New top-up TAX
New top-up TAX
The Act on Top-Up Taxes for Large Multinational Groups and Large Domestic Groups (the "Act on Top-Up Taxes") was adopted and promulgated in the Collection of Laws under No. 416/2023 Coll. (No. 191).
With effect from 31 December 2023, it introduced two completely unique taxes on profits: the Czech top-up tax and the associated top-up tax. It applies only to large groups. A group
qualifies as a large multinational/national group if, in two of the four tax years preceding the period under review, the consolidated revenue reported in the consolidated financial statements of the ultimate parent company amounted to at least EUR 750 million.
Although the top-up tax will be payable for the first time for accounting periods beginning after 31 December 2023, it already may affect the financial statements for the immediately preceding period.
As of 1 January 2024, Decree No. 500/2002 Coll. on the implementation of the Act on Accounting for Businesses (the "Decree") was amended in connection with the introduction of the top-up tax - Sections 39(5) and 59(7).
The good news is that no deferred tax on the top-up tax will be recognised for the time being. It will only be reflected in the level of tax payable. The Decree requires that it should be calculated separately in the notes to the financial statements (i.e. separately from the regular corporate income tax). Furthermore, if a company recognises deferred tax and is liable for a top-up tax, it must disclose in the notes to the financial statements that it is such a taxpayer and that the amount of deferred tax does not include the top-up tax. These provisions will be effective for the first time for the 2024 financial statements or a financial year starting in 2024.
The above requirements are consistent with the revised IAS 12 - Income Taxes, which was amended in connection with the top-up tax in May 2023.
The calculation of the effective tax rate will be based on the financial statements. Simply put, it will be the ratio of the aggregate of adjusted taxes included (i.e. taxes payable and deferred) to the aggregate of qualifying profits (reduced by qualifying losses, if any) for all companies in the country. However, the input data will need to be carefully reviewed and adjusted according to the rules of the Tax Compliance Act, which will be linked to the OECD model rules and the EU Directive. Primarily, it should be based on the financial data used for the consolidated financial statements prepared by the ultimate parent company.
Following the OECD model rules and the EU Directive, the Act on Top-Up Taxes simplifies the transition to the administratively demanding calculation of the effective tax rate for the purposes of the top-up tax. In addition, it allows for deferred tax reported before 1 January 2024 to be assumed without being subjected to strict rules for its adjustment to the value acceptable for the purposes of the top-up tax. However, this does not mean that the company will assume the deferred tax recognised prior to 1 January 2024 on a 1:1 basis. It will have to recalculate it at a rate of 15% and, if applicable, exclude the portion of the deferred tax asset that arose from certain transactions excluded from the calculation of the top-up tax.
For these reasons, we believe that when preparing financial statements for 2023 or a financial year beginning in 2023, companies should focus on deferred tax and recognise as many deferred tax assets as possible. They should also discuss this issue with their statutory auditor.
Disclosure in the input period is also understood in the Act on Top-Up Taxes to mean mere inclusion in the notes to the financial statements. Therefore, if a company has realised a tax loss or has other temporary differences (e.g. research and development deduction, investment incentives) that it will be able to apply against the tax base (or as a tax credit) after 1 January 2024, it is appropriate to recognise the related deferred tax asset in full. If its future utilisation is uncertain (due to an insufficient tax base), the company need only disclose the amount in a note to the financial statements together with a meaningful commentary.
When large multinational or national group are required to review their effective tax rate or determine a simplified effective tax rate for the transitional safe harbour based on information contained in a country-by-country report (CbCR), the allocation of deferred tax assets to individual company expenses can offer significant assistance.
With effect from 31 December 2023, it introduced two completely unique taxes on profits: the Czech top-up tax and the associated top-up tax. It applies only to large groups. A group
qualifies as a large multinational/national group if, in two of the four tax years preceding the period under review, the consolidated revenue reported in the consolidated financial statements of the ultimate parent company amounted to at least EUR 750 million.
Although the top-up tax will be payable for the first time for accounting periods beginning after 31 December 2023, it already may affect the financial statements for the immediately preceding period.
As of 1 January 2024, Decree No. 500/2002 Coll. on the implementation of the Act on Accounting for Businesses (the "Decree") was amended in connection with the introduction of the top-up tax - Sections 39(5) and 59(7).
The good news is that no deferred tax on the top-up tax will be recognised for the time being. It will only be reflected in the level of tax payable. The Decree requires that it should be calculated separately in the notes to the financial statements (i.e. separately from the regular corporate income tax). Furthermore, if a company recognises deferred tax and is liable for a top-up tax, it must disclose in the notes to the financial statements that it is such a taxpayer and that the amount of deferred tax does not include the top-up tax. These provisions will be effective for the first time for the 2024 financial statements or a financial year starting in 2024.
What will need to be reflected in the 2023 accounts or the financial year beginning in 2023?
If a company expects to become subject to a top-up tax in the immediately following period, it must disclose that information in a note to the financial statements and describe and quantify the expected impact of the top-up tax on the company. This obligation results from a transitional provision of the amended Decree.The above requirements are consistent with the revised IAS 12 - Income Taxes, which was amended in connection with the top-up tax in May 2023.
Is there anything else that companies should bear in mind in relation to the top-up tax when preparing their accounts for 2023 or a financial year beginning in 2023?
Recall that the top-up tax was introduced to make large multinational or national groups pay a tax on profits in each country where they operate through subsidiaries or permanent establishments, such that their effective tax rate is 15%.The calculation of the effective tax rate will be based on the financial statements. Simply put, it will be the ratio of the aggregate of adjusted taxes included (i.e. taxes payable and deferred) to the aggregate of qualifying profits (reduced by qualifying losses, if any) for all companies in the country. However, the input data will need to be carefully reviewed and adjusted according to the rules of the Tax Compliance Act, which will be linked to the OECD model rules and the EU Directive. Primarily, it should be based on the financial data used for the consolidated financial statements prepared by the ultimate parent company.
Following the OECD model rules and the EU Directive, the Act on Top-Up Taxes simplifies the transition to the administratively demanding calculation of the effective tax rate for the purposes of the top-up tax. In addition, it allows for deferred tax reported before 1 January 2024 to be assumed without being subjected to strict rules for its adjustment to the value acceptable for the purposes of the top-up tax. However, this does not mean that the company will assume the deferred tax recognised prior to 1 January 2024 on a 1:1 basis. It will have to recalculate it at a rate of 15% and, if applicable, exclude the portion of the deferred tax asset that arose from certain transactions excluded from the calculation of the top-up tax.
For these reasons, we believe that when preparing financial statements for 2023 or a financial year beginning in 2023, companies should focus on deferred tax and recognise as many deferred tax assets as possible. They should also discuss this issue with their statutory auditor.
Disclosure in the input period is also understood in the Act on Top-Up Taxes to mean mere inclusion in the notes to the financial statements. Therefore, if a company has realised a tax loss or has other temporary differences (e.g. research and development deduction, investment incentives) that it will be able to apply against the tax base (or as a tax credit) after 1 January 2024, it is appropriate to recognise the related deferred tax asset in full. If its future utilisation is uncertain (due to an insufficient tax base), the company need only disclose the amount in a note to the financial statements together with a meaningful commentary.
When large multinational or national group are required to review their effective tax rate or determine a simplified effective tax rate for the transitional safe harbour based on information contained in a country-by-country report (CbCR), the allocation of deferred tax assets to individual company expenses can offer significant assistance.