Corporate income tax: despite high administrative burden on taxpayers, the financial administration has introduced an annex to tax returns without any analysis of data usability
Press release to audit No. 17/21 – 11 February 2019
The Supreme Audit Office focused on corporate income tax administration in 2013-2016. Auditors addressed, in particular, how the collection of this tax had worked in practice and what results the financial administration1 had achieved in its collection. They also dealt with areas which might have a negative impact on the collection of the tax.
One of the risk areas is tax evasion and tax avoidance by means of the so-called ‘linked third parties’ — a capitally or personally linked companies which are often based in countries with more favourable tax arrangements.
In order to obtain information that would help the financial administration to detect potential tax evasion by linked firms, since 2014 selected taxpayers also have had to attach a list of realized transactions when submitting tax returns.
In spite of the great importance of the provided data, the financial administration has introduced only an annex to the tax return by means of which it should receive the information. The General Financial Directorate (GFD) did not provide the auditors either with analysis or with any other material that the GFD had considered before introduction of the annex whether such a fundamental change should have gone through a legislative process. Prior to its introduction, the GFD had not analysed whether such data were of any help or were an unnecessary administrative burden. In 2016, this obligation affected almost 14,500 entities. At the same time, as shown by World Bank data2, the time needed to comply with all tax obligations in the Czech Republic was long. In 2017, it took taxpayers 53 hours to deal with the corporate income tax and about 230 hours with all taxes.
The effectiveness of the tax collection was then affected by errors arisen during financial administration controls, owing to which Tax Offices had to return money to payers for a wrongly assessed tax and also to pay interest. Between 2013 and 2016, it were cases worth of CZK 180 million, out of which CZK 61 million consisted of interests, which were an unnecessary burden to the state budget.
It has also emerged that reported statistics on results of financial controls were overestimated in 2015 and 2016. In 2015, the GFD stated that on the ground of carried out controls, entities had been assessed an additional tax rate of almost CZK 1.8 billion. After offsetting appeals which the entities had used and which had not been covered by the financial administration in their statistics, this in fact amounted to CZK 850 million. This was also the case in 2016, when the GFD reported almost CZK 1.8 billion, but in reality it was roughly CZK 1.1 billion.
Finally, auditors also focused on the financial administration’s access to Czech crowns bonds. The financial administration started to deal with possibilities of abuse as late as in 2017, on the basis of information from the media, the public, or outcomes of discussions of the Committee on the Budget of the Chamber of Deputies of Parliament of the Czech Republic. Until then, it had not been identified as a risk area. As a result, the financial management started to lag behind with controls of taxpayers’ Czech crowns bonds. As a result, in case of at least 15 examined entities, the time limit for the possible assessment of an additional tax had elapsed.
In the audited period, the collected tax increased. In 2013, CZK 217 from corporate income tax was collected for CZK 1, and in 2016, it was CZK 243. The positive trend was particularly attributed to economic growth.
Communication Department
Supreme Audit Office
1] Ministry of Finance, General Financial Directorate, and selected Financial Offices.
2] Paying Taxes 2018;The World Bank Group and PwC 2017.