For almost thirteen years, the tax base from income from dependent activities, i.e. primarily from the employee's income from employment, also covers employer's social security and health insurance contributions (24.8 % and 9 % of gross salary). Thus, even though the law stipulates that the income tax rate is 15 %, the effective tax is – thanks to the increase in the tax base – at the level of approximately 20.1 % of gross salary.
Within the framework of the above mentioned discussion, two legislative proposals were discussed, one crafted by the Prime Minister Andrej Babiš, respectively the Ministry of Finance, and the second one from the pen of the First Deputy Prime Minister Jan Hamáček. Both proposals included the exclusion of the above specified contributions from the tax base calculation and the abolition of the so-called solidary tax increase, which currently applies to taxpayers with an annual income exceeding 48 times the average wage.
Jan Hamáček's proposal intended to introduce an increase in the basic tax rate, namely to the level of 19 %. For incomes exceeding 48 times the average monthly salary per year, a tax rate of 23 % should apply. The amendment further included an increase in the basic tax relief for the taxpayer from the current CZK 24,840 to CZK 27,240.
On the other hand, the ministerial proposal envisages maintaining the basic tax rate of 15 % for annual income up to 48 times the average monthly wage. For taxpayers, whose income exceeds this limit, a tax rate of 23% will apply.
As we already know, the deputies liked the proposal of the Ministry of Finance better. However, they went even further, when they supplemented this proposal by increase in the basic tax relief for taxpayer to CZK 34,125.
As described above, it is apparent that on the side of the employees, the night from Thursday to Friday brought many reasons for joy. But what does this mean for the state budget, and therefore the economy of the state as a whole?
The aim of the abolition of the super-gross salary is mainly to support household consumption. The second important issue that needs to be examined is the fiscal impact on public budgets.
In order to compare the two proposals, a study was conducted and elaborated by the University of Economics in Prague which examined the impact of changes in tax rates and of the combination of different tax relief’s amounts on both, the household consumption as well as the state of public finances. However, the study did not only compare the two existing proposals, but also introduced an alternative concept of how consumption could be supported more effectively.
Based on the study's calculations, the original proposal of the Ministry of Finance bore the costs for public budgets of around CZK 90 billion, while the increase in annual consumption was estimated at the amount of only around CZK 50 billion. As the study describes, the unfortunate impact on public budgets could be avoided by applying a higher tax rate (19%), but in conjunction with an increase in the taxpayer’s basic tax relief. Such proposal would help especially to low-income workers, and thus consequently the household consumption, as it is very likely that they will actually use majority of newly received income for spending, as opposed to taxpayers with higher incomes, who can be expected to keep most of the additional income for savings.
If you are interested in reading the study, click on this link (unfortunately, only in Czech): https://www.vse.cz/wp-content/uploads/VSE_studie_dopad-zmeny-sazby-DPFO-na-spotrebu-domacnosti.pdf
Nevertheless, it is now clear that the deputies have not chosen the happy medium and that the state of public finances was not their priority. Though, this can be a stumbling block in the further approval process. The amendment to the law passed by the Chamber of Deputies needs to be further approved by the Senate. Unfortunately, due to the complexity of all the tax changes involved and the passionate discussions surrounding the proposal in question, it is likely that it will be returned by the Senate to the Chamber of Deputies.
However, such a scenario would mean that we will find out what the tax system for 2021 will actually look like just before the end of the year, if not only in January 2021, which results in considerable uncertainty in several areas.
First of all, changing the net salary calculation will require adjustments in payroll software, which is not only time consuming but also quite costly procedure. In addition, it will have to be done during the annual payroll reconciliation season, which will be an additional burden for payroll departments besides necessity to set up the new rules.
Secondly, the method of taxation, and thus what net amount remains to employees for consumption and spending, is crucial during collective bargaining, raising salaries as well as negotiating rules for awarding bonuses. However, it is very difficult, if not impossible, to negotiate when we do not know one of the most important parameters.
In conclusion, it must not be forgotten that the opportunity to become acquainted with the tax system well in advance, and thus, to be able to adequately prepare for any possible change, is a fundamental pillar of legal certainty, and therefore, of a modern democratic state based on the rule of law.
The approved tax package for 2021 contains many positive changes, and not only on the side of employees. However, the way in which these changes are implemented without a broad political and professional debate, leading to a very likely prolongation of the legislative process, and thus, to the shortening of the period for possible preparation for the changes, leads to huge uncertainty. In this respect, we can only agree with Ing. Bc. Jiří Nesrovnal, a member of the Presidium of the Chamber of Tax Advisers of the Czech Republic, who concluded his statement on the tax package with the following words: „Unfortunately, the approved package is a reading book example of how it should not be done. And it is all the sadder since it is happening in one of the most difficult periods this country has ever experienced.”
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