Czech Republic Debates Tax Reforms Ahead Of EU Membership

by Ulrika Lomas, Tax-News.com Brussels

24 July 2003

As the Czech Republic attempts to tidy up its finances ahead of accession to the European Union next year, and the government attempts to rein in an expanding debt burden, legislators are currently mulling a complicated series of tax reforms and spending cuts, .

The country's budget deficit is approaching 7% of GDP (more than twice the 3% threshold applied by the EU Growth and Stability Pact), and Prime Minister Vladimir Spidla is now faced with some tough choices in terms of taxation and expenditure.

One of the main tax reforms currently being debated is a plan to drastically reduce corporate tax from the current level of 31% to 24%, thus bringing the country into line with regional corporate tax rates. However, whilst this has been welcomed by the business community, there have been complaints that the benefits will be largely offset by the closure of many tax loopholes and benefits. Rates will also still be higher than neighbouring Slovakia and Poland, which are set to drop corporate taxes to 19%.

Meanwhile VAT (Value Added Tax) rates will be increased, in some cases significantly increased, for example in the telecom sector, which will experience a hike in VAT from 5% to 20%. Right-leaning President Vaclav Klaus attempted unsuccessfully to veto this proposal.

A report released last month by the European Commission also identified a corporate tax measure in place in the Czech Republic that could potentially distort the internal market. The report showed that all acceding states, bar Estonia and Latvia, had some form of 'harmful' tax measure which must be rectified.

Recommended