INDIRECT TAX SYSTEM:
VALUE ADDED TAX (VAT)
(EVIDENCE FROM THE CZECH REPUBLIC)
(CONT.)
Taxation – Lecture 8
Content
• VAT – taxable supply, payment of tax, regulation and administration
• Evidence from the Czech Republic
• Literature
VAT – supply: goods and services
• A broad-based VAT is designed to bring within its charge every
kind of economic transaction, subject to limited exceptions. This
is normally achieved by drafting a very broad provision imposing
VAT on an extremely wide range of business transactions and then
removing by specific exception any transaction that is not to be
liable. For reasons of linguistic simplicity, all the relevant transactions
are termed "supplies" in most English VAT texts. However, there is no
one concept of "supply" in many languages. A more formal
presentation of the scope of a VAT law might refer to (a)
transactions involving the transfer of the legal rights to goods,
and (b) other transactions within the scope of VAT but not
involving such a transfer.
Besides identifying what transactions are within the scope of the VAT,
rules are required to determine where transactions occur, when they
occur, and who for the purposes of VAT is carrying out, or treated as
carrying out, the transactions.
• Goods - a possible definition of a "supply of goods" is a transfer of
VAT – supply: goods and services
the right to dispose of tangible movable property or of
immovable property other than land. A "supply of goods" is not
constituted merely by a transfer of possession, which is a transfer of
the use of goods, not of the goods themselves. A transfer of the use
of goods is a supply of services.
If a transfer of possession (a supply of a service) is followed by a
transfer of the title, or rights of ownership, the supply of goods is the
supply of those rights and reflects the residual value after taking into
account the value of the services already supplied.
Many laws also extend the definition of supplies of goods to
cover supplies of energy and other kinds of supply that are
similar to goods. For example, a supply of electricity is not generally
treated under civil or commercial law as a supply of goods, nor is a
supply of heat, refrigeration, or air conditioning. However, it is usually
regarded as convenient to treat them as supplies of goods to apply
the timing and location rules that relate to goods.
VAT – supply: goods and services
"Land" in this context means the rights of a person as the owner
to legal title and exclusive possession and control over any part
of the surface or subsoil of the territory of the state. The
emphasis is on the legal title, not on the actual soil. This may or
may not automatically include legal title and possession of any
buildings, structures, or equipment fixed to the surface or in the
subsoil. Another point of difference in the laws dealing with land or
immovable property of states is that some states have laws under
which a building on land is legally regarded as part of the land,
and so cannot be sold separately from that land. In other states,
a building can be sold even where the land is not sold or cannot
be sold.
• Services - a "supply of services" is often defined as any supply
within the scope of VAT that is not a supply of goods or a supply
of land. It may be asked why there is any need to distinguish
between "goods" and "services." The answer is that the rules
locating a supply of services are different from those
VAT – supply: goods and services
for a supply of goods, as are the rules determining when such
supplies occur. Further, where VAT is charged at more than one
rate, the precise identity of the supply may be critical. Finally, a
supply of goods across the frontier of a state is an import or
export of those goods and is subject to the customs regime of
the state. This does not apply to supplies of services. The latter
point serves to emphasize that, in cases of doubt, it may be useful to
consider the scope of the customs law of the state in considering
whether or not something is a "good.“ It is therefore not possible to
have a supply that is not either a supply of goods or a supply of
services, except for supplies of land or money. From this, it is
clear that "services" has an extended meaning. It covers the use
of all forms of property and also transfers of the right to dispose
of intangible property.
A transaction will fall within the scope of VAT under the normal
rules if the transaction is a business transaction, if the person
VAT – supply: goods and services
making the supply is a taxable person, and if some other person
makes a payment for the supply.
o Special cases of supply of services: supplies by employees
and officeholders - the law should provide that the service
undertaken by an employee for the employer of that employee
does not form a supply made by that employee. Two ways of
doing this are to expressly say so or to ensure that an
employee can never be a taxable person, by providing that a
person is a taxable person in respect only of supplies made by
that person independently.
o Special cases of supply of services: supplies by agents where
a supplier supplies goods or services through an agent to
another person, the supply is made not by the agent but by
the supplier. Whether in a particular case an intermediary is an
agent will depend on the precise legal nature of the contract
between the persons involved.
VAT – supply: goods and services
• Mixed supplies (goods and services together) - in practice, it is
often difficult to identify the nature of a supply. Often what is
supplied is a mixture of different things and often of both goods
and services. For example, A agrees to sell some goods to B and
also to deliver them to B. A also agrees to install them upon delivery.
An engineer agrees to repair B's broken machine and supplies some
small spare parts while doing so.
One broad practical rule is to treat any supplies incidental to a
main supply as part of that main supply. If, for example, A makes
no separate charge for delivery, then the service of delivery is
ignored, and the supply is taxed only as a supply of goods. If the
engineer charges separately for the spare parts, then VAT should be
applied separately to them.
A simple broad VAT allows many of these problems to be avoided. If
none of the forms of supply is exempt and all are subject to VAT
at the same rate, then it is not as critical to separate the elements
of a supply. When numerous categories of exemption are
VAT – supply: goods and services
allowed and more than one rate of VAT is introduced,
administration becomes more complicated because much closer
attention must be given to this problem.
VAT – supply: goods and services
• Conditions:
o Time: goods - the rules determining when a supply of goods
takes place vary from one state to another but generally a supply
of goods takes place when:
 a VAT invoice is issued for the supply,
 the goods are delivered,
 the goods are made available,
 the goods are removed or transported to or for the customer,
 or the goods are paid for in whole or in part.
In accounting terms, these rules include both a cash basis and
an accrual basis for timing a transaction. In the interests of
securing the cash-flow position of the state and of ensuring
efficient collection of the VAT, it is usual to provide that the
time of supply occurs when the first of these events occurs,
or soon thereafter.
VAT – supply: goods and services
In practice, many suppliers issue tax invoices at the time of a
supply or shortly thereafter to comply with the obligation to
issue a timely invoice. The law could, for example, define the
time limit as seven days after what would otherwise be the time
of supply under the rules set forth above. Where payment is
made in advance of goods being delivered, the supply
should be considered as taking place on the date of the
payment to the extent of its amount. The aim is to ensure that
the VAT liability arises as an advance payment is made and does
not await any transfer or dealing with the goods. Otherwise,
advance payments could be used as a means to avoid or delay
the payment of VAT. Where only partial payment is made,
portions of the amount of the supply will take place on
different dates: a partial payment is treated as the first
occasion of supply and the occasion for any further supplies
is determined in accordance with the general rules. This rule
will apply separately to the situation where two or more payments
VAT – supply: goods and services
are made for a supply if separate invoices are issued in respect
of each payment. If one invoice is issued for the full amount due,
then this will represent the applicable date for the supply for the
whole sum, although payment is made in installments. Where
the "supply" of goods is actually a series of supplies
occurring on a number of separate occasions, then a taxable
supply occurs on each separate occasion. This is equally
true for a supply of services. For example, a customer may
agree to buy from a supplier the right to set up a market stall on
the supplier's land each Thursday throughout a year. A supply of
the use of land in this way is a taxable supply of services. Is it
one supply or a supply of the use of the land each Thursday? A
technical answer to this question might refer to the precise terms
of the contract under which the supplier agrees to supply the use
of land in this way, including the method of payment adopted.
Treating each date of supply as a separate supply achieves an
efficient and practical result in that the supply is regarded as
VAT – supply: goods and services
occurring each Thursday if payment is made for each week only
after that week. If payment is made for the whole year at a set
time before the end of the year, the rule about prior payment will
apply. It is normally appropriate to apply the rules by reference to
the terms of the agreement between the supplier and the
customer.
o Time: services - it is usual to determine the time of supply by
reference to when the services have been rendered. This is a
question of fact to be interpreted in the light of any contract or
agreement under which the services are supplied.
A special case that may need a different rule is that of a
supply of services over a long period or a continuing supply.
If a supplier agrees to supply a customer with a continuing
service (e.g., a telephone service, a supply of electricity, or
continuing professional assistance), the supply might be
regarded as never reaching the point at which it "is
performed" until the contract between the supplier and the
VAT – supply: goods and services
customer is ended, or it might be viewed as provided every
minute, which would be impractical. However, payment is made
from time to time, and the rule about partial payment can be
applied.
o Place: goods - often a general rule is included in the law to
locate a supply of goods where the goods are delivered or
made available to the person supplied, in other words, where
they are physically handed over. The fact that legal title does
not pass at that time is not the important issue. For goods
that are being transported, a rule is needed to determine whether
they are delivered at the start or at the end of the transportation.
A rule that goods are delivered where the transportation starts
will accord with the common commercial arrangement that goods
are at the risk of the buyer while being transported. It will also
ensure that the location of the supply of goods being exported is
within the state. That is necessary to provide a legal basis for
providing a rebate of VAT on inputs used to produce those goods.
VAT – supply: goods and services
o Place: services - determining the location of a supply of
services can be a matter of considerable difficulty, especially
for international services. Customs rules cannot be used
because they do not apply to services.
o Some aspects of the problem can be solved by identifying
separate rules for particular kinds of supply. For example,
where the services relate to land or other immovable
property, it is common to treat the services as supplied
where the land is situated. Beyond this, states tend to adopt
rules that locate a supply at a place of business either of the
supplier or of the customer. The practical problem about
locating the supply where the customer is located is
imposing the VAT on that supply. One answer to this is that of
reverse charging. A reverse-charging rule treats the customer
being supplied with a service originating abroad as making
the supply to itself. It must then account to its tax authorities
for the VAT due as output tax on that supply. If the customer
VAT – supply: goods and services
pays that VAT as input tax, it can claim an offsetting deduction,
and will owe no VAT. However, if the customer makes exempt
supplies, then no VAT credit or deduction is available.
o Imports - the destination principle requires a charge to VAT
to be placed on all imports. Customs regimes, such as free
ports, duty-free shops, and tax-free zones can be applied readily
to VAT on this basis - the zones being regarded as outside the
territory of the state.
VAT – taxable and exempt supplies
• Taxable supplies - as previously noted, to be within the scope of
VAT, a supply of goods and services must also be made (a) as
part of the economic activities of the supplier, and (b) against
payment (or for consideration) to that person from some other
person. To complete the full definition of taxable supplies, the law
must also therefore define both these criteria and determine the
extent of exemption.
VAT is a tax on supplies made in the course or furtherance of
economic activity, or, put another way, as part of a business. It
should therefore be confined to activities of this nature and not be
imposed on other activities, such as the personal hobbies of an
individual, gifts made for personal reasons, or charitable
activities with no business or commercial content. As a result, the
law imposing the VAT usually makes it clear that only economic
activities are within the scope of the tax. Government activity,
charitable activity, and personal non-business activity should
therefore be excluded.
VAT – taxable and exempt supplies
• Payment (transfer of a consideration):
o Supply with payment - payment or consideration by both parties
to the bargain, as is a supply of goods in exchange for the
provision of services by the person receiving the goods. In
addition, it does not matter who makes the payment. It will
usually come from the person receiving the supply, but the
source is irrelevant. Therefore, some laws make it clear that all
forms of payment are to be included as payment or
consideration for the supply, even if this includes grants
made by public authorities or other third parties.
o Supply without payment - in principle, if there is nothing paid
or payable for a supply, then it is not a taxable supply.
Safeguards are needed to prevent the operation of this
principle from allowing transactions to escape a charge to
VAT in inappropriate situations. For example, a taxable person
who makes gifts of goods acquired for the purpose of the
person's economic activities should be brought within the scope
VAT – taxable and exempt supplies
of the tax. Likewise, an individual trader who personally uses
goods purchased for the business should also be made subject
to VAT on the use. The reason for this is that the trader will have
received a VAT credit (or deduction for input tax) for the goods on
purchase. If there is no offsetting output tax, then there is a
hidden subsidy of the trader's personal consumption and gifts.
It is therefore wise to extend the definition of supply for
consideration to cover certain non-business uses of a
supply. The following transactions or occasions should be
considered for this purpose:
 personal consumption by an individual of goods
purchased for the individual's business, including
consumption by the individual's family and household;
 gifts of goods, or the use of goods, made by a taxable
person where the goods were purchased solely for the
person's business, and the gifts are not themselves for
business purposes (e.g., advertising or trade samples); and
VAT – taxable and exempt supplies
 supplies of goods made without charge to employees of
the taxable person.
For example, a shopkeeper who purchases food as part of her or
his business but later uses the food for personal consumption
might be obtaining an unfair advantage. The shopkeeper will
treat the purchase of the food as a supply on which any VAT paid
can be reclaimed. When the shopkeeper consumes the food, if
there is no charge to VAT, the shopkeeper will have been able to
obtain a credit without any charge of tax to someone else. This
rule will apply equally to the use of durable goods.
A rule that imposes VAT on a supply for which there is no
consideration must also provide a taxable value to that
supply.
VAT – taxable and exempt supplies
• Exempt supplies - state practice on the exemption of supplies is
inconsistent. Few common themes emerge. When VAT was first
introduced, it was more common than it is now to apply VAT to
supplies at a range of rates, including very low rates, and also to
exempt a wide range of supplies. Since then, state practice has
tended to reduce the range of supplies exempted and also to cut
down the range of reduced rates of VAT and to increase the
levels of the lowest rates.
o Effect of exemptions - it is often assumed that "exemption"
results in the reduction of the VAT burden on a supply. This
is true if the person supplied is a consumer and is not
receiving the supply as part of a business. It is not true if the
person supplied is a taxable person. Exemption of a supply
to a business results in an increase in the burden of VAT on
the supply. The reason for this is that the person running the
business can offset the VAT against the VAT charged
VAT – taxable and exempt supplies
by the business, so claiming a full rebate for any VAT. The
person making the exempt supply will probably have had to pay
VAT on some part of the supplies made to it and will therefore
have to pass some VAT on to the business as part of its
price. It is this VAT that can be recovered if the supply is
subject to tax, but that cannot be recovered if it is exempt. To
avoid the distortions caused by this failure to recover, it is good
policy not to exempt the types of supply that are typically made to
business.
o Specific exemptions - although there are strong policy
arguments for minimizing exemptions, no state has succeeded in
removing all exemptions from the law. Even New Zealand, which
has been most successful in curbing the extent of exemptions,
has maintained some:
 Land and buildings - transactions involving land and
buildings are commonly exempted. Many states
VAT – taxable and exempt supplies
provide that a sale of land, or other transfer of the title to
land, is outside the scope of VAT. Other states achieve the
same effect by exempting these supplies. Further, the law
needs to deal with supplies of services related to land. The
main service is the use of land, or leases or tenancies of land.
For the same reason that land itself is exempted, it is
common to find that leases and lettings of land are also
exempted.
 Supplies by nonprofit organizations and individuals many
states provide exemptions for social goods and
services, that is, supplies that are made to individuals and
that do not form, or do not usually form, business
supplies. An example of this is the supply of health services
that are by their nature supplied to individuals. Many social
supplies are outside the scope of VAT because they are
not made as part of a business or are not made for
payment or consideration (as with free health supplies from a
VAT – taxable and exempt supplies
state authority).
However, similar activities carried out by an ordinary
commercial organization will not be exempt. As a result,
nonprofit bodies may be tempted to engage in commercial
activities in such a way as to gain unfair advantage over
ordinary suppliers. It is not enough to justify exemption that
those profits are used by the organization for nonprofit
purposes. For example, a religion organization that runs
profit-making shops to help finance repairs to a religious
building should be subject to VAT on the goods it sells. A
distinction must accordingly be drawn between the social or
charitable activities of nonprofit bodies and their commercial
activities.
VAT – taxable and exempt supplies
 Financial services - exemptions of financial services are
also included to avoid problems of complex
administration, for example, where it is difficult to identify
the value added within a transaction. In principle, any fee or
charge for a financial service should be liable to tax. The
difficulty is in identifying that charge separately from the
other elements that are included when determining levels
of payments of interest or fees. Those other elements
include the real cost of the capital involved, the risk to the
lender of undertaking the transaction, and the inflation rate
during the transaction. Transactions involving these elements
may be termed primary financial services, and nearly every
state exempts these forms of financial services for this reason.
 Exemption of diplomatic activities - states generally have
accepted treaty obligations to exempt certain supplies or
imports as part of the recognition of diplomatic and
consular immunities and of similar immunities for
VAT – taxable and exempt supplies
international organizations.
 Special categories of imports - international practice
recognizes agreed categories of goods that are exempted
from customs duty on import. Practice on this is well
established and ranges from the import of a limited quantity
of goods bought duty free in other states to exemption of
gifts to charities or similar organizations. It is for
consideration how far those exemptions should also apply for
VAT purposes. Some are appropriate because of the
underlying reason for the exemption from customs duty. Others
would not be appropriate because they would create unfair
competition with those supplying similar goods from within the
state.
One particular category of import has caused particular
concern in developing states and the economies in
transition. This is the import of foreign-produced
machinery and equipment for the use of local businesses.
VAT – taxable and exempt supplies
In principle, such items should be subject to VAT when
imported, if also subject to VAT when produced locally. In
some states, there is no local capacity to produce such
items, and importers lobby strongly for VAT exemption.
VAT – types of transaction
• Local supply, intra-community transactions, exports from and imports
to EU - See presentation from PPG “VAT”!
VAT – payment: tax base (TB)
• Charge to VAT - VAT is designed as a tax levied as a proportion
of the value added on any taxable supply. It is therefore
necessary to attribute a value (referred to as "the value”) to all
taxable supplies to ensure that this objective is achieved. To be
consistent with the fundamental principles of the tax, the value to be
taxed must reflect the value added by the supply.
The general rule for valuing a supply for VAT purposes is to
value it at the total of all payments, or consideration, that the
supplier receives or is entitled to receive as a result of the
supply. In other words, the value is taken as the actual realized
value. All forms of payment or consideration, whether paid by the
person supplied or some other person, are relevant for that
purpose. They are also relevant in determining the total value.
Any distortion of the price is neutralized if both the supplier and
the person supplied are fully taxable persons. Any increase or
decrease in the VAT collected will then be offset by a similar
VAT – payment: tax base (TB)
increase or decrease in the VAT credit or input tax deduction
claimed. The matter is only of concern if the high or low price
increases the overall amount of input tax available for deduction
or decreases the overall collection of output tax. This will
happen only where one party is a taxable person and the other is
not.
The value of a supply should be taken as including all other
taxes paid on that supply. VAT is not an alternative form of
excise tax or customs duty, but is a separate tax. Both customs
duties and excise taxes reflect the state's separate decisions to
increase the price of the dutiable and excisable products by the
amount of the duty or tax. That represents the value of final
consumption of the goods for VAT purposes and is therefore the basis
of the value for VAT. If it is felt that the combined effect of excise
duty and VAT on a product is too high, the answer lies in
adjusting the level of excise duty, not of the VAT.
VAT – payment: tax base (TB)
• FVA - where the person supplied is not a taxable person, or not a
fully taxable person, but the supplier is a fully taxable person in
respect of the supply, there may be a temptation for taxpayers to
understate the price to avoid creating input tax that the person
supplied cannot reclaim. There are also cases where a supply is
treated as being made for payment, even though nothing is paid or
payable. In both cases, it may be considered appropriate to override
the general rule. Instead, value would be based on an independent
measure of the value added by the transaction. This would
normally be the open market price, or arm's-length price, of the
supply.
The open market price - or some other objectively determined
price -will need to be determined in any case where a supply is
treated as made for consideration although no consideration is
actually paid or payable. It will also be needed in any other case
where the law allows the tax authorities to override or ignore the
actual price.
VAT – payment: amount
• Two important elements remain in order to establish how much
VAT the taxable person must pay to the tax authorities. The first
is the rate of VAT to be paid on the value of any supply. This
deals completely with the question of determining the output tax on
any supply. The second is the offset of input tax against output
tax to identify the net VAT payable.
• Rates - countries' practices in setting the rate or rates of VAT have
varied widely over the forty years since the tax was first introduced.
Some countries have imposed six or more effective rates at the
same time. The result has been some confusion as to the purpose of
the tax and considerable administrative complexity and market
distortion. Recognition of these problems, and of the underlying policy
issues, has led states to abandon complex rate structures. It is
now generally accepted that the VAT should not be used as a
vehicle for imposing luxury rates of indirect tax. If a state wishes
VAT – payment: amount
to impose high rates of indirect tax on specific goods or services, then
the generally easier way to do so is with a separate excise duty or
tax. This is the usual route now chosen. Internally, it simplifies the
identification of luxury goods. Internationally, it avoids any
accusation that differential rates of VAT are being used for
discriminatory purposes.
Usually VAT has a main or basic rate and one or more lower
rates. The main rate of VAT is an important matter of fiscal policy in
any state and the level varies significantly among states. Arguments
for lower rates concentrate on socially important goods such as
food, and socially important services that are not exempted or
outside the scope of VAT. Of course, there is a cost in VAT forgone
in allowing a lower rate, and any lower rate will usually cause
either the main rate of VAT to be higher than it otherwise would
be, or other taxes to be higher, given the total tax revenue. Some
states have decided that it is better to collect VAT at one rate and to
VAT – payment: amount
deal with such pressures in other ways (through subsidies or
adjustments in social security entitlements), while others have opted
for a lower rate. Again, practice used to involve a range of lower rates
but has tended to simplify toward one lower rate (as is happening
within the European Union) or none.
• Entitlement to credit for input tax - it follows from the definition of
"value added" on which VAT is based that any VAT incurred by a
taxable person as input tax should be repaid to that person in
some way. The usual method of repayment is to allow the input
tax to be set off as a deduction or credit against output tax
collected during the same period. A duty is imposed on the taxable
person to pay only the net amount to the tax authorities. In principle,
therefore, all relevant input tax incurred by a taxable person should be
available for credit in this way.
• Partial exemption - the main category of taxable person with
problems in identifying the amounts of input tax available for credit is
VAT – payment: amount
businesses that make some taxable supplies and some exempt
supplies. These are often termed cases of partial exemption. If a
state exempts goods of a kind available for retail purchase, then a
shop or business that sells these goods and other goods will be
partially exempt. Most states exempt financial services;
consequently, banks and other suppliers of financial services
routinely confront the problems of partial exemption. For
example, a finance house makes supplies of financial services, which
are exempt, and also supplies business advice that is subject to VAT
at the main rate. The finance house is a heavy user of telephones and
incurs a substantial amount of VAT on its telephone bills. If the
finance house were allowed to claim all the input tax on its
telephone bills, it would be receiving excessive input tax. The
law therefore allows the finance house to claim the VAT on the
telephone bills that relate to its business advice services but not
to its financial services.
VAT – payment: amount
• Disallowed input tax - in some states all credit for input tax on
cars is disallowed, sometimes with exceptions, such as for taxis
and rental cars. Input tax on vans or trucks is allowed. Many
states already have rules for income tax and other purposes
distinguishing between cars and vans, and they can also be used for
this purpose.
• Bad debts - VAT rules are designed to ensure timely payment of
the VAT related to a supply. Under these rules, occasions would
frequently arise when the VAT has been paid on a supply to the
tax authorities, but payment for the supply is not received until a
later time. In the extreme cases, more common in economies in
transition, some or all of the payment will not be received at all,
because the customer becomes insolvent or in some other way the
debt becomes bad.
Payment of VAT to the tax authorities ahead of receipt of the VAT
from the customer is a normal aspect of a VAT. This may provide
a cash-flow disadvantage to the taxable person. In many states,
VAT – payment: amount
this disadvantage is not particularly significant because the
taxable person benefits from a much greater cash-flow
advantage that arises from holding VAT collected from some
customers for several weeks before having to pay it to the tax
authorities. In addition, the supplier may recover some of the
economic cost of the delay in payment through an interest
charge on the sums outstanding.
Allowance for bad debts - this allowance will amount, in effect, to
the equivalent of input tax to offset any output tax paid to the tax
authorities but not collected from the customer. If this approach is
followed, a definition of "bad debt" is needed to ensure that any
allowance for a bad debt does not encourage slow payment. For
this reason, it is important that the mere fact of nonpayment should
not make the debt bad. It should be shown that the debt is not
collectable with reasonable effort on the part of the supplier, and
that a minimum set time has elapsed. The length of that period will
depend in part on the business practice of a state and on
VAT – payment: amount
its economy. Inflationary factors are clearly relevant, as is the usual
practice for payment of bills. Where all bills are long delayed before
being settled, the period for this provision will need to be longer.
VAT – procedures and administration
• Combining VAT and customs administration on imports - the
case for combining the collection of VAT on imports of goods with the
collection of customs duties is particularly strong.
• Handling VAT on internal supplies - there is also a strong
argument for combining the administration of VAT on internal
supplies with the administration of the direct taxes. In particular,
many income tax payers with business income will also be taxable
persons for VAT purposes. Many transactions will require review for
both income tax and VAT purposes, although the ways in which
income tax and VAT liabilities are calculated from that common base
are radically different.
• Regulations, instructions, and guidance - it is impossible to set
out in one law all the rules, regulations, procedures, and working
practices necessary to ensure the smooth operation of a tax that
can apply to several millions of transactions a day in a state. Not
only does the VAT have this invasive, and pervasive, effect, but it
must also take a clear enough form so that all those charged with
VAT – procedures and administration
settling transactions and issuing VAT invoices can do so with
confidence and without delay. The laws, rules, and guidance must be
effective, and the legislation is no more than the highest level of a
multilayered system of providing rules and procedures.
• VAT Invoices - VAT invoice is an invoice, chit, till roll print, or
other document that is issued by a taxable person who makes a
taxable supply and that records the supply and the amount of
VAT payable on it. The issue of invoices in the proper form is an
essential part of the procedure for imposing and enforcing the VAT.
The requirement that a special invoice be issued is a feature
unique to VAT. An invoice is a "VAT invoice" if it complies with
the requirement of the VAT law. Invoices issued for other
purposes or that do not comply with these requirements do not
count as VAT invoices.
VAT laws typically condition the allowance of a credit for input
tax.
A VAT invoice is normally required to be identified as such (perhaps
VAT – procedures and administration
by having the words "VAT invoice" on it) and to contain a
minimum of information about the supply being invoiced. That
information would normally include:
 the name, address, and VAT number of the taxable person
making the supply,
 the nature of the supply made (type of supply, type of
goods or services, and quantity of goods or extent of
services),
 the time the supply was made,
 the amount of payment for the supply,
 the amount of VAT,
 the name, address, and VAT number of the taxable person
supplied,
 the date on which the invoice is issued, and
 the serial number of the invoice (together with identification
of the printer if the invoice was purchased privately).
VAT – procedures and administration
The requirement to include all this information will make a VAT
invoice a formal document. This will not be appropriate for small
transactions, for example, those made by a retail store, particularly
where the customer is not a taxable person. States frequently
allow special simplified invoices for small transactions or for
transactions recorded in a retail store in a till or cash register.
For example, in these cases, it will not be required that the details of
the customer be recorded unless, perhaps, the customer wishes it.
For the sake of clarity, the law should distinguish between the formal
VAT invoice and simplified invoices. Only the VAT invoice will entitle
the purchaser to a credit for the VAT shown on the invoice, and
special procedures will apply to the VAT invoice that do not apply to
simplified invoices. While the basic distinction should be drawn in the
law, matters such as acceptable forms for simplified invoices are best
dealt with by regulation and guidance.
• VAT returns - the other essential document in administering a
VAT is the required provision of information at regular intervals
VAT – procedures and administration
by all taxable persons. This provision of information and the
document on which the information is provided is commonly known in
English as a "return." There should be a standard form of return,
so that taxable persons know precisely what is required of them
and can comply more easily with the formalities of making a
return, and so that the tax administration can process returns
efficiently.
All taxable persons should be required to make a return of their
taxable transactions and other relevant information at
predetermined and regular intervals. These intervals are called
"VAT periods.“
The return should cover all taxable transactions made by the
taxable person during the VAT period and should show how
much VAT is payable to the tax authorities for that period. The
essential information on a return is therefore the following:
 the total VAT collected on all taxable supplies made by the
taxable person (output tax) in the VAT period,
VAT – procedures and administration
 the total VAT paid by the taxable person on supplies made
to the
 taxable person in the VAT period and for which a credit is
allowed (the allowable VAT credit or input tax deduction),
 the amount of any bad debts to be set off against output
tax in that VAT period, and
 the amount of any excess of allowable input tax over
output tax in the previous VAT period that can be carried
forward (allowable excess VAT credit or input tax deduction).
The requirement that a return be made for each VAT period
needs to be enforceable, with a reasonably strict time limit for
submission, such as within 15 days of the last day of the VAT
period to which the return relates. A return should be required
even if the taxable person has no taxable supplies for a VAT
period. This rule allows efficient operation of systems to detect and
chase after persons who are delinquent in filing.
VAT – procedures and administration
Payment of VAT - the law should also specify that all taxable
persons must pay to the tax authorities at a specified time the
net amount of VAT due for the VAT period (i.e., all VAT collected
(output tax) less allowable VAT credit (deduction for input tax) and
any allowable excess VAT credit carryover and VAT with respect
to bad debts).
The duty to pay is usually on a self-assessment basis (i.e., the
taxpayer itself determines the amount due by filling out the
return). Each taxable person is responsible for paying the VAT due to
the tax authorities in respect of any VAT period at the same time as
(or, if convenient, separately but before) the return for that period is
due.
Some states require advance payments of VAT, for example,
three times a month, based on VAT liability for previous periods.
The advance payments are then credited against the VAT due with
the return.
VAT – procedures and administration
VAT periods - the payment of VAT to the tax authorities is linked to a
"VAT period" as explained previously. The length of a VAT period is a
policy matter for the state. The standard period is the calendar
month; often, taxable persons with small levels of taxable
turnover are allowed to use longer periods of three months or a
year. The VAT period should be distinguished from payment
periods. Thus, for example, a state may require enterprises of a
certain size to make advance payments of VAT three times a month,
while the VAT period remains a calendar month.
• Repayment of excess VAT credit - where the input tax credit for
any VAT period exceeds the output tax collected, there is an
excess of VAT credit or of deductible input tax. As a direct result,
the taxable person will pay no VAT to the tax authorities for that
period. However, should the tax authorities pay the difference to the
taxable person? VAT is fundamentally different from direct taxes
in that it involves regular situations where a taxable person is
owed money from the tax authorities. This is an essential feature of
VAT – procedures and administration
VAT if it is truly a proportional tax based on regular VAT periods. The
situation will arise, for example, where the taxable person buys
expensive equipment or machinery costing more than the total of
taxable supplies made by the taxable person during that VAT period.
It also arises if the law makes provision for rebating tax to exporters.
Policymakers may be tempted to reduce or abolish the right for
taxable persons to demand payments from the tax authorities,
especially where state budgets are under pressure. There is an
opposite temptation on political representatives to make the
operation of VAT "fair" by imposing the same tight timetables on
the tax authorities rebating VAT as on taxable persons paying it.
Evidence from the Czech Republic
• Value added tax is the most typical indirect tax collected not only in
the Czech Republic. VAT is a tax on transactions or better a tax on
consumption.
• In the Czech Republic VAT is quite a new tax (first introduced on 1st
January 1993). There were a lot of changes concerning VAT in the
Czech Republic because of implementation of the EU VAT directives
(since 2006 - Directive 2006/112/EC).
• In the Czech Republic a taxable person becomes a taxpayer
when his turnover in the last 12 consecutive months exceeds 1
000 000 CZK. This taxable person becomes a taxpayer since the
1st day of the 2nd month after the month in which the turnover
exceeds the limit.
• This taxable person is obligated to register as a taxpayer in 15
days after the month in which the turnover exceeds the limit.
• A taxable person which carries out transactions with a claim for
deduction (recovery) of tax could register voluntarily.
CR – exemptions without recovery
• According to VAT Act of the Czech Republic the exempted
transactions without recovery of input VAT are: basic postal
services, radio and television broadcasting, financial, pension and
insurance activity, delivery and lease of immovable assets
(amendment since 1st January 2016), health services, social
assistance, education and learning etc.
• The basic postal service for the purposes of this Directive, is a basic
service under the law regulating postal services provided by postal
license holder contained in this license.
• Radio and television broadcasting for the purposes of exemption,
means radio and television broadcast made by a broadcaster under
the law, except for broadcasting of advertising, teleshopping or
sponsoring.
• Financial services for the purposes of this Act are:
o the transfer of securities, including book entry securities, shares
in business corporations,
CR – exemptions without recovery
o accepting deposits from the public
o providing loans and cash loans,
o payment and settlement system,
o issuing payment instruments, notably credit cards or traveler´s
check,
o etc.
• Pension activities for the purposes of this Act are:
o the provision of pension savings under the law regulating pension
savings,
o provision of supplementary pension savings under the law
regulating supplementary pension savings,
o provision of supplementary pension insurance under the law
regulating supplementary pension insurance,
o mediation of pension savings, supplementary pension saving or
supplementary pension insurance.
CR – exemptions without recovery
• Insurance activities for the purposes of this Act are:
o the provision of insurance,
o the provision of ensuring,
o services related to insurance or ensuring provided by person
mediating insurance or ensuring.
• Delivery of immovable property – exempt from tax is supply of land
that:
o is not forming a functional unit with the structure fixed to the
ground and
o is not building land.
• Lease of immovable property is exempt from the tax except:
o short-term lease of immovable property,
o letting of premises and sites for parking vehicles,
o the hire of safes,
o the lease of machines or other attached devices.
CR – exemptions without recovery
• The health services for the purposes of this Act, is a health service
under the law regulating healthcare services provided by health
serivces specified in the autorization for the provision of health
services.
• Social assistance for the purposes of this Act, is a social service
under a special law. Social services are exempt from a tax, if they are
provided under special legislation.
• Education and learning for the purposes of this Act, are educational
and learning activities offered in kindergartens, primary schools,
secondary schools, conservatories, colleges, art schools, language
schools etc.
CR – exemptions with recovery
• According to VAT Act of the Czech Republic the exempted
transactions without recovery of input VAT are:
o delivery of goods to another Member State
o acquisition of goods from another Member State
o exports of goods
o providing service to a third country
o exemption in special cases
 a - c : Delivery of goods to another Member State to a person
registered for a VAT in another Member State (other than
Czech Republic)
 From the tax is exempt import of goods, if supply of such goods
by a taxpayer in the Czech Republic was in any case exempt.
 From the tax is exempt import of goods, if the imported goods
is eligible for relief under the directly applicable regulations of
the European Union:
CR – exemptions with recovery
 goods imported in consigments of a uncommercial nature,
 personal property of individuals,
 equipment, educational materials and facilities of inhabited
households of pupils or students,
 transfer of business assets and other equipment when
moving the business establishment,
 goods for charitable or philanthropic organizations
 etc.
CR – recovery
• Right for recovery of input VAT (deduction of input VAT) - the
taxpayer is entitled to a deduction of input tax, for a received taxable
supply, which is part of his economic activities applied as:
o taxable supplies for supply of goods or services with the place of
supply in the Czech Republic,
o transactions, which are exempt with tax deductibility with the
place of supply in the Czech Republic.
Entitlement for a tax deduction for a taxpayer arises at the moment,
when the events estabilishing the obligation to admit the tax arise.
The taxpayer is not entitled to deduct a tax on a received taxable
supplies used for the representation.
The taxpayer is entitled to deduct the full amount received by a
taxable transaction, which is used exclusively for implementation of
his economic activities.
• Terms for claiming recovery - o excercise the right of deduction, the
taxpayer is obliged to fulfill the following conditions:
CR – recovery
o in respect of deductions that another taxpayer applied to him, the
taxpayer is obliged to have a tax document
o in respect of deductions, which the taxpayer applied in providing
taxable supply or for goods acquired from another Member State,
the tax payer is obliged to admit the tax and to have a tax
document
o in respect of deductions on import of goods, if the taxpayer is
obligated to admit the tax according to law, the tax payer is
obliged to admit the tax and to have a tax document
The taxpayer is entitled to claim a tax deduction for the first time for
the taxable period, in which the conditions are met.
The right of deduction can not be applied after the deadline, which is
3 years.
• Correction of recovery - if a correction of tax base and amount of
tax is made, which has resulted in a reduction of a claimed tax
deduction, the taxpayer is obliged to correct the tax deduction.
CR – recovery
Correction is made by the taxpayer in the tax period, in which he has
learned about the circumstances to do so.
Correction of the tax deduction is made by the corrective tax
document.
• Calculation of recovery pro rata - if a taxpayer use a received
taxable supply within his economic activities as well as for purposes
unrelated to them, he is entitled to deduct tax only in proportion to the
extent of his economic activities.
Part of the received taxable supply, which is used for purposes
unrelated to taxpayer economic activities, are considered as supply of
goods or providing of services.
This does not apply in case of fixed assets.
The corresponding deducted amount (using pro rata calculation) is
calculated by multiplying the input tax for the received taxable supply
with the proportion of using this supply for his economic activities.
CR – recovery
• Calculation of recovery at the reduced amount - if a taxpayer use
a received taxable supply within his economic activities for the
fulfillment with the right to deduct the tax and also on the exempt
transactions without the right to deduct the tax, with the place of
supply in the Czech Republic or in other country, the taxpayer is
entitled to deduct only the reduced amount corresponding with the
applications range of the fulfillments of the right to deduct the tax.
The respective amount of tax deductions in the reduced amount is
calculated by multiplying the input tax for the received taxable
transactions of which the taxpayer is entitled to deduct the reduced
amount and the coefficient.
This coefficient is calculated as a percentage share of:
o numerator is the sum of the amount of tax bases and/or values
with right for deduction of the tax,
o denominator is the total sum of the values in the numerator and
the sum of the transactions which are exempt without the right for
CR – recovery
deduction of the tax.
Calculation of the coefficient does not include:
o sale of the fixed assets, if the assets was used for the taxpayer
economic activity,
o providing of financial services, the supply of immovable property,
lease of immovable property and only if they are a supplementary
activity of the taxpayer.
• Settlement of recovery - business assets subjected to settlement,
when during a period for claiming a tax deduction, the taxpayer use
this property in the context of his economic activities for purposes
other than those, which he took into an account, when applying the
initial deduction.
The amount of the settlement of tax deduction is calculated as the
difference between the right to deduct at the time of its use and the
amount of the original claimed tax deduction.
CR – recovery
• Right to recovery at registration and deregistration - taxable
person is entitled to deduct the received taxable supply acquired in
the period of 12 consecutive months prior to the date, when he
became payer, if the transaction is to this day a part of his business
assets.
Upon cancellation of registration, taxpayer is obliged to reduce
claiming of tax deduction for property that is to date of cancellation of
registration his business assets for which he applied the right of
deduction or portion of it.
CR – reverse charge
• Reverse charge procedure - in the reverse charge procedure the
taxpayer, to whom a taxable transaction with the place of fulfillment in
Czech Republic is made, is obliged to pay the tax on the date of
chargeable event.
Taxpayer, for whom the taxable transaction of the reverse charge
procedure was carried out, is obliged to correct the amount of tax in
his records for the purposes of VAT. For the accuracy of calculated
tax, the taxpayer is responsible, for whom the transaction was carried
out.
• Permanent use of reverse charge procedure:
o Delivery of gold.
o Delivery of goods listed in annex.
o Delivery of immovable assets.
o Provision of construction or assembly works.
Literature
• MCGEE, Robert W. The philosophy of taxation and public finance.
Boston: Kluwer Academic Publishers, 2004. viii, 313.
ISBN 1402077165.
• RADVAN, Michal. Czech Tax Law - 3rd ed. 3. vyd. Brno: Masarykova
univerzita, 2010. 65 s. Fac. of Law Publ. no. 4 (Edition of textbooks).
ISBN 978-80-210-5269-7.
• Victor Thuronyi, ed. Tax Law Design and Drafting. International
Monetary Fund, Vol. 1, 1996, 1222. ISBN 978-1-55775-633-6.