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What if the consolidation package does not pass and the President vetoes the pension savings plan?

The Consolidation Package

As we informed readers in Tax News No. 8/2012, the government bill proposing changes to tax, insurance, and other acts in connection with reducing the public budget deficit – also known as the consolidation package – was once again presented to the Chamber of Deputies for approval. Following the Senate’s rejection, the bill was sent back to the Chamber of Deputies in the wording that previously did not pass in the lower house.

The ongoing negotiations over adjustments to the bill have not yielded any results so far. Some ODS deputies object especially to the following:

- VAT increase from the current 14% to 15% and from 20% to 21%;

-  introduction of a solidarity-based 7% tax on income exceeding 48 times the average salary as per the Social Security Insurance Act; this extra tax applies to employment-generated income of individuals and personal income of sole proprietors;

-  the inability to apply a personal tax discount to income of taxpayers who receive old age pension;

-  the inability to apply a tax discount to a spouse and take advantage of child-related tax relief if the taxpayer who generates income as a sole proprietor or from leasing real estate applied flat-rate costs and expenses and the aggregate of the sectional tax bases will still be higher than one half of the taxpayer’s total tax base.

The deputies say they will not accept any of the compromises suggested by the Prime Minister, such as increasing only the bottom VAT rate to 15% and having the solidarity-based tax increase on personal income tax applicable only for 2013.

Most of the government-proposed changes referred to above, which some of the ODS deputies oppose, are to apply to 2013 – 2015 only. Starting in 2015, the income tax and VAT process will become subject to an already valid act amending legislation in connection with introducing a single collection point. If the consolidation package with the changes proposed by some of the ODS deputies is approved, the following changes will take place:

-  VAT rates will remain at the current level;

- flat-rate costs and expenses (percentage of income) for individuals (sole proprietors engaged in certain businesses and landlords) will be subject to a cap;

-  real estate transfer tax will increase from 3% to 4% (with the seller remaining the party liable for payment);

-  the maximum assessment base for health insurance premiums for employees and private proprietors will be terminated (the current maximum assessment base amounts to 72 times the average salary as per the Social Security Insurance Act).

Presidential Veto

A model example of how a presidential veto can complicate a redress of errors in already valid legislation can be seen in the method of determining old age pension insurance premiums for sole proprietors as of 1 January 2013. The error took place in connection with the legislation applicable to pension savings plans that constitute, as of 2013, the newly introduced “second pillar” of the Czech pension system.

Pursuant to the legislation, one of two pension insurance rates shall apply depending on whether the sole proprietor has enrolled in the new pension savings plan or not. While sole proprietors who have not enrolled will be subject to a 28% mandatory pension insurance rate, those who have are subject to an 8.5% rate (of which 3.5% goes to the state budget and 5% to pension savings). This obvious and groundless difference should have been redressed by the draft bill on amendments to acts in connection with the adoption of the act on pension savings premiums. However, the President vetoed the bill and returned it to the Chamber of Deputies for further debate, since the President disagrees with changing the Czech pension system. Because the President vetoed the act on pension savings premiums at the same time, it is not clear how the pension insurance premiums are to be collected. The Chamber of Deputies may override the presidential veto by approving the acts by a simple majority of votes of all deputies.

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