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Corporate tax fluctuations draw criticism

Study ranks ČR's tax system third to last in Europe

By Michael Heitmann
Staff Writer, The Prague Post
January 23rd, 2008 issue

The complex and variable tax regime of the Czech Republic has become a black mark on the country in the eyes of corporate investors.
That’s the conclusion of a recent Europe-wide survey that ranked the Czech Republic third to last in the overall attractiveness of its corporate tax system. Managers surveyed in the study, which was published by the accounting and consulting firm KPMG, gave the tax system low scores on categories like “clarity of interpretation” (0 points on a 100-point scale), “relations with tax authorities” and “consistency” (both 27 out of 100).
Managers criticized the sheer volume of tax legislation as well as the tax system’s instability in recent years.
“The Czech tax system is less stable and settled than those in many Western countries,” said Jan Žůrek, a partner at KPMG. “Frequent changes, additions and amendments have created the impression with entrepreneurs that the system is complicated and opaque.” Some tax laws are so vague and open to interpretation that many business owners are wracked with insecurity, Žůrek added.
The Finance Ministry disputes the methodology of the KPMG study and other surveys like it. Such rankings, which derive from the opinions of experts on taxation rather than on hard facts, mostly serve to advertise the consulting services of the publisher, said Zuzana Chocholová, spokeswoman for the Finance Ministry.
“The tax system does not significantly deviate from the usual standards set in developed countries,” she said. “Of course, it’s not perfect, and there’s always room for improvement.”
More improvements could lead to more confusion, though. Now that the government has reduced corporate taxes as part of the public-finance reforms — to 21 percent this year and 19 percent in 2010, down from 24 percent previously — it might be time for a period of rest. The tax system would benefit from such an approach, although it’s unlikely to happen, Žůrek said.
“In much the same way that the business environment here and throughout the world changes quickly, the tax legislation will be continuously developed and complemented,” he added.
The Finance Ministry acknowledged that frequent alterations to the corporate tax system had a detrimental effect, but said recent changes were necessary — as will changes they hope to make in the future.
“We’re striving to create a new income tax law that allows us to change certain parameters, like the tax rate, according to current budget requirements without having to completely reinvent the whole system,” Chocholová said. Such a system could then survive for years without major revision, she added.
Tax jockeys
While the tax authorities may want to avoid frequent changes to tax laws, the most recent revisions are welcomed by many experts.
“Yes, the tax system is complicated and changes frequently,” said Petr Mach, executive director at the Center for Economics and Politics. “But in 2008, it is changing for the better.”
Žůrek also praised the government for its move toward reform, saying chances are that the Czech Republic’s image will improve and its attractiveness for foreign investors will increase. “The new legislation creates a favorable environment for the creation of holding companies, thereby attracting more financial capital,” he said.
While Greece, Romania and the Czech Republic ranked last on KPMG’s list, Cyprus, Ireland and Switzerland occupied the top three spots. The countries scored well because they offer attractive tax regimes, good track records and forthcoming tax offices, Žůrek said.
The KPMG survey will likely have only a slightly negative impact on the Czech Republic’s image, Chocholová said. It has yet to be proven that the tax system is the single key factor in making investment decisions. Businesses also consider tax security, the state of the country’s infrastructure and its labor force, Žůrek said.
The overall corporate tax rate is an important consideration for firms, of course.
“Companies in general want to pay a zero-percent tax rate. That’s only natural,” Chocholová said.
That natural urge has led some European Union countries to lower corporate taxes, hoping to lure companies their way. To counter this and, more importantly, simplify their long-term planning, many managers would like to see a common tax base across the EU — 78 percent responded positively to such a proposal in another KPMG study last summer, Žůrek said.
One country known for luring Czech firms is the Netherlands. New World Resources (NWR), the parent company of the Czech Republic’s largest coal-mining company, OKD, is among those already based in Holland, setting up shop in Amsterdam in 2005.
Locating holding companies like NWR in the Netherlands has many causes, said NWR spokesman Joe Cook. The majority of NWR’s owners are not Czech, and the Dutch are known for their “historic receptiveness to international business.”
“Of course, the tax regime is also a factor. But that’s only one of many issues to be considered and seldom is the only or main driver of commercial decisions,” Cook added.
To compete with business powerhouses such as the Netherlands, the Czech Republic should take pains to secure investments in technology, said Raiffeisenbank analyst Aleš Michl.
“Investors in these fields regard excellent education as well as a predictable and transparent legal environment as highly desirable,” he said. “Then, and not till then, do they look at the tax rate.”

Michael Heitmann can be reached at mheitmann@praguepost.com


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