H26 - Tax Evasion and AvoidanceReturn

Taxes and other charges that are paid secure the economic existence of national and public budgets and funds. If a tax debtor refuses to consent to or pay their state tax, the state will not let this act go unpunished. While the issue of tax enforcement through taxation or the execution of insolvency proceedings is a highly interesting topic, it is also a huge and extremely sensitive and topical issue. Tax arrears have emerged within our economy and will continue to increase. Likewise, it is also known that the number of insolvency executions ordered for these non-payers is on the rise. This review focuses on the field of tax enforcement and defines the current position. The objective of this paper is to create the basis for further research into the effectiveness of enforcement instruments.

Reverse charge is currently used as a measure against VAT carousel fraud. Its extension to all goods and services is discussed among the tax policy makers at the national and EU level. Opponents of general reverse-charge argue that this method of VAT collection would completely change the nature of the VAT system. One of the practical drawbacks of reverse charge is the negative impact on the cash flow of the public budgets. This article quantifies the average monthly financing available to the State thanks to delayed repayments of input tax to VAT payers under the normal VAT system. This amount equals to almost 53 billion CZK and represents the negative impact of the general reverse charge on the cash flow of the public budgets. A change in the deadline for remitting VAT or introducing VAT advances to be paid prior to the final tax payment would reduce the negative influence on public finances.

The paper focuses on methods of quantification of VAT evasion. It describes the top-down methods using the National Accounts data for the calculation of the theoretical VAT liability. These methods first compute the theoretical VAT base in the whole economy. Then the base is multiplied by the weighted average VAT rate to get the theoretical VAT. The VAT gap is then obtained as the difference between the theoretical VAT liability and the accrued VAT revenues of the state budget. The first method described is based on the supply and use tables; the second method is a product of the calculation of a weighted average VAT rate by a model (WAR) performed by statistical offices. The third one is derived from the GDP as reported in the National Accounts. Finally, estimates of the VAT gap in the Czech Republic for 2006 to 2010 are compared and the differences in the methods discussed.

Which method of estimating the shadow economy is the best for the Czech Republic? To answer this question, it is necessary to compare the various existing methods and summarize the benefits and constraints of the individual approaches. At first, direct and indirect methods of estimating the shadow economy are described and various studies quantifying the shadow economy and tax gaps using different methods are mentioned. For each method, the advantages and drawbacks are explained based on the opinions of acknowledged authors engaged in the research in this area. Eventually, the models are compared and assessment methods for the shadow economy are recommended for different purposes depending on the intended use of the resulting estimates. In the conclusion, the partial statistical methods which can be combined to give a total assessment of the shadow economy as well as the indirect discrepancy method for calculating the VAT gap are suggested for the Czech Republic.