Auditing operation No. 04/07
Value Added Tax and Excise Taxes
The auditing operation was included in the Annual Audit Plan of the Supreme Audit Office (hereinafter referred to as „SAO“) for the year 2004 under No. 04/07. The auditing operation was managed and audit conclusion drawn up by Mr Josef Pohl, the Member of the SAO.
The aim of the audit was to examine the fulfilment of the duties of the tax and custom authorities when administering value added tax (hereinafter referred to as „VAT“) and excise taxes (hereinafter referred to as „ET“) as regards the import and the export of the goods and services.
The audited period covered the years 2002 and 2003 as well as previous periods in case of relevant connections.
The audited bodies were the Ministry of Finance (hereinafter referred to as „MF“), the General Directorate of Customs (hereinafter referred to as „GDC“), and twelve selected Tax Offices.
The SAO audit followed the audits carried out previously that had concentrated on the same area. In view of the increasing importance of international trade it also concentrated on international cooperation with Slovakia, in particular whether VAT and ET payers discharged their liabilities when importing and exporting goods and services.
The results of these audits indicated, among other things, continuing shortcomings in the activity of tax administrators, some faults of a systemic nature in cooperation between Tax Offices and the customs authorities that thwart effective control by the Tax Offices, and the failure of the VAT and ET payers to fulfil some of their obligations when they submitting tax returns.
In the administration of VAT and ET, shortcomings were detected in the following areas in particular:
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- The Tax Offices scarcely reviewed the VAT payers whether they paid a trade property tax when they required to be expunged from the VAT payers’ registration.
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- The Tax Offices were not consistent enough to carry out tax controls under the provisions of the section 16 of the Act No. 337/1992 Coll., or on-the-spot investigations under the provisions of the section 15 thereof. As a result, the justifiability of some claims for deduction of VAT charged was not examined sufficiently.
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- Official records and minutes of oral negotiations were not always drawn up in accordance with the provisions of the section 12 or the section 13 of the Act No. 337/1992 Coll. In some cases these minutes or official records were drawn up more or less as a formality and did not contain all the necessary details relating to the duty of taxpayers to abide by the provisions of the Act No. 588/1992 Coll.
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- The reprimand procedures carried out under the provision of the Act. No. 337/1992 Coll. slashed their effectiveness in 2003 in comparison with the previous year.
Inconsistencies between the details recorded in the Commercial Register and the reality led to delays in dealing with cases and made it more difficult to recover tax arrears. Although the tax authorities often discovered when dealing with cases that the records in the Commercial Register relating to the taxpayers did not correspond with the reality, they did not report these cases to the register courts with respect to the provisions of the section 2 paragraph 5 of the Act No. 337/1992 Coll. However, the provisions of the section 32 of the Act No. 513/1991 lays the duty on courts and other authorities always to notify the court keeping the Register about any discrepancy between the actual legal position and the state of the entries in the Commercial Register, as soon as this fact comes to light during the course of their activities.
From the size of the amounts of VAT arrears that were recovered (CZK 293 067 000 in 2002 out of a total volume of outstanding arrears of CZK 3 996 761 000, and CZK 244 044 000 out of a total of CZK 3 154 149 000 of outstanding VAT arrears in 2003), it can be seen that still only a small part of the arrears are successfully recovered.
The income from claims made in bankruptcy proceedings was low during the period covered by the audit. This was partly due to the fact that claims made by the state were placed in class II along with other claims made in bankruptcy proceedings. The situation was also made more difficult by the fact that in many cases by the time taxpayers were declared bankrupt they no longer disposed of any property.
The provisions of the section 62 paragraph 6 of the Act No. 337/1992 Coll. stipulate that uncollectible arrears for which the possibility exists that they will be at least partially recovered should be recorded in sub-ledger accounts. In 2002 the Tax Offices wrote off as uncollectible CZK 3 653.9 million of VAT arrears and CZK 611.3 million of ET arrears. In 2003 they wrote off as uncollectible a total of CZK 4 758.6 million of VAT arrears and a total of CZK 2 516.7 million of ET arrears. The GDC did not record separately the arrears of VAT and ET that it wrote off. Neither the MF nor the GDC observed the obligation arising from the section 62 of the Act No. 337/1992 Coll., and they failed to record arrears that had been written off in sub-ledger accounts.
The provisions of the section 8 paragraph 3 of the Act No. 563/1991 Coll. state that accounts are complete if during the accounting period all transactions have been entered in the account books that should have been entered in accordance with the section 3 of this act. But, for example, analysis of unpaid VAT was not included in the accounts of the GDC. According to the records of the Customs Offices, unpaid VAT totalled CZK 4.937 million at the end of 2002, and CZK 6.434 million at the end of 2003. In 2002 over CZK 221 billion of VAT were assessed by the Customs Offices, and in 2003 more than CZK 243 billion. The amount of ET assessed by the Customs Offices in 2002 came to more than CZK 40 billion, and in 2003 to nearly CZK 46 billion. During the audited period, though, the GDC only included income from these taxes in its accounting, although the list of accounts did include accounts for unpaid VAT and ET. The MF did not include analysis of tax income in the accounts in its list of accounts.
During the audit, as part of the international cooperation with Slovakia, the amount of goods actually imported and exported between the Czech and Slovak Republics was reviewed to see how they compared to the reported imports and exports. This cooperation brought to light problems in verifying commercial operations between partners in the two countries and deficiencies in the records of imports and exports. Among other things, it became apparent that when auditing the entries in the databases of the Czech and Slovak Customs Administrations it is in some cases not possible to clearly identify the corresponding entries on the import and export of goods between the two countries.
The SAO was able to verify facts demonstrating the correct application of VAT and ET from the data gained from the Customs Administration of the Czech Republic and from the documentation kept by the Tax Offices. The SAO of the Slovak Republic was in addition able to request the Tax Offices to furnish information about how the cases of individual taxpayers had been dealt with.
During the audited period the Tax Offices made use of the possibility to check details from the VAT tax returns and also information that was made available to them from the database of the GDC. Not inconsiderable funds were expended on the transfer of data between the customs and tax authorities in the Czech Republic; for example, CZK 767 000 were invested in making the National Register of the Standard Customs Declaration forms (Czech acronym JCD) accessible to the Tax Offices. In view of the fact that with the accession of the Czech Republic to the EU the administrators for VAT became mainly the Tax Offices, this investment would appear to be ineffective.
During the audited period, the Customs Offices were able, in accordance with the relevant provisions of the Act No. 13/1993 Coll. and the Act No. 588/1992 Coll., to return or waive import customs and VAT. VAT payers were obliged, under the section 43 paragraph 10 of the Act No. 588/1992 Coll., to reduce their original claims for deduction of VAT charged by the amount of tax returned by the Customs Offices, and to do so in the tax return for the tax period in which the tax was returned. The Tax Offices were not consistent enough to check whether this was in fact done. In 2002 the Customs Offices returned VAT to a total amount of more than CZK 319 million, and in 2003 they returned more than CZK 398 million.
During the audited period, no legal regulation stipulated any obligation for the Customs Offices to send the Tax Offices information about changes to or cancellation of Standard Customs Declaration forms (Czech acronym JCD). The JCD registers did not have access to the original values given in the JCDs, and so in some cases the Tax Offices did not know about changes to the JCDs. The level of interconnection and communication of information during the period under control was insufficient.
The ability of the Tax Offices to control the data on imports and exports given in tax returns was made worse, among other things, by the fact that taxpayers did not have to present lists of the JCDs on which they claimed deduction of or exemption from VAT when submitting their VAT tax returns, and also by the fact that the ADIS system did not contain any control mechanism (algorithm) linking the data from the tax returns and the data in the National JCD Register, which might indicate any discrepancy between these data.
From the information gathered from this and previous similar auditing operations it can be seen that there is still scope for tax evasion in the VAT and ET domains. It is therefore necessary to develop further legislative changes in order to eliminate opportunities for tax fraud, and that the work of the tax administrators is carried out thoroughly and responsibly.
Returning large amounts of deduction of VAT charged should be conditional, from
a certain amount upward, on the taxpayer providing documentary evidence of the justification for this deduction. Under the provisions of the section 102 of the Act No. 235/2004 Coll. on value added tax, effective from 1 May 2004, taxpayers are only obliged to submit a comprehensive declaration in cases where they supplied goods to another Member State of the EU to a person registered for VAT purposes in a different Member State. Tax controls,
on-the-spot investigations, and acts carried out in tax procedures should not be carried out as formalities, but thoroughly and to a high standard, so that the results of tax procedures are complete and enable as precise as possible an assessment to be made of large claims for deduction of VAT charged.