Czech Republic: New rules concerning the proof of origin of assets are designed to increase treasury’s revenues.
On 1 December, the hotly debated act on the amendment of certain laws to do with the origin of assets (Act No. 321/2016 Coll.) came into force.
The finance office thus gains a new tool with which to investigate obvious discrepancies between taxpayers’ reported income and actual income. The finance office will call upon taxpayers to provide proof of their income if it has reason to suspect that the income reported in tax returns over the past three years (or, in exceptional cases, up to 10 years) in no way corresponds to the taxpayer’s changed financial situation (which includes not only assets and property but also debts and liability), his or her consumption or other expenses, and if a preliminary estimate suggests that the difference is more than CZK 5 million. This particular amount was chosen to build upon the obligation of private individuals, previously enshrined in the law, to report tax-exempt income.
If the taxpayer fails to evidence the facts listed in the summons, and a tax assessment based on the available evidence is infeasible, and a preliminary estimate suggests that the tax will exceed the amount of CZK 2 million, the finance office will proceed and perform a special assessment based on substitute means. In estimating income, the finance office will draw upon a information according to which the income of the taxpayer does not correspond to their size of their estate, their consumption or their other expenses, but also upon other economic indices, a comparison with other comparable taxpayers, the market value of comparable assets, the movements and balances of the taxpayer’s bank accounts, and, where applicable, the disclosure of their financial situation in an affidavit. Taxpayers must submit such an affidavit, if proving the level of income and establishing the assessment base are unsuccessful, and provided further that the aggregate sum of assets which the taxpayer will have to declare in such affidavit exceeds CZK 10 million. The penalty charged on top of the tax determined by way of the alternative assessment is 50% or, if the taxpayer failed to show the necessary cooperation, 100 %. However, a transitional provision in the amendment provides that this penalty may only be imposed in the case of tax assessments for which the date for filing the (regular or supplementary) tax return has lapsed after the new law has come into force.
The amendment also provides for stiffer penalties for false statements and for refusing to collaborate in the disclosure of one’s assets before courts or „other public authorities“ (i.e., the finance offices). Such wrongdoing may result in imprisonment of six months to three years, financial penalties, or a ban on activities.
The finance ministry expects that the implementation of the new law will lead to higher revenues for the public budget and a leveling of the competitive playing field. However, this must be seen against the likelihood of increased administrative duties on the part of both taxpayers and authorities.
Income Tax Act (Act No. 586/1992 Coll.); Sec. 227 of the Criminal Code (Act No. 40/2009 Coll.)