Tax and Legal News - November 2021

Editorial And how much will you prepay?

The number one international tax topic is the global reform, which once again moved a little closer to reality in October[1]. Even the traditional troublemakers seem ready to cooperate – more on that in the next article. At the moment, however, another tax issue is resonating with the Czech media and in professional chatter, i.e. the VAT waiver on electricity and gas in November and December.

A brief outline of some frequently discussed points:

• The waiver was published on October 20^th, effective from November. While jaded Czech VAT payers are used to a lot of things from the past, they were still surprised to only have about a week to implement it (taking the long weekend into account).
• Some entities were also surprised to learn they’d be affected by this change because it applies not just to sales to households, as originally indicated, but also all supplies between VAT payers, likely because it’s a tricky business for companies with millions of customers to distinguish with certainty household customers.
• The methodology published just before the effective date seeks to address some unclear items[2]. In particular, there is the fundamental question of what is actually meant by the “supply of gas”. According to the General Financial Directorate (GFD), it should be gas intended for heat production or engine propulsion; the method of delivery is not decisive (pipeline, tanker, cylinder, etc.). On the contrary, it excludes the supply of oxygen, helium, technical gases, etc. Even leaving aside the question of whether such a restriction of a grammatically very broad waiver is permissible and why a more precise definition is not directly part of the waiver decision, there are bound to be many borderline cases in practice – isn’t lighter gas also intended for the production of heat?
• Irrespective of whether an across-the-board VAT waiver is an appropriate instrument to mitigate the impact of gas and electricity price increases, the stated aim is to provide relief to households that have seen energy prices soar. However, it’s clear that in addition to such households, other consumers will also enjoy significant savings – while for some such an impact may be justified (in particular, other households for which energy will gradually become more expensive or health care facilities), one can’t help but feel some “stowaways” will be riding along with them.
• On the contrary, the waiver does not apply, for example, to customers who heat with gas indirectly (VAT on heat supply does not change, even if gas is used for its production) or do not make any advance payments or readings in November and December (for example, they’ve agreed on quarterly advance payments due in October and then only in January). 
• Even some members of the government are open about the waiver running counter to EU law, stating that the European Commission cannot in fact intervene anyway, since the measure would expire before formal infringement proceedings could be launched. Nevertheless, the GFD methodology explicitly rejects the right to deduct input VAT for a customer whose supplier would have acted in accordance with EU law, i.e. applied VAT regardless of its waiver.
• The Ministry of Finance formally requested^[3] an exemption from EU law and prepared an amendment regulating the 0% VAT rate for next year. Approval is uncertain, however, and even representatives of the likely future government are skeptical of the proposal. It’s therefore likely that 21% VAT will again apply from January.
• No surprise, then, that energy consumers without the right to deduct are starting to come up with various creative ways to make the most of the favourable scheme valid until the end of the year. The most commonly discussed method is to pay a large deposit that will cover electricity and gas consumption well into the future. However, this opportunity is not limitless and depends primarily on the contractual terms agreed.
• Suppliers can expect an onslaught of non-standard requests from customers, in particular changes to billing periods, extraordinary readings, etc. However, these may run into limits in the form of administrative options or tax risk management by energy companies. The tax administration’s statements already indicate a strict approach and explicitly warn against abuse of the law – the risks involved are primarily borne by suppliers. On the other hand, they may find it interesting to boost their cash flow through higher advance payment collections.
• I won’t dare to guess if lines of gas-powered cars will form at gas stations before the end of the year (the waiver also applies to LPG and CNG).