New instruments of the VAT Act ineffective; the tax evasion annually exceeds CZK 100,000 million
PRESS RELEASE on Audit No. 14/17 – April 27, 2015
The Supreme Audit office (SAO) audited new instruments of the VAT Act, which were supposed to fight against the tax evasion as well as increase the collection of the value added tax (VAT) in the years 2011–2013. Auditors also calculated the so-called “VAT gap” for the year 2013, which is the difference between the theoretic and the actual VAT collection.
The SAO calculated that the tax evasion amounted to CZK 105,000 million in 2013, which counts for the VAT gap 25.7 %. Since 2011, the VAT gap has been rising. According to the European Commission, the VAT gap in the Czech Republic exceeds the average rate in EU.
The SAO also assessed individual factors, which caused the tax gap in the Czech Republic. The tax gap was mostly (by 40 %) generated by entrepreneurs who misrepresented data in their tax reports – in this case the tax evasion amounted to CZK 42,000 million. Illegal and shadow economics made 7 % of the tax gap and the increment of unpaid balance made 25 %. The rest of the tax gap was created by other tax evasion cases and by inadvertent errors in tax reports (28 %).
Auditors concluded that the new instruments of the VAT Act failed to improve the VAT collection and decrease the tax evasion. The reasons why the measurements had such a little effect were many. Amendments to the VAT Act came into effect just a few days after their adoption and authorities had only little time for preparations. For example, financial authorities had three months to verify 518,000 bank accounts, which was not possible to manage in time.
On the contrary, the delegation of the VAT duty (a reverse charge of the VAT) had positive outcomes. But financial authorities sometimes misinterpreted this legal instrument and supervised it insufficiently. The rulings on untrustworthy payers were made slowly – by the end of 2014, authorities only released 156 such rulings. The SAO finds this number problematic as there were different quantities of cancelled registrations, overdue payments and number of subjects, who failed to fulfil obligations.
A new instrument of the VAT Act that aimed at business support – the provision on tax corrections with debtors under insolvency proceedings – caused many legal disputes about unclear stipulations. In the end, the Supreme Administrative Court of the Czech Republic had to decide on the matters. General Financial Directorate failed to monitor the impact of the new instruments. Annual reports of the Financial Administration and commentaries to the State closing accounts only emphasized that the new instruments would have positive effects without further details. As a result, the Government and the supreme legislative body have no feedback for an appropriate respond.
Supreme Audit Office