Tax and Legal News - March 2023

Editorial - Tax for the state budget

Let me start by suggesting that fair, balanced and just taxation is a thing of the past. Tax is a source of revenue for the state budget and the state budget is going to need a lot of it. Both at home and in most other countries. COVID losses, energy subsidies, social assistance to the needy, pension reform for an ageing population, new defence spending and much more will need to be financed. The world has changed.

In parallel, a systemic reform of international taxation may still be underway, but even there we can expect strong voices for filling state budgets rather than achieving fiscal beauty. Pillar I of the OECD is a nice idea. Taxation of income where the customers are. If this could be completed at some point in the future, we would get rid of transfer pricing, residency, permanent establishments and many other terribly complicated and confusing concepts. Life would be easier. However, the current proposal foresees its introduction only for large entities and only for a part of income. So we have to keep all those complicated concepts and learn the rules of Pillar I.

Pillar I should go hand in hand with Pillar II. It is a two-pillar reform. Pillar II is another beautiful idea – all corporations will pay a minimum 15% tax. If it is not collected by the domestic tax authority, it has to be paid somewhere else in the group. That's where the beauty ends. The complexity of the implementation rules exceeded all expectations. Those who have tried to read it understand. Pillar II was finally approved by everyone and we’ll be implementing it.

However, we got stuck on Pillar I, with the French reportedly saying the US, Saudi Arabia and India were blocking the proposal. The EU directive implementing Pillar II keeps this in mind. If Pillar I fails, the European Commission is to come up with a proposal to address the challenges of the digital economy. I guess we'll be back to the digital tax here. The question is whether we won’t get stuck again – perhaps again with the USA – as happened during the last attempt.

The windfall tax, for example, interferes with this seemingly systematic approach. Completely unsystematic, but we simply need the money. We have already written a lot about the windfall tax on this site, so we’ll rather quietly watch who’s first to bring a lawsuit because of it.

Much more creative is the Italian tax administration's attempt to collect VAT on something we all use for free while somehow suspecting that nothing in life is free. Simply put, they want Meta to pay $900 million in VAT. Access to their platforms is allegedly not free, but in exchange for the provision of personal data, and should therefore be subject to VAT as barter. Allegedly, similar considerations took place years ago in Germany, but they did not lead to a real crackdown. VAT is nicely harmonised in the EU, so we'll be watching to see how Italy fares and whether other Member States join in.

And what about the Czech Republic? Do we have any more treats in store after the windfall tax? Maybe. Perhaps the update of the Czech government's program statement published last week. The government no longer has the ambition to create a tax brake (tax burden ceiling). It no longer promises to accelerate depreciation on rental housing and other buildings, nor will it reduce VAT on the construction and renovation of flats, nor will social insurance be reduced by 2%. I think the trend is clear. But let's not despair, the new Director General of the Financial Administration of the Czech Republic promises to build an environment of mutual cooperation and return the Financial Administration to its reputation as a fair, just and client-oriented institution. So, we look forward to that.