Books on Czech Republic
Update No: 123 - (31/08/07)
On August 22nd the government introduced a major tax reform. It has provoked
domestic criticism, but also praise from abroad.
The debate on whether people will gain or lose from the tax reform has focused
on whether savings made in the area of direct taxes will be outweighed by losses
in indirect taxes. The main tax changes are:
· in 2008, a unified 15 percent income tax is to replace the current four tax
brackets of 12, 19, 25 and 32 percent. The tax will be calculated from a
so-called "supergross wage" including social and health insurance paid
by the employee and the employer, meaning the actual tax rate will effectively
be 23.1 per cent
· in 2009, the unified rate will fall to 12.5 percent. Using the supergross
calculation, the actual tax rate will effectively be 19.4 percent
· corporate income tax to drop from the current 24 percent to 21 percent in
2008, 20 percent in 2009 and 19 percent in 2010
· the lower value-added tax (VAT) tax applied to food, drugs, books, apartments
and culture to increase from 5 percent to 9 percent
· abolition of minimum tax base
· abolition of the tax-free status of mortgage bonds
· introduction of environmental taxes to bring the public purse an extra Kc 4.3
billion (in consequence, slight increase in price of residential electricity is
· raising of excise duty on cigarettes and tobacco from the current 27 percent
to 28 percent (this will increase the price of a pack of cigarettes Kc 7)
· advantageous taxation for supranational holding companies
· possibility of group VAT registration for companies tightly interlinked by
financial, economic and organizational bond
The debate sharpens
The Social Democrat (CSSD) opposition weighed back into the debate with figures
showing that the package would cause a loss in tax revenues and other financial
setbacks that would add some Kc 400 billion (€ 14.4 billion) to the state
But Minister of Finance Miroslav Kalousek, (Christian Democrat, KDU-CSL) was
having none of it, insisting the reform measures in their entirety would
actually push the deficit to under 3 percent of gross domestic product (GDP), or
approximately Kc 78 billion, and thus not endanger the country's chances of
adopting the euro in the midterm.
David Marek, an analyst with brokerage Patria Finance, said lower direct taxes
should boost economic growth. This growth would be needed to set off lower
budget revenues in the short run, he added. "The key problem with the
public finances is not the tax system but deficits-and this is where the Cabinet
should aim its efforts and creativity," Marek said.
Analysts were generally not too enthused by the reform package, complaining that
it is not far-reaching enough. This line has previously been voiced by President
Václav Klaus, who must sign the legislation in order for it to take effect Jan.
1, 2008. However, looking at the lowered taxes as far as companies are
concerned, the analysts predicted there would be a certain stimulus provided to
the economy. "Lower corporate income tax will obviously have a positive
impact on high tax-paying companies like CEZ, Unipetrol, Zentiva, Komercní
banka and Erste Bank as well as dividend stocks Telefónica O2 Czech Republic
and Philip Morris CR," said Robert Keller, a financial analyst at Patria
Finance. Analyst Milan Procházka at brokerage Wood & Company Financial
Services saw the approved fiscal changes in terms of both personal income tax
and corporate income tax as positive for the market. Nevertheless, Wood's
overall Aug. 23 reaction to the reform bill regarding its likely impact on the
financial markets was only "neutral."
Benefit fraud targeted
Apart from the raft of tax changes (see box), the package-which squeezed through
with 101 votes from the available 200 thanks to the continued refusal of rebel
MPs Miloš Melcák and Michal Pohanka to back the party they have walked out on,
CSSD-also contained many social and health care changes.
While containing measures that will make it more difficult for a person to
remain long-term unemployed, it also targets employees who might try to exploit
sickness benefit arrangements. A worker will not be able to claim any benefit
for the first three days of illness. Days four to 30 will be covered by a
payment equivalent to 60 percent of income, days 31-60 by 66 percent, and
subsequent days by 72 percent. The current system awards 25 percent for the
first three days, then 69 percent for all subsequent days.
Another measure is the introduction of "three-speed" parental leave. A
two-year leave secures a monthly parental benefit of Kc 11,400; a three-year
leave Kc 7,600; and a four-year leave Kc 7,600 crowns until the child is 21
months of age, then Kc 3,800 crowns thereafter.
On the health care side, each visit to a general practicioner, pediatrician,
dentist, gynecologist, out-patient specialist, psychologist or speech therapist
will cost Kc 30, while a prescription will also cost Kc 30 and each day spent in
a hospital or spa treatment will cost Kc 60. A visit to an emergency facility
will cost Kc 90, unless hospitalization follows. Various exceptions relate to
vulnerable people and children. Fees must be paid for children of any age, but
these will be compensated with a Kc 240 tax relief.
Any health care facility not collecting the fees may be fined up to Kc 50,000.
A SLOVAK CRITIQUE
Czech reforms step in right direction
The Czech Republic has taken a step in the correct direction when it passed a
package of public finance reforms today, some Slovak economists and architects
of the Slovak reforms during Mikulas Dzurinda's rule (1998-2006), have agreed in
interviews with CTK.
They said, however, the reforms could be even more radical.
The reform introduces as from next year a flat individual income tax, lowers
corporate income tax, introduces fees in health care and restricts some welfare
"The Czech reform is definitely a step in the right direction, even though
not as big and quick as economists might imagine," former finance minister
Ivan Miklos, a leading author of Slovakia's tax reform, said.
He said exceptions and deductibles should have been abolished to a greater
Miklos said taxes should not be decreased gradually because this may result in
people postponing the fulfilment of tax duties until later when taxes will be
"It is always a political problem as well..., a more radical change was not
probably possible," Miklos, now an opposition politician, said.
Economist Pavol Karasz, from the Slovak Academy of Sciences, said "there
exists a real supposition that this reform could produce positive results from
the point of view of raising the effectiveness of the public administration's
Tomas Szalay, one of the architects of Slovakia's health care reform, said the
planned changes in the Czech health care system, including fees, are but the
"It is not yet a reform with the capital R, but it is a good signal,"
He said more fundamental changes should follow, such as transformation of the
health insurance companies into joint stock companies, introduction of saving
accounts, a greater competition on the insurance market.
Slovakia's reforms among others united individual and corporate income taxes at
19 percent, introduced pension private schemes as well as cash payments in
The new leftist government of Robert Fico has, however, adjusted some of the
reform steps since it took over in July last year.