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Gift tax and its incorporation into the income tax.

JEL Classification E62

The approach to taxing donation has fundamentally changed in the Czech Republic since 2014. The original progressive sliding tax rates were replaced by flat rates which differentiate according to legal form. This research note deals with gift tax development in the Czech Republic in relation to a long-discussed abolition of this tax. Assessment of the impact of legislative changes on the taxpayers' tax burden is also becoming a subject of investigation. For our research, secondary data from the years 1993 to 2013 were used. They are based on internal tax office sources and our own simulation model calculations.

In the Czech Republic, donations have been subject to the gift tax since 1993. In gift tax calculations, taxpayers were divided into three groups based on kinship with a transferor. Category I was defined as first-degree relatives, including by both ascending and descending bloodlines and husbands. Category II included collateral relatives and persons who had lived with a donor for at least one year prior to transfer within a common household. Category III featured other natural persons and legal entities. Since 2008 there has been full tax exemption for gifts between relatives from categories I and II. Progressive sliding tax rates were applied to persons in category III. The gift tax was cancelled at the beginning of 2014. Donations are now taxed in accordance with income tax rules. Flat tax rates remain for persons in category III.

Gift tax revenues were investigated by dynamic time series (absolute increase and rate of growth). There was a growing trend in gift tax revenues up to 2004. The 2004 revenue amounted to more than five times the yield in 1993 (The 1993 yield was CZK 156 mil. The 2004 yield was CZK 818 mil.). Due to gradual extensive tax exemption, revenues naturally declined gradually by CZK 138 mil. in 2010. With declining gift tax revenues, tax efficiency also declined because the costs of collecting the tax exceeded the tax itself. This situation resulted in gift tax abolition and its incorporation into the income tax.

Model situations were created during evaluation of the impact on tax burden. Tax bases were determined according to the old tax brackets. The effective tax burden according to the original legislation was investigated. These values were compared with the tax burden based on the new legislation for legal persons, individuals, and for individuals without other income.

The finding was that effective tax rates were increasing by a growth rate ranging from 1.1 to 1.32 % similar to the gift tax. For individuals who cannot take advantage of deductions, the effective tax rate was 15 % due to a flat tax rate. For individuals without other income, the effective tax rate has been increasing and for higher incomes is approaching 15 %. For example, for a gift of CZK 1,000,000, the effective tax rate for the gift tax is 6.72 % and for the income tax it is 15 % (or 12.52 % for individuals without further income). The tax burden for individuals is different because the donation is included in the total tax base for the tax year. Taxation might be more favorable for taxpayers who could take advantage of the tax allowance, tax relief, or business losses. The calculated tax for other individuals is mostly higher according to the current legislation. The lower tax burden is only applied to gifts worth more than CZK 12.33 mil. rendered to individuals. This is the point when the effective tax rate for the sliding tax rate is higher than the flat tax rate.

The new taxation system is more disadvantageous for legal entities than for individuals because of the higher corporate tax rate. The lower tax burden was calculated for high tax donations (i.e. CZK 37 mil.). Only then does the average progressive sliding tax rate reach higher values than the corporate income tax rate of 19 %.

Based on our simulation model, the tax burden for taxpayers has increased in most cases. Some individuals remain an exception as they can take advantage of deduction and relief. The situation is different with high donations due to the rising effective tax rate. The increase in tax revenues was not the reason for gift tax incorporation into the income tax. In particular, administrative simplicity and lower compliance costs is the benefit of the new legislation. There is a cost reduction for tax collection by the state. The number of submitted tax returns will be lower if donations are included in the income tax returns.

DOI 10.1007/s11294-016-9593-9

Sarka Sobotovicova [1]

Published online: 24 June 2016

[mail] Sarka Sobotovicova

[1] School of Business Administration in Karvina, Silesian University in Opava, Karvina, Czech Republic
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Title Annotation:RESEARCH NOTE
Comment:Gift tax and its incorporation into the income tax.(RESEARCH NOTE)
Author:Sobotovicova, Sarka
Publication:International Advances in Economic Research
Article Type:Report
Geographic Code:4EXCZ
Date:Aug 1, 2016
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