The European Union allowed the widespread use of reverse charges for all transactions (within the payment of VAT) exceeding the cap of €17,500 some time ago, although they are not used in the 27 countries.
The Czechs were very interested in this exception. Andre Babis’ government wanted to introduce the system from July 2020, but in the end this was not possible, just like the government of Peter Fiala.
But this summer, the Czech Republic was given much more time than originally planned for a possible introduction of the transfer of tax obligations (see below).
“Currently, the transfer of tax liability in the Czech Republic is only applicable in some cases that you specify Value Added Tax Law. And in this area, it has been modified several times in the past years,” says attorney Jerry Kokal.
In 2022, domestic reverse charges apply, for example, to purchases of gold, purchase of real estate, construction and assembly work, delivery of mobile phones, provision of communication services, or sale of gaming consoles, tablets or laptops.
Permanent use of the tax transfer system in the Czech Republic
Temporary use of the reverse charge system in the Czech Republic
- Transfer of emissions allowances
- Connect mobile phones
- Delivery of devices with integrated circuits (microprocessors or CPUs)
- Supplying gas and electricity to the merchant
- Delivery of gas and electricity certificates
- Providing communication services
- Connect game consoles, tablets and laptops
- Supply of grain and technical crops, including oilseeds and sugar beets
- Supply of raw or semi-finished metals, including precious metals
This also includes the supply of goods or the rendering of services for which the Czech Republic has been permitted by an Executive Decision of the Council to apply special measures contrary to Article 193. Directive 2006/112 / EC on the common value-added tax system.
How do you imagine this situation in practice? While VAT is usually paid by the company that sells the goods or services, it varies with the Reverse Charge (RC).
Who pays VAT, when and why? We’ll guide you through the labyrinth of tax legislation
The owner of the construction company Mr. Novak, a constant payer of VAT, will provide his client Mr. Nowotny with assembly and construction work worth half a million kroner. These services belong to the tax transfer system. Therefore Builder Novák will issue an invoice without VAT. The customer Novotný is then obligated to add, declare and pay this tax in his records, and he is also responsible for the correct determination of the tax rate.
The difference between value-added tax and self-assessment tax
Michal Dvořáček advises: “Entrepreneurs must distinguish between ‘tax self-assessment’ for foreign transactions and domestic reverse costing.”
“Tax self-assessment simply means that the importer of goods or services, assessing the tax on the output, assesses the VAT on the inputs himself. This will then be applied to the tax office as a deduction. The output tax is paid by the recipient of the goods or services (Czech payer) and not by the supplier/provider from another Member State. This principle is particularly relevant to transactions between EU Member States.”
In the case of internal reverse charges, the member states of the Union provide that for the listed goods or services the person for whom the taxable transaction is carried out, i.e. the customer, is obliged to declare and pay the tax.
When is a mandatory evaluation required?
If you are in doubt whether the supplier or customer should pay VAT, you can use the so-called “binding assessment”. This will determine if you should use reverse charging mode. With a request to make such a decision, entrepreneurs turn to tax official.
In the application, they must provide a description of taxable performance (always only one per application). You will pay an administration fee of SEK 10,000 for the application. The Public Financial Administration will subsequently issue a “Decision on the binding assessment of a particular taxable transaction for the use of the tax liability transfer system”, which guides VAT payers.
Circumstances surrounding the application of the Czech Republic
The Czech request for exemption, under which lawmakers can introduce a system of transferring tax obligations, was approved by the European Commission three years ago, and granted by the Czech Republic by all member states.
The Ministry of Finance wanted to implement a general reverse charge in our country from July 2020. All companies will have to use it if they issue invoices with amounts exceeding 450 thousand kroner (see above).
According to an investigation by the Chamber of Commerce, more than three-fifths of local businesses have approved the Finance Ministry plan, and nearly a quarter of a million VAT payers already have RC experience. However, business people have been concerned about the uncertainty surrounding how long reverse charges will apply in the Czech Republic. The exemption was originally supposed to be for two years.
Companies have also admitted that they will have to adjust their accounting systems. They estimated the costs of these changes at up to 100,000, small businesses planned to spend less, usually up to 50,000 kroner.
The reverse charge, which the Babish government has struggled with for so long, is seen as an almost miracle cure against round-shaped VAT fraud.
Michel Dvoracek, Consultant
Andrej Babis has fought for him since he entered politics. The fight against circular fraud was supposed to be carried out with the help of monitoring reports (in force in the Czech Republic since 2016) and the RC. The system was also supposed to significantly reduce the financial burden on suppliers, who must pay VAT even on goods and services for which the customer has not been paid.
However, the project collapsed a year ago due to delayed preparations, and the country has to negotiate with the European Commission again. Last year, the Department of Finance asked the commissioner to extend the exemption granted. However, the European Commission does not want to act yet.
The Council of the European Union (not only) gave the Czech Republic more time
The Czechs were only supposed to have the possibility to operate a nationwide voluntary tax transfer system until June 30, 2022 (until the entry into force of the new single tax system in the EU). It was virtually impossible to meet this gallows deadline.
However, the EU Council has significantly extended this deadline, until the end of 2026.
“Universal reverse charge is important from the point of view of entrepreneurs. The majority will welcome the fact that they will not have to work with money in the merchant chain, although the tax will be recorded – eg electronically – but will only be paid at the end of the entire chain,” said Ladislav Mincic. Director of the Legislation, Law and Analysis Department of the Czech Chamber of Commerce:
Fight with circular tricks
The system of transferring the amount of VAT from the seller to the buyer, in which the tax is paid only by the end customer and the state does not pay refunds, practically excludes widespread fraud in the respective chain of merchants. The Czechs faced circular fraud for hundreds of millions of crowns years ago, for example when importing non-taxed fuel. The fraudulent companies went bankrupt before paying the VAT for bogus reasons, but another company in the chain was able to collect a VAT refund from the state in the meantime.
The state has introduced other measures curbing circular fraud, such as the aforementioned surveillance report. However, fraudsters are still trying and looking for new and new ways to defraud the state of taxes in the framework of other goods and services.
RC does not have to solve tax evasion
The reverse charge parameters, approved in the Czech Republic as an exception, specify the maximum limit for transactions (invoices) over 450 thousand kroner. Low transactions will not be subject to the new VAT regime, which poses a risk for ongoing tax evasion.
In addition, existing measures such as control reports, EET or mandatory distributor deposits partially prevent leakage.
Most experts agree that reverse charge is an effective tool against intentional criminal activity, but it does not address leakage associated, for example, with corporate insolvency or withholding of sales.
“It has more to do with tax morale in that country, about how the financial department is able to collect VAT, or rather compel its payer to declare it,” says Hana Zídková of the Chamber of Tax Advisors in the Czech Republic.
In addition, it makes sense to present it in all areas. If the RC is limited to the goods or merchandise that is currently most at risk of circular fraud, then criminals will begin to lower the tax on other items.
Similar “fliability” to organized crime also operates between individual countries. If a country implements a tax deferral system, fraudsters will target businesses in the country where this measure does not apply.
External reverse charge
The tax liability transferred in foreign relations is determined by the relevant European Union directives. All services included in it, which are provided to a Czech company from abroad, are invoiced by the foreign supplier (VAT payer) without tax, and the Czech entity must calculate, declare and pay the VAT to the Czech Tax Authority.
The document should state that in this particular case, the rules of reverse charge are followed. The Czech entity must check through the VIES system whether the foreign supplier is really a VAT payer.
“Proud twitter enthusiast. Introvert. Hardcore alcohol junkie. Lifelong food specialist. Internet guru.”