Act 261/2007 Coll.

With effect from January 1, 2008, Act No. 261/2007 Coll., on the Stabilization of Public Budgets (ZSVR), introduced so-called energy taxes into the Czech tax system as another type of indirect taxes.

3 chapters of the Act are important for metallurgical processes:

• PART FORTY-FIVE – TAX ON NATURAL GAS AND SOME OTHER GASES (§ 1 – § 30)
• PART FORTY-SIX – TAX ON SOLID FUELS (§ 1 – § 29)
• PART FORTY-SEVEN – TAX ON ELECTRICITY (§ 1 – § 30)

A new term Metallurgical process is introduced.

According to § 8 paragraph 1 letter e) part forty-fifth of the ZSVR, gas intended for use, offered for sale or used in metallurgical processes is exempt from tax.

According to § 8 paragraph 1 letter e) part forty-six ZSVR, solid fuels intended for use, offered for sale or used in metallurgical processes are exempt from tax.

According to § 8 paragraph 2 letter e) part forty-seven ZSVR, electricity intended for use or used in metallurgical processes is exempt from tax.

What lies beneath? By law, the price for energy also includes an ecological tax to support renewable sources. In the case of electricity, it is 28.30 CZK/MWh, for natural gas 264.80 CZK/MWh of combustion heat, and for solid fuels 8.50 CZK/GJ of combustion heat.

The processes listed in §8 are exempt from this tax. In point f) then metallurgical processes

Tax administration is carried out by the Customs Administration of the Czech Republic, i.e. the Customs Administration is responsible for tax collection, as well as for approval of tax exemption.

However, as the pressure on companies and their demands for exemption from ecological tax is increasing, many problems arise with how to interpret the term Metallurgical Process. It has no definition in the legal system. There is only a statement that it refers to the production of metals listed in the CZ-NACE classification under code C 24 “Manufacture of basic metals“.

For clarification, NACE or CZ-NACE is the European classification of economic activities. The abbreviation NACE comes from the French nomenclature “Nomenclature Statistique des Activites Economiques”.

Classifications of economic activities are constructed to disaggregate data that can only be associated with an activity unit (eg an individual plant or a group of plants forming an economic unit such as an enterprise). They provide the basis for the preparation of statistical outputs, various inputs to the production process (labor, material, energy, etc.), for capital formation and for the financial operations of these units.

If we look at CZ-NACE in more detail, the contradiction between the wording of Act 261/2007 Coll. and CZ-NACE begins here. Section 24 contains the following definition: “Production of base metals, metallurgical processing of metals; foundry“. Compared to the definition in Act 261/2007 Coll. there is therefore a significant difference, with a much broader interpretation. In the next classification, the detailed category is given, coded with subgroup numbers 24.1 to 24.5, with the number of individual Classes and Subclasses.

In addition to the CZ_NACE codebook, there is also the NACE Methodological Guide, rev. 2. She says:

Paragraph 11, page 4:

“Economic activity is the production of a certain product or service using a combination of means of production, labour, production procedures and intermediate products. Economic activities are therefore characterized by inputs, production processes and their outputs (goods or services)”.

Paragraph 12, page 4:

“An activity, as defined for the use of NACE, may comprise either a single production process (e.g. weaving) or may consist of several processes, each of which is described in a different classification category (e.g. the manufacture of a car consists of different activities such as casting, forging, forming, assembling, painting, etc.). If the production process is organized as a series of individual activities within one statistical unit, the entire unified production process is considered to be an economic activity”.

Therefore, if the casting produced by the foundry has one integrated process, then all the operations of this process will be part of one economic activity and will fall into the CZ-NACE, category code 24. But the production of a casting means the preparation and production of a mould, the preparation and production of a melt, transport of the melt to the casting place, casting into the mould, knocking the casting out of the mould, sandblasting, grinding and other operations aimed at creating a semi-finished product intended for sale.

Since CZ-NACE is followed by the CZ-CPA production classification, I have to take this classification into account as well. The acronym CPA comes from the term Classification of Products by Activity. Production classifications are constructed in such a way as to divide production (products and services) that have common characteristics. They provide the basis for the preparation of statistics on production, business activity, consumption, foreign trade and transportation of these products.

Some terms are defined in the Methodical Guide for CZ-CPA, and I consider the following to be essential:

Semi-finished products are “Products which have undergone some processing but require further processing before they are ready for use“. They may be sold to other manufacturers or moved to subcontractors for further processing. Typical examples are raw metal castings, ready for sale or for further processing”

From this it can be concluded that in order for a product to be classified with a CZ-CPA number, it must be created by a CZ-NACE economic activity.

CZ-NACE, Methodological Guide, p. 4, paragraph 14

When classifying according to the CZ-NACE classification, the type of ownership of the statistical unit does not matter, since this characteristic does not affect the economic activity. Units that perform the same economic activity are classified in the same NACE categories. It does not matter whether the unit is a commercial company, whether it is privately or state-owned, whether the parent company is owned by a foreign investor, or whether the unit has one or more headquarters. Therefore, there is no connection between NACE and the classification of units of the System of National Accounts (SNA) or the European System of Accounts (ESA).

What follows from this. If a product with CZ-CPA classification is created within one economic activity, according to CZ-NACE, then all operations that are part of one integrated procedure will be classified with the same CZ-NACE number.

This opinion is also supported by the statement of the Ministry of Finance. Even though Metallurgical processes do not have a legally defined definition, if they are classified under CZ-NACE, code 24, they are exempt from tax. These processes are:

• Thawing, heating and treatment of raw materials for the primary production of metals – full exemption
• Primary production of metals by smelting input raw materials (ore, secondary raw materials) – full exemption
• Subsequent casting of metal products from molten semi-finished products – full exemption
• Hot metal forming (eg rolling, forging) and cold – full freedom
• Heat treatment of the material, e.g. quenching, tempering – full exemption
• Service operations connected only with metallurgical production (transport of raw materials, semi-finished products and finished products within production operations, heating and lighting of operations, including the social background of metallurgical employees) – full exemption
• Service operations common to metallurgical and non-metallurgical production – proportional exemption according to an economically justified criterion, e.g. total input of installed appliances
• Other operations (e.g. administration and management of the company) – without exemption

Where am I going with this? Commercial heat treatment shops generally do not fall under Metallurgical processes. However, if a forge or foundry creates its product with CZ-CPA economic activity CZ-NACE, section 24 in one integrated process, and if within this integrated process there is a heat treatment operation that will be subcontracted by a commercial heat treater, then even this activity would be was supposed to apply tax exemption for energy consumed by heat treater. The condition is that the contracting authority, which orders the production process, is the owner of both the raw material and the final product (CZ-NACE, p. 20, point 82).

Point 14 of the CZ-NACE Methodological Guide states that economic activity does not depend on the ownership structure, i.e. not even on the entities that carry out the activity. Units that perform the same economic activity are classified in the same CZ-NACE category.

Minutes of the meeting of the coordination committee of the Ministry of Finance with the Chamber of Tax Advisors of the Czech Republic contribution 214_17.12.07 of December 17, 2007, tax advisor Martin Kopecký, certificate no. 3826, states:

https://www.ucetni-portal.cz/vyklad-nekterych-pojmu-v-zakonech-o-energetickych-danich-124-v.html

In addition, the ZSVR does not stipulate that the exemption applies only to taxpayers who carry out metallurgical processes themselves, and not to their subcontractors. On the contrary, the principle that the exemption is applied in relation to a certain activity, and not in relation to a certain taxpayer, is based on the general principle of indirect taxes, where there is no substantial number of entities through which the taxable activity is carried out. For example, if one entity carries out the entire metallurgical process itself and the other entity also uses a subcontractor (e.g. for heating the input raw materials), the tax burden should be the same in both cases and the subcontractor should also be able to use the exemption for metallurgical activity.

Under certain circumstances and with a good argument, it seems that even the heat treater should not lose the possibility of exemption from environmental tax, but only under the above-mentioned conditions:

• The tax entity that orders heat treatment is classified by economic activity in CZ-NACE, section 24
• He owns both the raw material and the final product/semi-finished product
• The heat treatment operation is part of a single, comprehensive production procedure at the client

In the case of commercial heat treatment plants, the only question is whether they can recognize the product created by the economic activity of CZ-NACE, Section 24 at the entrance, and whether they are able to assign energy consumption to this economic activity.

March 11 , 2023

Jiří Stanislav