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Generalized reverse charge mechanism in the Czech Republic from (potentially) 2021

After five years of the Czech government efforts the use of the “local” generalized reverse charge mechanism (“GRCM”) was approved by the Council Decision 2019/1903 (based on the article 199c of the VAT directive) for the Czech Republic in November 2019.

Currently Czech Republic makes use of the reverse charge (“RCH”) system for supplies in all cases enabled in articles 194 – 199b of the VAT directive. In CZ RCH is considered to be one of the important tools for combatting the VAT frauds estimated to amount to EUR 150 billion annually within the EU. The advantage of the RCH mechanism is no VAT related cash flow between businesses and tax authorities. The standard system of VAT with its output tax to be paid and input tax incurred to be claimed is burdened with fraud and seems to be unadministrable. (One of other tools against VAT frauds in use since 2016 in CZ is a so called control statement where both sides of the transaction report electronically in detail supplies both effected and received).

There is certain opposition against the use of the generalized RCH within the EU – e.g. from France as a country that stands at birth of the traditional VAT system. Another concern is that the fraud will cumulate in the last link of the chain.

The advantage of the generalized RCH system is the fact that the tax authorities do not have to investigate in such a detail individual entities in the chain where they under existing conditions have to prove that the entity inspected knew or might have known about the fraud, but they might focus on the last supplier in the chain and its tax obligations.

Another clue that the generalized RCH mechanism might be effective against the tax fraud is article 199c itself. It provides that Commission abolishes the generalized RCH if it obtains information from other member states that because of the use of GRCM in one member state VAT frauds have increased in their jurisdictions. Funny – we all have to bear the burden of the leaking standard VAT system jointly and severally.

It looks like GRCM in CZ will not be in force before 2021. But – until June 2022 at maximum under the current wording of article 199c. Czech Republic is now making efforts to extend that deadline. It would be necessary to amend Czech VAT legislation and for the businesses to adopt the new system (which might not have to be that difficult). Only two-year period of potential GRCM use and all those changes – it does not seem to speak in favor of the implementation of the GRCM so far in CZ in spite of all potential benefits it might bring in fighting the VAT frauds.

Contribution by:

Ondřej Štědrý
Tax Adviser
Prague
Czech Republic
stedry@email.cz