Electronic record keeping of sales in the Czech Republic

Each Minister of Finance has the task to secure enough income for the state treasury. Andrej Babiš, the new Czech Minister of Finance is no exception. No wonder that after being appointed to the position, he started pushing through many innovations. One of the most controversial issues is his effort to introduce online record keeping of sales (ORKS) that is to be introduced in the Czech Republic as of January 2016. This record keeping is expected to reduce grey economy and make tax collection more efficient. According to Babiš, it should also balance out the lower income from VAT, which is due to the expected decrease of VAT rate for restaurants from 21% to 15%, rectifying the current illogicality when in the case of buying food the VAT rate is 15% and by subsequent sale of processed food the rate increases to 21%. ORKS advocates also believe it will improve the competitiveness of honest traders in comparison with those who do not duly pay taxes. To what extent these objectives may be actually met depends on many various factors.

According to estimates, introducing ORKS should lead to an increase in the number of VAT payers in tens of thousands. It should concern those business entities that generate their income in the following ways: cash, via credit cards, vouchers, cheques, promissory notes or other means representing money. ORKS thus does not concern those who only invoice and receive money on their banking accounts. So far, no amount after which an entity exceeding this limit would be obliged to introduce ORKS, has been established, which means that the obligations concern all entities – at least for the time being. However, some exceptions are being discussed: ORKS should not apply to maverick sales on marketplaces, but it should involve those selling on such marketplaces regularly. This rule is parallel to the current duty to pay tax. Introducing the ORKS system is primarily aimed at those entities who claim they do not reach the VAT registration threshold, which is currently CZK 1 million (approx. EUR 36,300.00).

The system is to follow the Croatian model, introduced at the beginning of 2013. „The Croatian system is simple, it does not excessively burden business entities and thanks to online connection to the tax office, there is no space for subsequent modifications in actually received and documented income,“ Minister Babiš said after a round of consultations. The truth is the Croatians praise this system, however, the same success is not guaranteed in the Czech Republic with regards to the fact that the Croatians had huge problems with tax collection before the ORKS was introduced, its effect was thus very significant.
Babiš´s department has still not made it clear how expensive such a system will be for the state and for the business entities. Experts estimate that costs of introducing the system will be around CZK 2.5 billion (EUR 90 million). The system is not expected to require any costs on the part of business entities, but common cash registers, mobile phones or tablets connected to the internet and printer should be sufficient. When selling goods or services, the seller will enter the transaction into the system, the transaction will be sent to the central registry and return back with a validation code that will be printed on the receipt issued by the seller. The exact technical solution has not been specified yet, the Ministry of Finance presumes the IT market will work in its favour starting to offer tailor-made packages for business entities. Nevertheless, this reaction will be considerably delayed with respect to the fact that no specifications for software via which business entities will communicate, are not known.

The system has many pitfalls, considered by its opponents to be great risks. These include, inter alia, bad internet connection in some localities (e.g. ski centres), the communication with central registry may lead to system failures and the need to enter transactions into records a posteriori. The greatest threat seems to lie in simply getting around the system, when the seller will not print the receipt when the buyer does not require it, or in more complex frauds of issuing receipts with fake codes (in this connection introducing “receipt lottery” is considered, but this lottery did not prove successful in the Slovak Republic).

Author: Tomas Havlik, Kancelář CATO s.r.o., Prague