www.pwc.cz/tbnTax, Legal & Business NewsTax, legal, accounting, advisory and assurance newsletter February 2012

Summary

›› Watch›out›for›illegal›employment

›› PwC›–the›most›desired›tax›employer

›› Where›will›the›increase›in›VAT›rates›stop?

›› Change›in›EU›customs›tariff›for›2012

›› Estimated›items›are›back›before›the›court›again

›› New›liability›when›in›overindebtedness

›› CURRENTLY:›Changes›in›Czech›accounting›legislation

›› General›directors›are›predicting›gloomy›prospects›for›the›economy

Topic of the month

If›you›are›interested›in›receiving›Tax›&›Business›News,›please›contact›Michal›Horáček,›+420›251 151 673.

„PwC offers an immigration audit tailored to the employment conditions in your company. Following a short

investigation, we will verify whether your company complies with legal obligations relating to the employment of foreign nationals.”

Jana Zelová+420›251›152›567

Watch out for illegal employmentThe›amendment›to›the›law›onemployment›entered›into›forcein›January›and›it›provides,›interalia,›amendments›relating›to›theperformance›of›illegal›employment›and›the›employment›of›foreign›nationals.Dependent›work›outside›theemployment›relationship›is›consideredillegal,›in›particular›the›so-called„švarcsystém”.›The›law›also›newlydefines›that›illegal›work›by›a›foreignnational›is›considered›to›be›not›onlywork›performed›in›conflict›with›theissued›permit›for›employment,›orworking›without›this›permission›butalso›working›without›a›valid›residencepermit.At›the›same›time,›the›penalties›forworking›illegally›are›being›increased.In›the›event›that›the›administrativeauthority›uncovers›illegal›employmentduring›an›inspection,›the›employermay›get›a›penalty›of›up›to›CZK›10›mil.›(minimum›of›CZK›250,000)›for

companies›and›up›to›CZK›5›mil.›forindividuals.›Other›penalties›may›entailthe›loss›of›entitlement›to›the›allowanceof›the›Employment›Office›on›protectedjobs›for›3›years›or›an›obligation›toreturn›the›material›aid›for›the›creationof›new›jobs.Also›the›subcontractor›or›intermediary›act›as›a›guarantor›for›the›eventual›penalty›for›the›violation›of›the›law›

or›administrative›offences›in›relation››to›illegal›work,›in›the›event›that›he›knew›or›could›have›known›about›it.››A›company›does›not›account›for›administrative›offence›if›it›canprove›that›it›have›made›every›effort›toprevent›the›breach›of›legal›obligation.The›employer›is›also›obliged›to›retaina›copy›of›the›working›and›residentialpermits›and›proof›of›the›employmentrelationship›in›the›workplace›forthe›duration›of›the›employment›andfor›three›years›after›the›end›of›theemployment.Another›innovation›in›the›law›isthe›extension›of›the›informationobligations›to›holders›of›work›permits.The›employer›has,›since›this›year,›theobligation›to›report›the›start›of›theiremployment›the›same›way›as›for›thecitizens›of›the›European›Union.›

›››Jana›Zelová

››+420›251›152›567

PwC – the most desired tax employer

PwC Česká republika has beenchosen as the most desired taxemployer in the Czech Republicin 2011. The results werepublished on 27 January atwww.danarroku.cz.The competition Tax Individualand Tax Firm of the Year isbeing organised by DaněMEDIAs.r.o. It is the only competitionof its kind in the CzechRepublic focused on voting forthe best tax firm, teams andindividuals. The category –most desired tax employer isdefined as a tax firm where youwould prefer to work the most.

2

Tax PwC Legal

Where will the increase in VAT rates stop? As›at›1›January›2012,›the›reduced›VAT›rate›in›the›Czech›Republic›has›been›increased›again,›up›to›14%.›The›amount›of›this›rate›will,›however,›likely›not›be›final.›Further›changes›in›VAT›rates›are›expected›as›at›1›January›2013›when›the›reduced›and›standard›VAT›rates›should›be›unified.›The›amount›of›the›unified›VAT›rate›is›planned›to›be›17.5›%.›The›question›remains,›however,›how›the›state›budget›in›2012›will›further›develop.›The›budget›deficit›could›be›compensated›by›an›increase›in›the›unified›VAT›rate›up›to›18›to›20%.›This›change›could›even›take›place›during›2012.›The›only›country›of›the›European›Union›that›already›currently›uses›the›unified›single›VAT›rate,›in›the›amount›of›25%,›is›Denmark.›Ireland›and›Hungary›belong›among›those›EU›countries›that›changed›the›amount›of›VAT›as›at››1›January›2012.››Both›countries›in›this›way›sought›to›address›the›increasing›debts›in›their›national›budgets.›Ireland›increased›the›standard›VAT›rate›by››2›percentage›points›up›to›23%.›Hungary›has›even›decided›to›increase›the›standard›rate›of›VAT›to›the›level›of›27%›(from›the›original›25%).›››After›the›increase,›Hungary›thus›became›the›country›with›the›highest›standard›VAT›rate›among›the›EU›member›states.

Martin›Diviš

+420›251›152›574

Change in EU customs tariff for 2012 The›EU›common›customs›tariff›contains›a›number›of›changes›as›at›January›2012.›The›nomenclature›contains›newly›added››item›codes,›some›of›the›existing›codes›have›been›changed›and›many›of›the›codes›were›also›grouped.›This›significant›change›reflects›the›development›of›new›production›technologies,›the›needs›of›international›trade,›as›well›as›the›efforts›towards›simplification›and›having›a›uniform›interpretation›of›the›tariff.››Those›companies›that›trade›in›the›concerned›products›are›obliged›to›use›the›updated›tariff›classification.›Another›effect›may›be›a›change›in›the›amount›of›the›customs›duties›due›to›changes›in›the›code›of›the›goods.›We›are›ready›to›discuss›all›the›impacts›of›the›customs›tariff›changes›with›you.

Radovan›Šmídl+420›251›152›525

Estimated items are back before the court againThe›creation›of›estimated›items›is,›in›the›area›of›book›closings,›the›hit›of›last›years.›The›Supreme›Administrative›Court›(SAC)›confirmed›recently›its›preceding›decision›in›a›similar›matter.›In›this›decision›SAC›defined›the›conditions›under›which›it›is›possible›to›create›estimated›items›to›costs›that›can›be›tax›deductible›and›when›it›is›only›possible›to›create›provisions›that›are›tax›non-deductible.›According›to›SAC,›it›is›still›valid›that›estimated›items›to›costs›can›be›created›where,›by›the›end›of›the›accounting›period›the›other›party›of›the›transaction›was›legally›entitled›to›the›fulfilment›of›the›obligations›(for›example,›in›the›form›of›salary›entitlement)›and›it›is›without›doubt›that›the›entitlement›will›actually›be›met.›In›the›event›that›the›entitlement›is›linked›to›the›facts›that›will›occur›only›after›the›end›of›the›accounting›period›(such›as›having›enough›cash),›it›is›not,›in›the›current›year,›possible›to›account›for›a›tax›deductible›estimated›item›but›only›about›a›tax›non-deductible›provision.›A›similar›principle›applies›with›respect›to›all›other›estimated›items,›e.g.›customer›bonuses›and›price›reductions.›In›the›same›decision,›SAC›also›commented›on›the›moment›at›which›the›revenues›from›premiums›should›be›posted.›According›to›SAC,›there›is›an›obligation›to›post›the›revenues›in›the›event›where›it›is›clear›that›an›insured›event›occurred›and›that›the›assurance›

company›will›actually›fulfil›its›obligations.›

The›basis›for›the›posting›can›be›the›entitlement›applied›against›the›insurance›company›even›if›the›insurance›company›may›subsequently›deny›all›or›part›of›the›claim.›According›to›SAC,›in›this›case›the›principle›of›substantive›and›temporal›context›of›the›revenues›and›their›posting›take›precedence›over›the›precautionary›principle.›SAC›thus›diverted›from›its›previous›decision›in›a›similar›case›in›which›it,›conversely,›confirmed›the›opinion›of›the›taxpayer›that,›in›a›case›where›there›are›doubts›that›the›insurance›company›will,›based›on›the›claimed›entitlement,›fulfil›its›obligations,›the›taxpayer›does›not›have›an›obligation›to›post›this›entitlement›into›revenues›through›active›estimated›items.

.

David›Brokovec›+420›251›152›561

New liability when in over-indebtedness From›the›beginning›of›this›year,›managers›have›the›obligation›to›submit›an›insolvency›proposal›to›the›own›company›not›only›in›the›event›of›its›insolvency›but›even›in›the›case›of›over-indebtedness.›This›is›a›situation›in›which›the›company›has›at›least›two›creditors,›its›commitments›(even›undue)›exceed›the›value›of›its›assets›and›it›cannot›be›reasonably›expected›that›the›situation›will›change›in›the›foreseeable›future›and›that›the›company›will›be›able›to›generate›a›profit.›Managers›should›therefore›monitor›the›value›of›the›assets›and›foreign›sources›with›greater›care.››In›case›of›problems›they›then›must›realistically›assess›the›possibility›of›further›operations›of›the›business›and,›in›particular,›with›regard›to›the›likelihood›of›future›revenues.›The›insolvency›proposal›must›be›made›without›undue›delay›after›learning›of›the›insolvency›situation›or›after›it›could›have›been›learnt›had›the›managers›acted›with›proper›care.›In›violation›of›this›obligation›the›company›creditors›may›seek›satisfaction›of›their›receivables›in›the›form›of›action›for›damages›and›this›can›be›done›directly›against›the›managers›of›the›company. „According to the law, the amount of damage to the creditors of the company shall be equal to the difference between the claim of the creditor and the amount that the creditor received after the termination of the insolvency proceedings.“Martin Strnad +420›251›152›904

„If you import consumer goods or electronics, please pay attention to these changes!”

Radovan Šmídl+420›251›152›525

„I recommend, based on the Supreme Administrative Court decision mentioned, that you verify that

the conditions for creating estimated items are met, within the book closings, in particular in relation to claims arising from the contractual documentation.”

David Borkovec +420›251›152›561

StudyAccountingPwC LegalTaxTopic of the month

3

Accounting Study

The Latest News: Changes in Czech accounting legislation In›relation›to›the›amendment›of›the›Act›on›Transformation›issued›on›27›October›2011,›a›revised›Decree›on›Accounting›for›Entrepreneurs›was›published›in›statute-book›no.›413/2011›on›13›December›2011.›Furthermore,›related›changes›to›selected›Czech›Accounting›Standards›were›put›out›in›the›Financial›Bulleting›of›the›Ministry›of›Finance›no.›9/2011on›20›December›2011.›

Fundamental changes in Czech accounting legislation valid from 1 January 2012

•››A›revaluation›arising›from›a›business›transformation›is›no›longer›posted›to›the›closing›accounting›books›of›a›company›involved›in›the›business›transformation.›Instead,›the›revaluation›is›posted›into›the›subsequent›accounting›period›books›prepared›as›at›the›decisive›date›of›the›business›transformation›–›i.e.›now›it›is›not›the›closing›balance›sheet›but›the›opening›balance›sheet›that›is›being›revaluated.›

•››There›is›a›new›obligation›to›disclose›a›provision›for›corporate›income›tax›net›of›the›advances›paid›for›it.›This›fact›must›be›disclosed›in›the›notes›to›the›financial›statements.›

•››The›company›may›change›the›calendar›year›to›a›fiscal›year›within›30›days›after›its›incorporation›or›

after›the›business›transformation›is›registered›in›the›Commercial›Register.›

•››Amendment›permits›more›situations›allowing›one-off›extension›of›an›accounting›period›by›3›months.›

•››A›company›using›the›component›depreciation›method›will›no›longer›be›allowed›to›create›a›provision›for›repairs›of›tangible›fixed›assets.

Fundamental changes valid for the accounting period starting on 1 January 2013 and onwards

•››Corrective›accounting›entries›of›prior-period›material›errors›booked›in›the›current›period›will›no›longer›be›posted›to›extraordinary›income/charges.›Instead,›their›impact›will›be›booked›directly›to›equity›and›will›be›presented›on›a›new›financial›statements‘›line›called›„Other›retained›earnings/accumulated›losses“.›The›obligation›to›disclose›an›explanation›for›such›an›item›in›the›notes›to›the›financial›statements›will›remain›unchanged.›Furthermore,›the›corrective›accounting›entry›will›probably›have›to›be›reported›in›the›statement›of›changes›of›shareholder›equity›and›the›comparative›data›of›the›prior›period›will›have›to›be›restated›accordingly.

Martina›Chrámecká›+420›251›152›238›

Petr›Kříž+420›251›152›045

CEOs are predicting gloomy prospects for the economy Almost›half›(48%)›the›1258›CEOs›interviewed,›those›who›responded›to›the›annual›PwC›survey,›believe›that›the›development›of›the›global›economy›will›worsen›this›year.››Only›15%›expect›improvement›during›2012.››However,›almost›three›times›as›many›CEOs›(40%)›believe›in›the›growth›of›their›own›companies›which›suggests›that›the›CEOs›have›learned›how›to›lead›their›companies›in›a›difficult›and›unstable›economic›situation.›This›has›been›shown››

in›15th›global›survey›of›the›opinions›CEOs›the›results›of›which,››as›in›previous›years,›have›been›introduced›by›PwC›at›the›Global›Economic›Forum›in›Davos,›Switzerland.›A›comparison›of›the›responses›of›the›Czech›and›global›CEOs›shows›more›pessimism›from›the›Czech›perspective.›Two›thirds›of›them›expect›a›worsening›of›the›world›economy›and›less›than›13%›are›really›sure›that›their›company›will›increase›sales›this›year.›More›information›can›be›found›at›www.pwc.czDecline

48%

Improve

15%

Stay the same 34%

Donť know 4%

How will the global economy develop this year?

How do you expect the number of workers in your organisation will change in the next 12 months? Do you expect…?

Decrease›by›more›than›8%

Decrease›by››5-8%

Increase›by››5-8%

Increase›by›more›than›8%

Decrease›by›5%

Stay››the›same

Increase›by›less›than›5%

„CEOs understand that we are a small open economy that can hardly develop outside the mainstream. The majority of the negative impulses come from abroad and we can hardly influence them. On the other

hand, the situation in the Czech Republic is not that bad. The Eurozone can be envious of the stability of our banking sector and there are a number of firms here that, despite the crisis, managed to find opportunities for growth and are recruiting new employees. ”

Jiří Moser +420›251›152›048

0

5

10

15

20

25

30

35

TOP 10 countries that are considered the most important in terms of outlook for growth in the next 12 months

30%

China

Russia GB France Japan Australia

USA Brasil India Germany

8% 6% 5% 5% 4%

22% 15% 14% 12%

StudyAccountingPwC LegalTaxTopic of the month

4

Contact

Jiří›MoserCountry›Managing›Partner››PwC›CR››Lead›Advisory›Services›Partner›+420›251›152›048›

Paul›Stewart›Lead›Tax›&›Legal›Services›Partner›+420›251 152 711

Chris›Skirrow›Lead›Assurance›Services›Partner›+420›251›151›840

Daniel›ČekalPartner›PwC›Legal›Legal›Services››+420 251 152 900

Prague Office Kateřinská›40,›120 00›Prague›2+420›251 151 111

Brno Officenáměstí›Svobody›20,››602 00›Brno+420›542 520 111

Ostrava OfficeZámecká›20,›702 00›Ostrava+420›595 137 111

© 2012 PricewaterhouseCoopers Česká republika, s.r.o. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Česká republika, s.r.o., which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

StudyAccountingPwC LegalTaxTopic of the month