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50 • Fifty Shades of Tax Dodging Czech Republic “It is not possible that an honest businessman pays taxes and his competitor does not, that is – he has a competitive advantage.” Andrej Babiš, Vice Prime Minister and Minister of Finance, Czech Republic 338 General overview The Czech Minister of Finance likes to say that the Czech Republic is among the leaders setting the tax agenda in Brussels. 339 In reality, however, although the Czech Republic is not blocking a progressive tax agenda, it is very far from being a ‘leader’. On a positive note, the Czech Republic signed the Multilateral Agreement on Automatic Exchange of Financial Account Information and fully implemented the EU provision for public country by country reporting for banks. On the other hand, the Czech government is displaying little enthusiasm for including developing countries in the negotiation of global tax rules and standards. On the contrary, the Czech Ministry of Finance is championing the OECD Base Erosion Profit Shifting (BEPS) process and speaks against an upgrade of the UN Committee of Tax Experts to an intergovernmental tax body. Tax policies As noted by the European Commission, the Czech Republic “continues to suffer from a relatively high level of tax evasion, although efforts are being made to counter this.” 340 These efforts are mostly focused on value added tax (VAT) and consumption tax. A special unit called “Tax Cobra” – which is a joint team of the state police, financial directorate and directorate of customs – has so far prevented financial loss totalling CZK 1.9 billion (€70.3 million) according to its own estimates. 341 Although the government’s Specialised Tax Office has undertaken a large nationwide control of the transfer pricing procedures of large Czech companies, 342 tax losses related to tax avoidance of big multinational companies remains outside the main agenda of the government. However, this does not mean that the Czech Republic is not negatively influenced by tax havens. According to estimates by the General Financial Directorate, savings related to Czech citizens in just three countries – Switzerland, Liechtenstein and Austria – amount to CZK 100 billion (€3.7 billion), generating CZK 1.7 billion (€62.8 million) every year in interest that is not taxed. 343 If the capital gains were properly taxed, this would generate about CZK 300 million (€11.1 million). This is exactly the amount that Czech NGOs are demanding from the government in terms of increasing the level of Czech Official Development Assistance. 344 In April 2015 the government approved a new Criminal Code. This included a tightening of the legal definition of tax evasion/fraud, implying that tax crimes that had not yet been carried out but were still in the planning stage would nonetheless be considered an offence. 345 In case of tax fraud that is prepared in an “organised group/manner”, the crime could be punished with between five to ten years of prison. The main focus of this change is to tighten the criminal response to VAT carousel fraud, which is usually prepared and committed in an organised manner. However, in theory this could mean that tax planning by multinational companies and wealthy individuals would also be considered as a tax fraud. Since 2014, the Czech Republic has been obliged to publish an analysis of tax allowances. According to the latest available figures obtained from the Ministry of Finance, tax allowances connected to corporate income tax and investment incentives were estimated for 2012 at CZK 5.5 billion (€203 million). 346 However, the Ministry warns that, “Due to lack of reliable data, the estimates do not include exemption for incomes from profit share between subsidiary and parent companies. We estimate the amount of this allowance to be tens of billions of CZK...” 347 This could mean that the Czech Republic is providing much higher tax incentives to multinational companies than is officially recorded. Tax rulings The Czech Republic has allowed tax rulings since 2006. According to data from the European Commission, it had 34 Advance Pricing Agreements (APAs) in force at the end of 2013, which is a significantly higher number than in big Member States such as Germany and Poland. 348 There are indications that the number is likely to be higher today since the Czech Republic received 30 requests for APAs in 2013 alone. 349
Fifty Shades of Tax Dodging • 51 The Czech Republic was criticised in May 2014 by the European Commission for delays in providing information about companies that may have preferential tax deals. 350 In a letter from 9 June 2015, the Czech Minister of Finance informed the Chair of the European Parliament’s special committee on tax rulings (TAXE) that “all necessary steps [to share information about the tax ruling practice of the Czech Republic with the European Commission]… should be finalised in upcoming days.” 351 Nevertheless, according to the Ministry of Finance letter the “number of acts similar to rulings issued in the Czech Republic is rather insignificant and their nature fully corresponds to general standards.” 352 In the letter the Czech Minister of Finance states that, “the Commission’s legislative proposal of 18 March 2015, which aims at improvement of the tax rulings’ transparency, was strongly welcomed…” 353 Special Purpose Entities (SPEs) According to the OECD, SPEs are not significant in the Czech Republic. 354 Despite this overall assessment, a conference held in June 2015 entitled “Slovakia and Czech Republic as Tax Planning and Asset Protection Alternative for Ukrainian Businesses” focused on the use of “special purpose vehicles for international tax planning and asset protection.” 355 Patent box The Czech Republic does not have a patent box. 356 However, there are various research and development (R&D) tax incentives that seem to be quite generous. According to a Deloitte survey, the Czech Republic offers a super deduction for costs incurred for qualified research activities. Deduction for the costs incurred during the implementation of R&D projects could be up to 200 per cent and tax relief of corporate income for investments in technological centres and strategic service centres could be up to ten years. 357 Tax treaties Regarding tax treaties with developing countries, according to information from the Ministry of Finance one new tax treaty with Colombia came into force 358 and one older one with Kazakhstan was updated (the new protocol has not yet been ratified). 359 Another tax treaty with Ghana is in process. According to available information, the bilateral tax treaty has already been approved by the Czech government. 360 No detailed information about the treaty itself or when it is going to be approved by the Czech Parliament could be found. A revised treaty with Luxembourg took effect from January 2015, replacing a treaty from 1991. The new treaty includes lower withholding tax on several income categories, including a zero per cent rate on dividends under certain conditions. 361 In general, the Czech Republic uses a combination of the UN and OECD models in its treaties. Before 1989 treaties with some countries (i.e. China, Nigeria and Tunisia) were negotiated using the UN model. Since joining the OECD, the Czech Republic uses its own template based on the OECD model. 362 Financial and corporate transparency Public reporting for multinational corporations The Czech Republic implemented into Czech legislation the exact wording of the Article 89 of the Capital requirements directive (CRD IV), which includes country by country reporting for banks with public access to these reports. 363 Whether the Czech government would be willing to support extending this reporting public requirement to other sectors remains unknown. Ownership transparency At an EU Council meeting in January where the anti-money laundering directive was approved, the Czech government issued a statement that welcomed the deal. However, it also criticised the directive for including a ten-year limit for keeping records for criminal proceedings in relation to money laundering, which it considered to be too short and stated its preference for a minimum threshold instead of a limit. 364 The implementation of the directive is set to begin this year. According to information provided by the Ministry of Finance, an amendment to the current legislation will be submitted to the government by the end of October 2015. 365 The amendment would include two options for a register of beneficial owners. The first version with a register that is not accessible to the public, and a second version would propose partly public access (part of which would be publicly accessible, including the following information: name, date of birth, country of residence and nationality of beneficial owner). 366 A final decision about which version will be implemented will be made by the government during the fall. The Ministry assumes the new law to be effective from 1 July 2016. 367
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