IMF Presents Tax Recommendations To Czech Republic

by Ulrika Lomas, Tax-News.com, Brussels

28 January 2010

The International Monetary Fund (IMF) has published its Article IV Consultation with the Czech Republic. In the report, the IMF notes that the crisis has taken a major toll on the country’s fiscal position, and has recommended that various measures be introduced to consolidate the budget from tax year 2011 onwards.

The report observes that exports have particularly been badly hit, falling 4.25% as a result of the downturn in the eurozone. With the government introducing fiscal measures to cushion the economy against recession, the overall fiscal deficit increased by some 4% of GDP in 2009. The IMF estimates that the Czech Republic will return to growth of around 1.5% in 2010, but has warned that this is dependent on a global recovery.

While measures introduced by the government have put the country’ s economy back on track, the IMF has said that the government will need to begin reining in support to prevent an ongoing budget deficit of 5% of GDP over the medium term. Against this background, the IMF has recommended that the government implement a structural adjustment of at least 0.7% of GDP per year so that the country’s debt returns to within the Maastricht Criterion of 3% of GDP by 2013.

The IMF observed that the 2010 budget – which is mostly reliant on indirect tax increases and, to a lesser degree, on temporary expenditure cuts that will expire in 2011 – is a welcome first step towards taking control of the country’s financial situation. It has warned, however, that the government should be austere in the pre-election period, and resist spending increases to appease voters.

“The government that will be formed after the May general elections will need to propose a credible and durable plan for fiscal consolidation. Broad support among the social and political partners will be crucial for its successful implementation. Without such a plan, market sentiment could deteriorate and the cost of public sector borrowing could increase, thus crowding out the private sector and undermining the economic recovery,” the IMF report states.

In the report’s recommendations, the IMF has advocated that concentrated fiscal consolidation takes place in 2011-2013, which should focus on both expenditure and tax measures.

On the tax front, the IMF has presented a number of recommendations, including the following:

• the tax base should be expanded by eliminating exemptions and loopholes;
• VAT rates should be unified at the higher rate;
• the tax on real estate should be altered so that it is calculated based on market value;
• the authorities should consider revising upward the corporation income tax rate, as it is currently below the OECD average;
• improvements should be made to the tax administration, particularly in improving the efficiency of revenue collection; and
• the tax-benefit system should be reformed to incentivize productiveness and labor participation.

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