Shortcomings in VAT administration after accession of Czech Republic to European Union

Press release
May 4, 2007

During auditing operation No. 06/27, the Czech Supreme Audit Office (SAO) aimed at VAT administration after the Czech Republic’s accession to European Union (EU), as well as legal regulations of VAT gathering and the administrative proceeding of VAT check-ups. The audit followed a similar operation, numbered 05/19 and entitled “VAT administration”, which had been performed earlier. The audit operation found out ongoing shortcomings.

Auditors focused on period from May 2004 to the end of 2005, including associated data from the previous time and till the end of the audit. The audited bodies were Ministry of Finance (MF) and 10 tax offices (TO): TO in Humpolec, Jihlava, Kadaň, Liberec, Nymburk, Otrokovice, Sokolov, and Třinec, as well as the municipal tax offices in the 1st and 4th districts of Prague.

“Generally, we can say that the VAT administrators poorly controlled how the taxpayers were fulfilling their duties. At large, the administrators did not pay appropriate attention to various prices of business transactions. In several cases, the audited tax offices did not use their rights to annul VAT registrations of those subjects who repeatedly omitted handing in their VAT reports. As a result, the outland taxpayers were able to show deliveries to Czech tax subjects that had not declared them and thus had not paid VAT. We could have decreased the tax avoidance, had the administrators been due to deregister those VAT conscriptions,“ said František Dohnal, president of SAO.

By the VAT law, tax administrators are obliged to examine the reported data, withdraw expected errors, and use the data for scheduling tax duties. The audit revealed that TO did not follow the VAT law when administrating the taxes. For example, TO had not started off checking misinformation about outland taxpayers who were mentioned in the submitted summaries till the audit began. They also did no variety check-ups among prices of the same products in other countries of EU. In total, the differences made up over CZK 776 million. As a result of putting incorrect data about abroad purchases in Countries of EU, tax discrepancy of estimated CZK 2 billion occurred.

“Introduction of annual automatic comparisons of tax duties and VAT deduction demands would contribute to analyze and anticipate the future errors in VAT reports and could eliminate possible evasions,“ said Dohnal.

Auditors from SAO also focused on international cooperation and interchange of good-class information among tax administrators. “In some cases, tax offices avoided the possibility to send their information requests to other members of EU. At some time, they did not check whether the business transactions between payers from Czech Republic on one side and other EU countries on the other side were accomplished,“ added Dohnal.

The auditing operation was included in the Annual Audit Plan of SAO for the year 2006 under No. 06/27 and was performed in cooperation with the Bundesrechnungshof of Germany on the basis of the mutual cooperation agreement between the two audit institutions. Jiří Kalivoda, Member of the SAO, controlled the auditing operation and drew up the audit report as well.

Radka Burketová
Press Speaker
Supreme Audit Office

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