The biggest tax issue of the day: highly political, a search for fairness, lots of strong opinions. I always find it unfortunate when yet another economic problem is solved by taxes. When this happens, it’s usually more or less a deserved tax advantage in the form of a tax exemption or other relief. Although everyone wants to fight against tax exemptions, I guess in the end we can live with tax relief for church collections, the Wine Fund and the Czech-German Future Fund.
But a measure that works the other way around and imposes an additional tax is in a different league. We don’t have many similar examples on this scale in the past, and experience is therefore scarce. Some historical experiments illustrate the difficulty of such measures. The bank tax, the digital tax, the plastics tax, etc. Despite systemic consensus, implementation has dragged horribly (and in some places failed completely), simply because it is complex and hard to find fairness in.
Another Czech (not so) nice experience is the solar levy introduced more than ten years ago – an industry where we created the conditions for making significant (unexpected?) profits and then wanted to take some of those profits away. While seemingly logical, it nonetheless yielded implementation woes and left a wake of angry investors and international arbitrations. An experiment with a gift tax on emission allowances also failed to convince the courts and ended in a tax refund. In addition, the state paid billions in interest to the affected taxpayers.
On the other hand, the war in Ukraine and its consequences are force majeure, and when else but now should extraordinary measures be taken. Moreover, we’re starting from a certain consensus at the EU level, and the parameters are therefore not a completely arbitrary decision of the Czech legislator. However, there is still a great deal of latitude. The Finance Ministry’s proposal and the subsequent long list of amendments tabled in the Chamber of Deputies during the second reading illustrate the variability and creativity. Choosing the sectors and entities that we “think” will have windfall profits is probably the most difficult. Interestingly, the Czech list of sectors is not exactly the same as the European one (why?); the amendment attempting to take out some sectors thus comes as no surprise. The de-minimis limit with the justification not to burden small and medium-sized enterprises is probably factually correct, but its level represents another conundrum. The same for everyone? Higher for banks? Group vs. individual? Another set of amendments.
Probably the biggest injustice I personally feel is in the case of entities that fall under the tax because of their group, but actually pay the tax on completely different activities than the legislator intended. The EU proposal foresees a 75% test of the listed activities (somewhat fair), but the Czech proposal doesn’t adopt it. I don’t know. I’m probably not alone with such feelings; some amendments have tried to address this. One suggested a 50% limit (why not the EU's 75%?). The other subtle one basically said that by spinning off other activities I would materially escape the tax (under the government's proposal, spin-off does not have to help). It will be very interesting to see how the tax authorities deal with such a potential spin-off. On one hand, a law that can be read as saying I escape tax by spinning off in certain circumstances, and on the other, perhaps a textbook abuse of the law where I’m effecting the transaction with the sole purpose of not paying tax. A “reasonable” conclusion is offered: well, if the law allows it... But it reminds us a bit of crown bonds: "well, if Kalousek did it with state bonds...", and today it’s one of the most frequently (tax) assessed items. Let's see.
The 60% rate looks scary – probably the highest rate that has ever appeared in Czech law. So in the end effect, we tax windfall profits at 79%. The possibility of a reduction to 33% in some situations under the EU proposal is again not taken on board. Some amendments proposed 40%.
The third reading took place on Friday 4 November, and now we have the Senate and the President.
Extraordinary measures without historical experience will logically encourage those affected (and angry) to use equally extraordinary means to defend themselves. We will see what they choose from the palette of the obvious, or less obvious, options. Bad legislative process in the form of a attachment? Could it even be imposed for the years after 2023? Discrimination against certain other similar entities? Is the 79% tax strangling? And what else... ?