Andrej Babiš echoes EU findings over poor Czech VAT collection

Incoming finance minister Andrej Babiš sometimes gives the impression that he is shooting from the hip before he has even warmed the seat of his ministerial chair. But his assertion about the Czechs poor performance on collecting Value Added Tax is pretty much on the mark.

Andrej Babiš, photo: CTKAndrej Babiš, photo: CTK ANO founder and leader Andrej Babiš’ macroeconomic comments sometimes leave surprise and confusion in their wake. His assertion a few days ago that there was around 350 billion crowns hiding in the reserves of the Czech National Bank brought a quick rebuttal. The central bank dryly remarked that reserves only amounted to around 50 billion crowns.

But Babiš was on firmer ground when he switched his attention to the poor Czech record on VAT collection and highlighted the issue as one that he needed to urgently address. Babiš added that it should be possible to increase revenues here by around 50 billion crowns a year.

Not surprisingly, Babiš’ words have been mocked by former finance minister Miroslav Kalousek. Kalousek was a great fan of VAT, describing it as a very efficient and easy form of tax collection. The same minister was also in charge of raising local VAT rates to some of the highest levels in Europe.

As most economists might have pointed out to Mr. Kalousek, when you increase charges on something you also increase the incentives to avoid those same charges. If Czechs were already active in VAT avoidance they had every encouragement to hone their skills when the rates were hiked to 21% and 15%.

According to a European Union study published last autumn, the Czech Republic was failing to recoup around 4.24 billion euros (around 100 billion crowns) or 28% of its maximum potential VAT receipts in 2011. This compares with a shortfall of 12% in Germany, 13% in the United Kingdom, 19% in France and 2% in Sweden.

On the other hand, Babiš’ assertion that Czechs are among the worst in Europe is not quite correct. The same figures for Poland reveal a 15% underachievement, rising to 30% for Hungary, 37% for Slovakia and 48% for bottom of the class Romania.

Photo: Barbora KmentováPhoto: Barbora Kmentová Actually the picture of Czech VAT collection performance worsened rapidly after 2007 with the worst results, a potential collection shortfall of 29%, accompanying Mr. Kalousek’s increased VAT rates.

Of course, not all failures in VAT collection can be put down to fraud. Some, for example, stem from companies going bust before the tax can be levied. Nonetheless, Czechs seem to have been pretty adept at the favourite means of fraud, the creation of short lived companies which import goods to sell cheaply but disappear with no trace before the VAT payments are due. Such fraud has become a major earner for criminals in such areas as sales of mobile phones.

The European Union has already paved the way for emergency steps to be taken by countries to halt the VAT haemorrhage. One step allows quick reaction measures and the other shifts the burden of VAT payment from suppliers to customers, making it more difficult for companies to take their massive earnings and evaporate.

It would not be a surprise if Babiš grasped these possibilities and also took the opportunity to cast some value subtracting epithets at Mr. Kalousek for good measure.