The Czech Republic has signed the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (“Multilateral Instrument” or “MLI”). On 7th of June 2017, over 70 Ministers and other high-level representatives participated in the signing ceremony at Paris.
The Convention is a key outcome of the OECD/G20 Base Erosion and Profit Shifting (BEPS) project, which aims to offers concrete solutions for governments to close the gaps in existing international tax rules by transposing results from the OECD/G20 BEPS Project into bilateral tax treaties worldwide.
The Convention enables all signatories, inter alia, to meet treaty-related minimum standards that were agreed as part of the Final BEPS package, including the minimum standard for the prevention of treaty abuse under Action 6.
The Convention will enter into force after signatories have completed their domestic requirements and deposited their instruments of ratification with the OECD.
The Czech President signed some amendments to the Income Tax Act, which include the withholding tax (WHT) provisions. The amendments will be effective on the 15th day of its publication. There is an indication of its publication date and it is 1st of July 2017. The new provisions of withholding tax basically alerts for shareholder associations and profit companies and financial institutions that pay interest on these companies. The changes extend the chance of 19% withholding tax on interest in case of deposits. This new measure imposes extra requirements on banks and savings and credit organizations.
The Czech Government recently approved the signing of the Multilateral Convention to implement into bilateral tax treaties the tax treaty-related measures arising from the OECD / G20 BEPS Project to tackle Base Erosion and Profit Shifting (BEPS). A signing ceremony will be held on 7th of June 2017 in Paris.
The BEPS recommendations combat tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid. The multilateral instrument will enable countries to adjust their bilateral tax treaties to include BEPS treaty-related recommendations without having to renegotiate each bilateral treaty.
On 11th of April 2017, the Double Taxation Agreement (DTA) between Czech Republic and Ghana was signed in Accra. From the Ghana side, the document was signed by Finance Minister, Ken Ofori Atta and from the Czech side by the Czech Ambassador to Ghana, Margita Fuschova. This agreement was signed after the two countries concluded negotiations for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income. It will remove the incidence where income from both countries are taxed double and as well as increase Ghana’s exchange of information network, which allows treaty partners to exchange information in order to mitigate tax risk and tax evasion across borders.
The Finance Ministry published on its website a discussion paper regarding the implementation of EU Anti-Tax Avoidance Directive on 12th of July 2016. The directive mainly states new rules for interest deduction restrictions and similar expenses for all corporate income tax payers, specifically when tax deductibility is to be restricted by 30 per cent as proposed by EBITDA. Announcing the controlled foreign companies (CFC) rules should also be new to the Czech tax environment. The CFC rules requires that a domestic company should contain in its tax base passive income or income from the so-called artificial transactions of a foreign subsidiary given that its tax burden is less than half of the tax. So that, it would be responsible to pay as a tax resident of the Czech Republic. Other rules, containing those for CFC rules, exit taxation, and hybrid mismatches will be implemented in the scope proposed by the directive, with no exceptions. Misusing hybrid mismatches means taking advantage of tax benefits arising from a circumstances where two countries have different methods to financial instruments. This relates to, for example, a failure to recognize a permanent establishment, such as when one country considers the economic activities of an entity as meeting the definition of a permanent establishment of the entity in another country but the permanent establishment has not been created in that country or other situations resulting in double non-taxation of activities or payments. The Czech Republic will perhaps not apply the general anti-avoidance rule (GAAR) with reference to the existing administrative and judicial practice. The deadline for implementing this directive falls on 31st of December 2018. The exception is for exit tax that must be implemented by 31st of December 2019.
On 2nd of August 2016, the Finance Ministry published a public consultation on a bill. This would implement the country-by-country (CbC) reporting requirements in EU Directive 2016/881 on exchange of CbC reports among EU member states. In accordance with section 5 of the bill, the proposals align with the OECD BEPS Action 13 minimum standard. According to proposed amending legislation to become effective on 5 June 2017, the CbC report will be mandatory for multinational groups with an annual consolidated turnover in excess of €750 million. Czech companies will be obliged to prepare a CbC report on behalf of the entire multinational group if they are the ultimate parent company of the group or if they have been regulated for the purposes of CbC reporting as representing companies. If the Czech company prepares the CbC report itself, all the member companies of the group will need to be informed of the fact and it will be necessary to further communicate with them so that all the details that are necessary for preparing the CbC report may be obtained.
The number of tax audits focused on transfer pricing in the Czech Republic and the resulting tax adjustments have increased rapidly because of Czech Tax Administration’s systematic risk assessments. These risk assessments are successively used to pick taxpayers for transfer pricing audits. The Tax Administration is applying the disclosure reporting of related party transactions as part of a risk analysis if selecting taxpayers for a transfer pricing audit. The recent audits focus on companies in ‘high risk’ types from the transfer pricing perspective and specific transactions identified through the disclosure reporting. Companies that stated tax losses or received investment incentives as a tax relief become main targets for transfer pricing audits. The usual inter-company transactions include business restructuring, licence fees, management or service fees and interest or other types of financial payments. Although transfer pricing documentation is still optional, is highly recommended and generally expected to be prepared and submitted during the tax audit.