Fair tax

A basic tenet of a fair tax system is that income is taxed only once. Violations of this lead to taxpayer outrage and efforts to circumvent any double taxation. The government's plan to tighten thin-capitalization rules for loans from related parties can be justified if the loans are used to avoid Czech tax through offshore schemes. Harder to justify, though, is a cap of 6% on the interest rate from an unrelated party that can be claimed as a deductible expense. Not only will this disadvantage small companies with high borrowing costs, as HN noted, but it will also introduce a new element of double taxation. How else could the finance ministry expect to raise several billion crowns by making the change? If the interest cost over the 6% limit is in effect income to the borrower, the lender should be exempt from tax on its loan profit, as long as it dutifully pays taxes in the CR. Otherwise, the tax change will merely shift more borrowing to murky offshore schemes. [Czech Republic]