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The Czech Republic

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1) REFERENCES

Commission Opinion COM(97) 2009 final [Not published in the Official Journal]
Commission Report COM(98) 708 final [Not published in the Official Journal]
Commission Report COM(1999) 503 final [Not published in the Official Journal]
Commission Report COM(2000) 703 final [Not published in the Official Journal]
Commission Report COM(2001) 700 final - SEC(2001) 1746 [Not published in the Official Journal]
Commission Report COM(2002) 700 final - SEC(2002) 1402 [Not published in the Official Journal]
Commission Report [COM(2003) 675 final - SEC(2003) 1200 [Not published in the Official Journal]
Treaty of Accession to the European Union [Official Journal L 236 of 23.09.2003]

2) SUMMARY

In its Opinion of July 1997, the European Commission took the view that transposal of the acquis in the direct taxation field should not pose significant difficulties for the Czech Republic. That assessment also held for indirect taxation, provided that the country made a considerable effort.

The November 1998 Report, however, stressed that no progress had been made in bringing Czech law more closely into line with the acquis.

The October 1999 Report stated that the Czech Republic had adopted VAT legislation very similar to Community legislation. However, the legislation on excise duties did not completely conform to the acquis. The Czech Republic should draw up a more structured and more closely targeted pre-accession strategy in this area.

The November 2000 Report noted that certain additional measures had been implemented in the fields of VAT and excise duties. With regard to administrative cooperation and mutual assistance, no significant developments were evident. In the area of direct taxation, the rates of income tax (higher band) for natural and legal persons were decreased to 32% and 31% respectively. In addition, the legislation on the rate of tax withheld at source of 15% on dividends and interest was aligned with the acquis.

The November 2001 Report noted that the only significant progress was in the field of excise duties. A single combined duty (specific/ad valorem) was established for cigarettes, and tax stamps were introduced for cigarettes, cigars and cigarillos. Similarly, duty rates on certain mineral oils rose and wine was now subject to zero duty. However, no progress was made in the areas of direct taxation and VAT, where the rate for restaurant services was even reduced from 22% to 5%, thus breaching the acquis. The closure of duty free shops at land borders was put off until December 2003. Progress was made in the field of mutual assistance and administrative cooperation (recovery of debt relating to the EAGGF, customs duties linked to VAT and certain excise duties). The effectiveness and transparency of the tax administration was improving its capacity.

The October 2002 Report notes that no legislative progress can be reported in the fields of indirect taxation and direct taxation. Progress has, however, been made in the areas of taxation, administrative capacity, administrative cooperation and mutual assistance.

The 2003 Report recorded that the Czech Republic was essentially meeting the commitments and requirements arising from the accession negotiations in the taxation chapter, except on duty free shops at land borders. In view of the repeated failure to close such shops and in particular in light of the recent further postponement of their closure until the end of March 2004, it was most important that shops be closed without any further delay.

The Czech Republic was granted transitional periods for the continued application of the reduced VAT rate on the supply of construction work for residential housing not provided as part of a social policy (until 31 December 2007), and on the supply of heat energy used by households and small entrepreneurs not registered for VAT for heating and water services (until 31 December 2007). It also obtained derogations for the application of a VAT exemption on international passenger transport and VAT exemption and registration thresholds of EUR 35 000 for SMEs. The Czech Republic was granted a transitional period regarding delayed implementation of the excise duty rates on cigarettes and other tobacco products (until 31 December 2006: minimum excise duty equivalent to 57% of the retail selling price and minimum excise duty of EUR 60 per 1000 cigarettes of the category most in demand; until 31 December 2007: minimum excise duty of EUR 64 per 1000 cigarettes of the category most in demand), and a derogation to continue to apply its excise duty rate scheme for spirits distilled from small red fruit, provided that the quantity does not exceed 30 litres of fruit spirit per year per household and the reduced excise rate is not less than 50% of the standard national duty rate for ethyl alcohol.
The Treaty of Accession was signed on 16 April 2003 and accession took place on 1 May 2004.

COMMUNITY ACQUIS

The body of EU law in the area of direct taxation mainly concerns some aspects of corporation taxes and capital duty. The four Treaty freedoms have a wider impact on national tax systems.

The legal framework for indirect taxation consists primarily of harmonised legislation in the field of value added tax and excise duties. This includes the application of a non-cumulative general tax on consumption (VAT) which is levied at all stages in the production and distribution of goods and services and requires equal tax treatment of all domestic and import transactions.

In the field of excise duties, established EU law and practice comprises harmonised tax structures and minimum rates of duty together with common rules on the holding and movement of excisable goods (including the use of tax warehouses).

EVALUATION

Value Added Tax

The Czech Republic has continued to align its VAT and excise duty legislation. The VAT system in force incorporates the broad principles of Community legislation. Yet since the 1998 Report there has been no real progress in aligning legislation with the acquis. The alignment of VAT and excise legislation has been considered as a less important priority since the first opinion on the matter was delivered by the Commission in 1997. However, a special programme to monitor the accuracy of VAT declarations has been established.
Despite efforts being made in 2000, the trickiest problems affecting in particular the application of the rates (public authorities) and VAT exemptions (subsidies) still remain. The same is true for the establishment of a complete system for VAT refunds for taxable persons not established in the territory and the application of the right to VAT deduction allocated from the bottom up.
In April 2002, a VAT rate of 10% on bus transport operated by Austrian companies was introduced. However, in its 2002 report, the Commission notes that this rate is not in line with the acquis, as the VAT rate is applied only against Austrian bus operators and not in a general manner, and may therefore constitute a discrimination.
Overall, it would appear that, because of the delays in the gradual alignment of rates, VAT rates in the Czech Republic are still far from being aligned with the Community acquis.
At the end of 2003 alignment still needed to be completed on the scope of the reduced VAT rate for some supplies of goods and services, and the scope of exempt transactions. Alignment was also needed in the following areas: VAT refunds to foreign taxable persons not established within the Czech Republic; further reduction of the registration and exemption threshold for small and medium-sized enterprises (SMEs); introduction of certain special schemes including for second hand goods, travel agents, investment gold; introduction of the intra-Community regime.

Excise duties

Although the Czech Republic has continued to align its excise legislation, there has been some delay in transposing the acquis. As in the case of VAT legislation, alignment in this sector has progressed only slightly.
In July 1999, the Excise Duty Act was amended by an increase in the rates of duty for tobacco products, including cigarettes, and mineral oils. Duty-free shops at the country's land borders with the European Union continue to operate. Parliament rejected a government proposal which would have terminated the operating licenses for these shops by the end of 2001 at the latest. In September 1999, the government adopted a new proposal to close these shops, without however specifying a date. This date is now planned for some time before 31 December 2001 but follow-up work is required since the date of closure has already been postponed several times.
The 2000 report states that a single combined system for duties (specific/ad valorem) should be introduced for cigarettes. The 2001 report is satisfied with the adoption of a single combined duty for cigarettes. However, the 2002 report does not report any significant progress in the area of excise duties.
In 2003 the Czech Republic adopted legislation aiming to fully align with the acquis, except for the areas where transitional measures were granted in the accession negotiations.

Direct taxation

According to the Commission 2002 report the Czech Republic needed to align its legislation further with the acquis, in particular by eliminating potentially harmful tax measures and complying upon accession with the Code of Conduct for Business Taxation to the same extent as current Member States.
At the end of 2003 alignment needed to be completed with the Directive on indirect taxes on the raising of capital and the Merger and Parent/Subsidiary Directives. The Directives on interest and royalties and on taxation of savings income had still to be transposed.

Administrative capacity

As regards administrative capacity, the Czech Republic has strengthened and modernised its tax administration, regarding both VAT and direct taxation. According to the Commission's 2002 report, it appears to have adequate legislative and administrative structures to ensure effective tax collection, enforcement and controls. In addition, the transfer of the administration of excise duties to the customs administration is progressing well. 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.
By the end of 2003 the necessary administrative structures for VAT and direct taxation were in place.
The transfer of the administration of excise duties to the customs administration was progressing according to plan, but some measures remained to be completed on schedule.

Administrative cooperation and mutual assistance

With regard to administrative cooperation and mutual assistance, a Central Liaison Office was set up in February 2002 within the tax administration. 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.
By the end of 2003 the Excise Liaison Office was established, but needed additional staff. Preparations for the VAT Information Exchange System were progressing.

This summary is for information only and is not designed to interpret or replace the reference document.

Last updated: 09.01.2004
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