Part II

Developments in the Member States

Czech Republic

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Overall trends in taxation

Structure and development of tax revenues
In 2010, the total tax-to-GDP ratio (including social contributions) stood at 33.8 % in the Czech Republic. This tax
ratio is below the EU-27 average (35.6 %). Compared to neighbouring countries, the ratio is lower than in Austria
and Germany but higher than in Slovakia and Poland.

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The main source of tax revenue is social security contributions, which reach 45.2 % of total taxes and are over 14
percentage points above the EU-27 average (31.1 %) the highest in the EU. The share of Czech social
contributions in total revenues has been the highest in the EU for several years, followed by Slovakia and Germany
in 2010. The share of direct taxes (20.8 % of total taxation) is conversely 9.6 percentage points below the Union
average (30.4 %), as these levies play a less important role than indirect taxes (34 %). Given the predominance of
social security contributions, the other sources of revenue tend to fall below the EU average. In particular, indirect
tax revenue is one of the lowest in the EU as a share of revenue being along with Austria, Italy and Spain. PIT
revenue stands at 3.6 % of GDP, among the lowest values of the EU. In 2010 CIT revenues are close to PIT
revenues (10 % vs. 10.6 % of total taxation) and exceed the EU-27 average by 2.4 percentage points. Only three
other EU countries, i.e. Cyprus, Luxembourg, Malta and Sweden collect more tax revenues with the means of CIT
than the Czech Republic. Despite the forceful cut in the CIT rate from 55 % in 1991 to 19 % in 2010, CIT revenues
have not markedly declined until 2008 when the reductions of the rate coincided with unfavourable economic
conditions.
Since the structure of the tax system is quite centralised, local government receives 14 % of total tax revenues
(3.4 percentage points above the EU-27 average). The central government receives 68.4 % of total taxes, by almost
10 percentage points more than the EU-27 average (58.8 %). This level is the seventh highest in the EU.
The total tax burden rose steadily from 2001 to 2004 peaking at 35.9 % of GDP. In the 20052010 period the taxto-GDP ratio has remained below this level (being 33.8 % in 2010, 1.8 percentage points below the EU-27
average). In the 2005-2008 period, the cyclically-adjusted tax ratio has been declining much faster than the
unadjusted tax ratio, suggesting that the reforms enacted since 2004 have effectively reduced the tax burden
beyond the relatively modest decline in the headline ratio. The increase of the VAT rate and social contributions
base in 2010 counterbalanced the decrease of the CIT rate and the overall tax revenue in terms of GDP recorded a
modest increase of 0.2 percentage points.
Taxation of consumption, labour and capital; environmental taxation
The tax mix by economic function is consistent with the structure described above: taxation on labour is the main
source of revenue (52.3 %, 5 percentage points above the EU-27 average), followed by consumption (32.3 %) and
capital (15.4 %). In 2010 the share of labour taxation revenues increased again to the level of 2008 after a sudden
drop from 52.3 % in 2008 to 50.8 % in 2009, mainly due to the decrease of the employers' and employees' social
contribution rate in 2009. The share of capital taxation revenues has declined by 4.2 percentage points since 2003,
more markedly in 2008 due to the CIT rate cut in that year and the relatively low economic growth in the last
years.
The implicit tax rate (ITR) on consumption is at 21.1 % broadly in line with the EU-27 average. It grew
substantially in 2004 following a revision of consumption taxes preceding the EU accession and remained mostly
stable since then. Selected goods and services earlier taxed at a reduced 5 % VAT rate were made subject to the
standard EU rate in two steps; from 1 January 2004 (e.g. telecommunications) and from 1 May (e.g. construction
works). The pick-up observed since 2009 is probably driven by the hike of the standard and reduced VAT rates.
The ITR on labour income has been declining from its peak level of 41.7 % in 2003 until 2006. In 2007 the rate
peaked again but the 2008 PIT reform which introduced a flat tax rate of 15 % led to another decline in 2008. The

Taxation trends in the European Union

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