The administration of the income tax: the system is non-transparent and complicated, impacts of the introduced measurements not evaluated
PRESS RELEASE on Audit No. 16/21 – August 21, 2017
The Supreme Audit Office (SAO) performed an audit of the administration of the income tax within the period from 2012 to 2015. Auditors scrutinized whether the tax administration offices followed the appropriate legislation and what was the impact of legislative changes related to the income tax revenues.1 Auditors concluded that the law on income taxes had become too complicated as there were many exceptions, which complicated the tax administration and increased the administrative burden on both taxpayers and offices. The effectiveness of the income tax collection was also adversely affected.
The performance of tax administration was also influenced negatively by various allowances and tax deductions and their adjustments. Frequent legislative changes influenced the accuracy of annual estimates of the State budget revenues. During the audited period, new tax deduction practise was introduced, which allowed for deductions according to the number of children in the family, tax rise for people with high-income, and there were changes to the conditions for taxable amount calculations. The legislative changes also affected the estimated tax collection. The tax revenue estimates differed from the actually collected amounts by up to some 6 %.
The Ministry of Finance did not analyse how the amendments of the Income Tax Act would influence the national budget. Data from tax reports were available, but their processing did not make it possible to monitor the actual impact of individual changes to the national budget. When the Ministry proposed an amendment to the law, some estimates of the State budget revenues were presented. Having regard to the fact that such changes would affect some 4.5 million natural persons and more than 350,000 employers and considering that amendments do increase the administration burden, the SAO recommends that analyses of potential impacts were done with each individual proposal.
In 2015, among the changes to the system was the obligation to submit a report on income tax and calculation of the tax electronically in case the taxable person has an electronic data repository. Processing such tax reports is enabled by the automatic tax information software system – ADIS. However, ADIS cannot report back in case of a report’s refusal. Tax officers had to inform the taxable persons individually. Auditors selected 144 cases of refused electronic reports and revealed that in eight cases, financial authorities did not inform the taxable person and require corrections in due time, but directly imposed fines thus violating the law. Tax offices violated the law several times in connection with the electronic registration of sales (EET). Had the system answered automatically, the risk of such errors would have decreased. This practice increases the administrative burden and is at odds with the principle of electronic public administration, which would allow for the reduction of costs and better communication with the public. However, the General Financial Directorate failed to introduce such a functionality, in spite of the fact that there were more than 400,000 reports registered via electronic data repositories only in 2015.
Auditors also scrutinized the efficiency of the income tax collection. In 2015, for each 1 CZK spent on the tax administration, the collection amounted to CZK 156. When considering all kinds of taxes administrated by the Financial Administration, for each 1 CZK spent on the administration, CZK 73 were collected on average. The magnitude of efficiency is mostly influenced by the fact that employers are bounded by a significant proportion of obligations. The SAO estimated that if the State had been complied with those obligations, some CZK 950 million would have been spent annually.
Supreme Audit Office
 Audited bodies were: Ministry of Finance, General Financial Directorate, and selected financial authorities.