On 22 November 2011, the President of the Czech Republic signed the governmental proposal for an amendment to Act No. 235/2004 Coll. on Value Added Tax, as amended (hereinafter referred to as the “Value Added Tax Act” and the “Amendment”). The main, but not the only, change brought by the Amendment is the alteration of the reduced rate of value added tax from 10% to 14%, with effect from 1 January 2012. Subsequently, with effect from 1 January 2013, the basic and reduced rates of value added tax will be unified at 17.5%. This circular will address the most common problematic situations that the change in the value added tax rate will bring.

Firstly, it is important to determine at what moment a value added tax payer is obliged to declare output tax. According to the provisions of Section 21(1) of the Value Added Tax Act, a payer is obliged to declare output tax on the date of realisation of a taxable transaction or on the date of receipt of payment, whichever date occurs earlier, unless the Act provides otherwise. A payer reports the tax in the tax return for the tax period in which the obligation to declare tax arose. The transitional provisions of the Amendment, Article II(1), provide that for tax obligations in respect of value added tax for the tax period preceding the date of entry into force of the Amendment, as well as for the rights and obligations related thereto, the Value Added Tax Act in the wording effective before the date of entry into force of the Amendment shall apply.

Below we shall outline the most common situations that will occur with the change in the value added tax rate from 1 January 2011. These concern primarily situations where payment is received during 2011 and the taxable transaction or other event occurs only during 2012. Therefore, in the event that during 2011 an obligation arises for the payer to declare tax on the date of receipt of payment, but the date of realisation of the taxable transaction occurs only during 2012, the value added tax rate applicable shall be that which is stipulated for 2011 (10% or 20%).

A more complex situation will occur where the contracting parties agree between themselves on an advance payment, which will be paid in 2011 and the remainder of the agreed price will be paid in 2012 and the taxable transaction occurs only during 2012. In this case, the payer shall remit tax on the advance payment received at the tax rate stipulated for 2011 (10% or 20%) and on the remainder of the agreed price shall remit tax at the rate stipulated for 2012 (14% and 20%).

Finally, we shall address the situation where a tax payer delivers goods to a customer during 2011, but the customer returns part of these goods due to, for example, withdrawal from the contract, during 2012. In such a case, the provisions of Section 42(4) of the Value Added Tax Act shall apply, where it is stipulated that for the correction of the tax base and the amount of tax, the tax rate effective on the date of the obligation to declare tax in respect of the original taxable transaction shall be applied. The tax payer shall therefore issue a credit note for the returned goods, on which it shall state the amount of the tax base for the returned goods and the tax rate stipulated for 2011. This credit note shall then be claimed by the tax payer in the tax return in 2012.

This text was translated from Czech to English using an AI translator.