Cabinet approves tax reform

The Cabinet agreed to tax reforms Aug. 24 to put before the Parliament, but the plan has drawn criticism from unions, employers associations and opposition parties. Tax attorneys following the debate say there is still a long and rocky road ahead before a final bill is passed into law.

The tax reform proposed by the Cabinet would abolish the concept of so called "super-gross" wage calculations for income taxes, and would do away with several tax exemptions, including the meal vouchers provided by many companies to their employees.

"The aim of this reform is not to cut or raise taxes. The aim is to make them as simple as possible - their administration and payment - and set equal conditions for all," Finance Minister Miroslav Kalousek said.

The Cabinet's proposal for a stripped-down system of liabilities and deductions may be more simplified, critics say, but it risks exposing the most vulnerable in society to greater hardship.

"Kalousek's goal is simplification, not something that would be more just to society or would gain more revenues for the state," said Vít Samek, head of the legal department at the Czech-Moravian Confederation of Trade Unions (ČMKOS). "If you get rid of deductions for handicapped people, vouchers and different deductions for different groups, of course it could be simpler - but not necessarily better."

In addition to terminating many deductions, the Cabinet reform would scrap the super-gross system of income tax calculation, whereby an employee's tax contribution is calculated as 15 percent of the employee's gross wage combined with the employer's payroll tax contribution. Critics of the super-gross calculation, or what some call a "Czech invention," say it is just a way to show employees how much their employers spend on them and does nothing to increase state tax revenues or make tax obligations more equitable. Under the reform, employee taxes would be calculated as 19 percent of the gross wage alone.

"The super-gross system is certainly more complicated, but every reform is introduced as a simplification compared with the previous system, and I don't think we've ever achieved that," said Pavel Fekar, a tax associate at Baker & McKenzie. "I have doubts that this reform will be a simplification - it will just be different. People will have to study it and change their practices to follow it, and companies will have to change their software, but that's it."

Also concerning employers is the change to their health and social insurance payments for workers, which would be lowered to 32.5 percent of total wages from the current 34 percent. Health insurance contributions by employees are to be raised 2 percent, and social and health insurance payments by self-employed would be lowered.

Samek said the disparity in tax advantages favoring self-employed people will increase pressure on employees to become self-employed by working on a trade license. He adds that slashing meal vouchers, which would be replaced by a 3,000 Kč annual tax bonus instead, would unduly punish workers, employers, and restaurants and pubs. He is skeptical, however, of the coalition's sincerity in ending meal vouchers, saying it may be a political trick to rile tempers and draw attention away from other parts of the proposal. Coalition partners Public Affairs (VV) and the Civic Democrats have vowed they will fight to save meal vouchers, as have the Social Democrats (ČSSD) and the Communist Party (KSČM).

Confederation of Industry Chairman Jaroslav Hanák welcomed several of the measures in the reform, including the cancellation of taxes on dividends, which he said is one of several steps included in the reform that will help maintain economic competitiveness.

Tomáš Hlaváček, tax partner at White & Case, said the question of taxes on dividends is difficult, as there is no consensus to draw from tax policy in other countries.

"There is no common practice on dividend taxes in Europe. Slovakia recently abolished them, and the United Kingdom hasn't had a withholding tax on dividends in years, but Luxemburg, Holland and many other countries do have it," he said. "But gift and inheritance taxes here are a different story. They're very low here, and it's kind of unusual."

Though getting rid of the tax on dividends may make the country more attractive for some investors, Fekar said scrapping the tax on dividends may have negative consequences.

"If you combine an exemption from withholding tax on dividends with the exemption on capital gains tax already in place, along with the low inheritance and gift taxes among relatives, then the Czech Republic will be more beneficial for certain individuals than living in Switzerland, and it could create a real tax haven."

Emily Thompson can be reached at
ethompson@praguepost.com