The Czech coalition government will cut corporation tax from 31% to 24% by 2006 as part of a new reform package. The gradual decrease in the corporate income tax rate will be accompanied by a large increase in VAT on most services from 5% to 22% and increases in excise taxes.
The reduction represents an effort to bring the Czech Republic's tax system in-line with other countries in the region that also plan to join the European Union in May 2004. Jan Capek, head of Ernst & Young's tax group in the Czech Republic explained: "Hungary and Slovakia have significantly lower corporate income tax rates, so the Czech Republic is trying to match these countries."
Pavel Fekar, tax manager in the Prague office of Deloitte & Touche agreed: "The Czech government fears that the companies now operating in the country will run away to Slovakia or Hungary due to the lower tax rate".
The Czech government introduced tax incentives three years ago to attract investment. These incentives include corporate income tax holidays of up to 10 years and customs-related benefits.
The coalition government plans to cut the deficit not only by increasing VAT on services, but also by broadening the tax base generally in an effort to get closer to the 3% Budget deficit limit required to enter the European single currency. This would probably mean that some of the exemptions, allowances and deductions that are in place now will be reduced or abolished.
The lower house of the Czech parliament narrowly approved the VAT hike on services on May 22, but it is still unclear whether the whole package will be passed because the government only has a slim majority. According to Capek: "They have agreed the basic principles of the reform package, but there is no official wording to the legislation yet and the final figure on corporate tax liabilities still remains to be seen."
