tax News. The Parliamentary Print No. 1060/1, which reacts to the decision of the Constitutional Court in the form of an “appendix” to the government’s law proposal amending laws in connection with the adoption of the law on cash transfers, is currently still subject to negotiation by the Parliament and a third reading is scheduled shortly.
Based on the newly proposed law, the VAT Act should directly list specific requirements for the Control Statement. These requirements should include the identification and contact details of the taxpayer, identification details of the customer or vendor and information regarding supplies, payments and input VAT deductions. Although these requirements are already part of existing Control Statement, the Constitutional Court has decided that their absence directly in the law is undesirable and has stipulated a period to remedy the currently insufficient wording of the law until 1 January 2018.
We will keep you informed about the progress of the law approval process and potential consequences, should the law not be adopted on time.
CHANGES IN TAX EXEMPTION UPON ACQUISITION OF OWNERSHIP IN A RESIDENTIAL UNIT IN A FAMILY HOUSE
In the last issue of Tax News, we informed you about the inconvenience caused to the taxpayers in respect of the definition of real estate transfer tax exemption upon acquisition of ownership of a residential unit in a family house. To recap – due to the absence of tax exemption applicable to acquisition of ownership of residential units in family houses, additional tax has been assessed in respect of transfers of these units even in cases where the taxpayer had proceeded in line with instructions from the tax authorities and had filed a tax return claiming tax exemption. The tax administration became aware of its error in granting tax exemptions and assessed tax (including late payment interest) to the affected taxpayers. Subsequently, General Financial Directorate issued a directive enabling the waiver of late payment interest of up to 100% in those situations when the tax exemption had been granted by error.
In reaction to this finding, an amendment of the legislative measure on real estate transfer tax was proposed in April of this year which aimed to extend a tax exemption to acquisition of ownership in residential units in family houses that would apply within 5 years from the date of construction or first use (Article 7 of the Legislative Measure of the Senate No. 340/2016 Coll, on real estate transfer tax). This would put an end to the difference in current treatment of tax exemptions of residential units in family houses. The law amendment was presented to the Parliament in a way that a direct approval in the first reading could be sought. The government and its organizing committee approved the reading which is scheduled for September. After the approval of the law in its first reading, the law will be subject to approval by the Senate and then signed by the President. The law effectiveness is set for the first day of the calendar month following its publication in the Collection of Laws.