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IB Grant Thornton: VAT from January 1, 2011

Ministry of Finance is preparing an Amendment of the VAT Act, which should be effective from 01.01.2011. There will be a lot of important changes in this Amendment...

The reason for the bill is to take into account amendments responding to the experience and needs of practice, transposition of EU regulations and steps for prevention of tax frauds in the VAT area. In view of the fact, that so far the Amendment was presented by the Ministry of Finance for suggestions to proposed amendments, it is possible that some of the further mentioned changes will not be approved or will be changed.

Main suggested changes include:

• Changes in entitlements to deduction
• VAT pledge
• Regime of the tax liability transfer
• Change of place of supply for cultural, sports, educational services, expositions and exhibitions
• Adjustment of the tax base and corrective tax document
• Adjustment of the VAT on receivables in insolvency proceeding
• Possibility of taxation of tax exempt real estate delivery
• Change in calculation of the tax deduction adjustments
• Sanctions for not fulfilling the registration obligation

Changes in the deduction claim

Person liable to tax will not be able to claim a deduction on long-term tangible assets laid down in §78 subparagraph 2 of the Act on VAT, if he uses them also for purposes which do not relate to his economic activity (e.g. provision of a car to an employee for personal use).
Newly it will not be possible to claim the whole deduction and subsequently pay VAT from the amount related to the private use of assets.

A coefficient will be introduced (§75 of the Act), which will reduce the deduction claim already on the assets’ acquisition.

The Amendment also newly defines the input tax, as tax applied according to the Act on VAT. This means that it will be possible to apply the deduction claim only in the correct tax rate and not in the tax amount stated on the invoice.

It will be possible to apply the deduction claim only when the tax payer has the invoice in hand.

If the tax document does not include the legal necessities, the claim can be proved otherwise. This can be applied only if the tax document includes information decisive for tax calculation or tax identification number.

Tax pledge

One of the new measures is the implementation of article No. 205 EU VAT directive.
It proposes that in case of fulfilling specific conditions the customer is liable
for VAT, which was not deliberately paid by the supplier on transaction between two domestic entities.

The tax liability can be applied, if two conditions defined in the Act are fulfilled. First condition is that the customer knew or could know, that the tax will not be deliberately paid, the supplier got deliberately in a position, when he cannot pay the tax or the tax is cut short. The second is the situation when consideration evidently diverges from the standard price without any economic reason.

Regime of the tax liability transfer

In accordance with the article No. 199 the EU VAT directive, new regulations are introduced into the Act, which provide that a person liable to pay tax and file the tax return in case of mentioned supplies is the businessman – recipient of the supply (as in the reverse charge system on supplies received from EU). Reason for this regulation is to prevent tax evasions.

Following transactions are concerned:

• delivery of scrap and waste, including their processing
• trade with permissions for greenhouse gasses emissions
• providing building or assembly works

In the Act there is further mentioned §92f, which also imposes the application of this regime on petrol and oil delivery in an amount exceeding 1.500 l per delivery. Considering that the EU VAT directive does not allow this regime for petrol and oil, Czech Republic requests an exception. If it is not granted, this regulation will be omitted from the Act.

Change of the place of supply for culture, sports, education services, expositions and exhibitions

Recently the place of supply is situated where the action really takes a place.

Newly this regulation will be effective only on delivery of services from a businessman to the final consumer. The present regulation will be effective for the delivery of services by a businessman to another businessman in case of entrance fees and the basic regulation applies for organizational activities, i.e. that the place of supply is where the recipient of service is registered.

Adjustment of the tax base and corrective tax document

It will be mandatory to correct the tax base even if it is reduced. It can have an impact e.g.
on provision of financial bonuses, which relate to goods purchased in the past.

The tax credit and debit note concept ceases to exist; instead a corrective tax document will be used.

The tax can be also adjusted by a tax non payer, if he stated it on the document (see §43 subparagraph 3 of the amendment of the Act). The recipient of supply files an additional tax return.

Adjustment of VAT on receivables in insolvency proceedings

If the tax payer delivers supply to the customer, who is in the insolvency proceedings, this tax payer will be entitled to adjust the output tax from the value of the receivable.

If the following legal conditions are fulfilled

• insolvency court decided about the solution of decline
• creditor registered his receivable in time
• creditor and debtor are not persons with joint capital, close persons or do not carry out business in association
• creditor delivered a tax document to the debtor

the creditor adjusts the outpu tax and the debtor is obliged to reduce his input tax by the amount of the tax adjusted by the creditor.

Possibility of taxation of the tax free delivery of real estate

The tax payer will be able to decide to apply the VAT on output when transferring real estate, which is otherwise exempt from tax without the right for deduction.

But the real estate transfer is always a taxable supply liable to tax on output, if the tax payer applies the tax deduction on input on received taxable supplies.

Change in calculation of the tax deduction adjustments

The adjustment of the tax deduction will be in the amount of one fifth (eventually one tenth on land, buildings and flats) as a product of tax on input and the difference between the indicators of tax deduction claims as of the acquisition date and the date of the adjustment.

Settlement of the tax deductions will be omitted from the Act.

Sanctions for not fulfilling the registration obligation

In case of not fulfilling the registration obligation, present compensation in the amount of 10% from the total of payments is cancelled and applies the tax in the amount based on legal rates from the total of payments from the time the tax subject was supposed to be a tax payer up to the date the registration is effective according to the date on the registration.

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