Tax and Legal News – October 2024

Nostalgic tax memories

By the time the kind reader scrolls through these lines, the author will be nostalgically reminiscing about his first day in tax consulting just 30 years ago. Please allow me a little of that sentiment and let's reminisce together about how the world of tax has changed in that time (a generation and a half).

The laws were then fresh (1993), short and punchy. The Income Tax Act had exactly 41 sections (189 today). The accounting procedures for businesses basically had more influence on the determination of the tax base than the law itself and were often more used. The VAT Act was logically organised and fit into a thin booklet, which cannot be said of the new law, which has been in force since EU accession and is dependent on the Directive. We no longer have a customs code, which has been replaced by a pan-European code. The dreaded “Triple Tax”, feared by tax consultants, has been completely dispersed.  Instead, we have lots of new taxes – windfall tax, top-up tax (unfortunately, only in one direction), taxes on coal, gas and electricity, levies on cigarette filters and inflatable balloons, and so on.

The tax rates were (in the consultant's view) friendly – income tax of 42% for corporations and a progressive rate of up to 47% for individuals. Social security with no cap – no wonder the “švarcsystém“ emerged then, and no wonder it was vehemently fought by the tax administration (today it has become a nice commonplace in many professions, and the tax administration may be relying on the self-cleaning effect of the impact on pension entitlements). 

The penalties were not to be ignored either, 109% p.a. for VAT and a third lower for other taxes. Is today's 20% fix + 15% p.a. a major incentive?

Case law in the tax area was practically non-existent, and if it existed, it was not public. It was still almost 10 years before the creation of the SAC (Supreme Administrative Court), which is now a trendsetter. Today, we have thousands of judgments in tax cases, and artificial intelligence searches them for the most relevant rationales, reversals and principles. 

The interpretations of the Ministry of Finance (there were still 10 years to go before the General Financial Directorate (GFD) was established) were non-public and inscrutable, and a well-asked and documented question led to significant tax savings in the form of a coveted non-public opinion of the tax administration on a tax issue. This is not to say that today's GFD, which issues no opinions for a change, is ideal; the idea of some transparent compromise in the form of publishing anonymized interpretations is tempting.

Abuse of law then played out on the magic rectangle 2-7-7-2: § 2(7) of the Tax Administration = real content > disguised legal relationship; § 7(2) of the Accounting Act already foreshadowed a true and fair view. The Halifax and University of Huddersfield cases, which held that the existence of a non-tax reason was still sufficient to preserve the tax benefit, were more than 10 years away. Today, despite the requirement of a prevailing non-tax reason, we have moved to within reach of the principle "consider all options and choose the least tax-advantageous one, or else it will be bad".

Tax authority checks were done on a random basis – no data analysis, red-flags, social media monitoring, cross-checking of reports or automatic international exchange of information. Checks were done on a random, hit-and-miss basis (unless there was a denunciation, which was, is and will be forever). In Prague 1, for example, once every 170 years, in Pacov every three years (not that there was more reporting there, there was just not much to check). And in a nice itemized way, travel allowances, depreciation, service costs.

Transfer pricing? § 23(7) has remained essentially unchanged since then, but the OECD (or any other) methodology has not, so this phrase has tended to be avoided by the authorities, and options have been available for experienced and creative taxpayers. Today, we have functional and risk profiles, benchmarks and binding assessments, and we can tax even the service of providing loss-making contract manufacturing to a parent company for which we don’t contractually manufacture anything.

For a tax advisor, the field had not been ploughed, sometimes it was enough to find the right paragraph, sometimes there were several, often from several regulations; logic and creativity were relentlessly applied and an answer was found. And if there was no answer in the law, or rather if there were more than one, the principle of in dubio mitius could be relied upon, i.e. in case of doubt, favour the taxpayer. However, careful and sophisticated advisers even then applied principles common today and did well – for the tax office always has at least 5 and at most perhaps 10 years to spare – and in that time even very solid doctrines can shift.

Then it was written up in a long report (nicely detailed, because it really amused everyone – from the taxmen, to the CFO, to more than one CEO (see above for tax rates and penalties). This was then printed, faxed (usually on a Friday night, but sometimes after the whole team had spent a weekend together in the office) and then discussed in a face-to-face meeting with the client. If the fax was not ready by 11:59 pm on Sunday, a blank paper was shoved into the fax machine (the client had to get the answer by the promised “end of the week” deadline), then the whole night was spent embroidering and on Monday morning the fax mistake was resolved and the message forwarded. Today, it’ll be done somewhere through Teams, the output will be uploaded to the cloud, the tracker will tick the box and a new tender will be issued to see who can do it even cheaper.

Yup, the golden nineties..