...no one can deny that taxes are what we pay for an organized government. Or that taxes are a tool to shift resources from private investment to public investment; in other words, to shift the intent of investment from private focus with possible public benefit to public focus with possible private benefit.
The goal of economic policy to find the balance between public and private investment that creates the greatest and widest level of prosperity a country can achieve. The goal of tax policy is find a way to finance that level of public investment without decreasing private investment below that optimal level. That involves three primary factors: 1) avoiding taxes that overly distort investment decisions, 2) achieving a high level of compliance on the lowest possible level of taxation, and 3) creating incentives for certain types of high value-added investments that help reduce the risk of those types of investment.
The first factor could be called tax balance. The more evenly taxes are distributed over different economic activities, the less likely companies will modify their investment decisions due to the added cost of taxation or due to their desire to avoid higher level of taxation (for instance, on labor). The ideal system would eliminate consideration of tax consequences from private investment decisions.
The second factor could be called tax fairness. For taxes to be fair, every person should pay the same tax for the same economic activity. Evading that tax creates not only the unfairness of one person paying their full share of tax while another does not, but leads to a second unfairness: in order to collect the full share of tax from those who intend to evade paying it, authorities have to build systems of compliance which increase the cost of taxes for not only the state, but also those who want to pay their full share. Everyone who evades taxes, therefore, contributes to a below optimal balance in the tax system.
The third factor could be called tax competitiveness. In order to generate wealth, each country strives to generate products and services that other countries will buy. Those products and services can either be a cheaper version of what is available in other countries or a better version that can sell for more. Better versions create bigger prosperity. Keeping a higher level of products and services require riskier investments into education and research. To help private investors offset the cost of those risks, countries can create tax incentives that encourage private investors to take the risk of such investments.
Over the next pages, we provide some international data on these three factors to put some perspective on how Central European countries conduct tax policy. Read the analysis attached below (in English).
Read also notes and quotes from the 2017 AmCham Regional Tax Conference. All presentations are available here.
Czech Finance Minister (until 24 May 2017) A. Babiš: "We can be back atop of Europe, we can create the growth by ourselves. It would take hundreds of billions of crowns invested – and people. Managers should engage themselves more in public affairs and should have people around who would be able to finalize the legislative steps needed… "
"There is no reason to increase investment incentives...Pouring money into incentives without knowing what the outcome will be is non-sense."
L. Malůšek, Partner, Tax Services, KPMG Czech Republic: "In the latest KPMG tax survey, 71% of respondents named tax administration as a source of inefficiencies, 63% named shadow economy… There is a lack of openness to business approach – there is a need to extend possibility of binding rulings, for example."
S. Kouba, Czech Minstry of Finance mentioned the key role of improving the risk analysis. However, this requires an IT system and a big data set provided by taxpayers. This seems as a bigger administrative burden for taxpayers, but a centralized database would solve the problem, as it would enable better data flow between individual databases run by the state. Based on the risk analysis, tax administration could plan targeted audits. Control statement is meant to stop caroussel fraud. EET enables to collect more taxpayer data. "Our preference is electronic and standardized communication related to tax duties, i.e. automation. All data should have an electronic format and this would open the new way of communication between the tax administration and clients, the so-called virtual tax office. Parts of taxpayer files could be open. Legislation should be pushed in this direction."
M. Brix, CFO, LeasePlan, sees the impact of the online sales registration system on small businesses rather than on large corporations. He agrees with the idea that the attitude towards paying taxes must be identical for all taxpayers. We cannot simply say that small businesses are not used to paying taxes. "If companies devote sufficient attention and care to their tax issues, nothing should surprise them and the cooperation with the tax administration is simple and unproblematic." It should also be noted that the tax system cannot be too simple and big corporations cannot expect to process their tax return within a couple of days.
P. Chrenko, Partner, PwC Czech Republic, forner Deputy Finance Minister: "Companies are more and more pushed to show that they are good citizens, that they support good governance. Cooperative compliance means enhanced cooperations. But both sides need to start working diffferently as the old ways are unsustainable..." Good governance is nothing new, so why not use good governance as a principle in the tax area, asks OECD. But if I am doing more than legislation requies, what benefit do I get for that, asks the taxpayer.
L. Klimešová, Specialized Tax Office: Big companies have a major influence on the state budget and that is why they have been monitored so closely. Their compliance or non-compliance has impact on the government expenditure plans. "EET and control reporting provide data for risk analysis of individual taxpayers, make possible the segmentation of taxpayers into reliable and unreliable and frame their behavior. We are interested in credibility of individual taxpayers... The project of horizontal monitoring raises many questions and there has to be an expert debate to make sure that there is motivation on both sides." She also mentioned the Tax Kiosk project, a platform for the submission of accounting data.
L. Říhová, Partner, EY Czech Republic: "According to the EY R&D Incentives Reference Guide 2017, almost all OECD countries consider supporting R&D in some form, only Germany has no R&D tax incentive anchored in their legislation, but they are discussing it...We need R&D tax incentives.“ B.Springael, AmCham Belgium: "There are Incentives for employing foreigners in R&D in Belgium, for example."
G.Hrachovinová, Czech Chamber of Tax Advisers: "There are things that taxpayers and the financial administration view differently, but what they have in common is that they have the same expectations: professional approach, pro-actve cooperation on a partnership base, mutual trust, openness, transparency, timely response."
Weston Stacey, Executive Director, AmCham Czech Republic: "The role of the government is that we do not pay any less tax than we should. We need to agree that the cost of compliance is not too high for any of the two sides."
More expert opinions and practical examples from abroad:
F. Imrecze, President, Slovak Financial Administration, described the state of compliance in Slovakia, where in 2012, 80% of businesses were compliant vs. 20% involved in a tax fraud (the ratio in Scandinavia is 95%:5%). This meant that the starting point in 2012, when he took up the Office, had to be repressive measures. VAT gap was 41%, 3.3 mld EUR (VAT was a product, a field of business), effective tax rate was 11.8%. Measures included the Cobra unit, new joint analytical centre including police, financial police, prosecution that enabled centralized exchange of data - will be launched in 2018. A number of action plans were adopted, the first included 50 measures, the second 30 measures, third to be implemented, includes 21 measures. In 2014, 4,500 carousel frauds were uncovered. There was a dramatic decline after the above-mentioned measures were implemented. Currently (2016 data) effective tax rate is 15.12%, VAT gap 2.2.mld EUR, 28% percent...
"Back in 1990, we did not ask, and even in 2000, we did not ask how to build a central database for communication. Estonia did ask somewhere. Estonia as a model for us to follow is a far away future. Our databases are not integrated. Centralization of the systems would help build quality relationship between the business and the tax administration..."
"There was no other way than repression at the beginning, but it is now the time to balance the repressive measures with massive support to tax compliance... Unless something is not managed electronically, it is not managed. You cannot manage paper – there is too much human factor involved."
There is a large group of small sole traders and entrepreneurs who reject the idea. In March 2015, Slovak Financial Administration launched a single portal for tax and customs administration ADIS. This is not a twin of the Czech ADIS, but a new system. There is a central database that the administration can build on and it is safer and more stable than the central government system.
He also explained that the Slovak tax administration addresses various groups of taxpayers. The tools include live chat, call centres; large companies are treated within a special regime. The approach to taxpayers is rather industry-based than turnover-based. "We would like to segment the market, apply different approach to various groups; we would like to make Slovakia more competitve in terms of customs procedures." The issuance of a binding ruling costs 4,000 EUR; there were five rulings issued in 2016, so the plan is to go down with the price. Poland started with a very low price and many more binding rulings were issued.
"What we need is trust, transparency, respect, treat taxpayers as compliant, not with suspicion. But we have to audit all procedures and we will do that with all companies. Besides customer care, we want to Improve legal certainty for the client. The more we can rely on clients processes and the more they can rely on our pocesses, the higher revenue.
The Slovak Financial Administration also introduced the Index of the taxpayer reliability as a means of supporting voluntary compliance. The reliable taxpayers get benefits (mistni zjistovani instead of tax controls, lower sanctions than sanctions for unreliable taxpayers – the unreliable taxpayers then face much higher sanctions). The Index covers more than 40 criteria such as risk profile, compliance history, the way taxpayer communicates with the tax administartion, etc.
"I would rather seek competitive advantage in effective customer service than in tax rates. There is not much freedom in the area of taxes, so we have to focus on electronization and customer service instead."
P. Gruza, Polish Deputy Finance Minister: Polish financial administration divides taxpayers into large taxpayers and everybody else; the division is based on industry rather than turnover. "Data will bring us only to a certian point. Real time collection of data does not prevent us from VAT fraud. Data will be part of our system, but we are trying to devise a payment mechanism where VAT payments are done via subaccounts in banks. It should be a safe platform, and involves a huge technical banking element. The idea is to grab the money before it evaporates."
"We want to learn from our Czech and Slovak colleagues what is related to data collection, but we also want to go one step further. We want to create a new relation between corporation, tax advisor and tax administration. We want a tax advisor to work more on the side of tax compliance, have a more balanced view of the situation, to dismiss agessive optimization line. This means transformation of tax advisor job into a more compliance-based service line."
"CSR is welcome, but it cannot replace corporate income tax."
"We have brain drain from tax offices for big four companies, we need to attract talent into financial administration."
"Our economy is not progressive enough, we perform simple tasks in value chains in the global economy and we want to go one step further." The only way how to progress is to have more value added industries and tax instruments are part of this policy. We want to change the mindset of our corporations and SMEs to create more intellectual property in Poland. "We tell them: Do this and it will pay off tax-wise. But we need more than just tax incentives."
G. Hrachovinová, Czech Chamber of Tax Advisers, on horizontal monitoring:
The idea of horizontal monitoring appeared for the first time in 2001 in the Netherlands, in 2009 it was applied on selected large corporations. Austria followed suit in 2013. So how did they test the idea in Austria?
Financial administration focused on large corporations and found out that they pay 89% of the total corporate income tax paid and 84% of the total VAT paid. Selected corporations were contacted, preparations were made, contact persons selected. Financial administration issued control report for the 2010-2012 period and selected large taxpayers signed a memorandum on accesion to the pilot project on horizontal monitoring. Both sides stated their goals and expectations. Companies submitted tax returns and the financial administration requested documents. The financial administration issued a statement accepting the tax return. The feedback was positive; corporations involved in the project liked the fact that there is one person visiting the company knowing it well. Also, what was unclear could be easily clarified in this way.
As a result, companies felt that horizontal monitoring increased their efficiency in the tax area. Austria plans to introduce horizontal monitoring into tax practice. In Germany, preparation is underway. Details are available in a presentation.
"I hope that based on practical experience from Austria and the Netherlands, the Czech financial administration maybe could reconsider their plans to start the pilot with SMEs... Horizontal monitoring is a competitive advantage for our country...Taxes can unite (people)."
According to an Informal vote where the question was - How many of the participants would be in favor of introducing horizontal monitoring in the Czech Republic, Slovakia, Poland? - no one voted for „definitely no“, majority voted for „yes“, some participants voted for „maybe“.
6th September 2018
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