Default interest in the Tax Code under the amendment

The concept of interest “cherry-picking” has been used to refer to the procedure where overpayments in personal tax accounts are considered when calculating default interest. The tax administrator is obliged to consider whether the taxpayer has overpaid any other tax during the period of default, including to another tax administrator, when determining the default interest. If there was an overpayment, the default interest was not accrued for the period during which the overpayment existed. However, the tax administrator’s obligation to consider overpayments was not expressly provided for in the law but was established by case law. The latter has undergone certain developments and has concluded that the tax administrator must consider overpayments of tax registered with other tax administrators, unless this involves a complicated procedure. However, according to the Tax Code, the term “tax administrator” includes not only tax authorities but also, for example, municipalities administering local taxes. The legislator thus apparently considered the obligation imposed by case law to be too broad from this perspective. Therefore, the amendment limits the tax administrator’s obligation in such a way that overpayments to another tax administrator are now to be considered, but only if it is also an administrator with substantive jurisdiction. In practice, this should mean that tax authorities should continue to consider overpayments existing with another tax authority but would no longer be obliged to take into account overpayments with other administrative bodies in their capacity as tax administrators.

However, the changes do not only affect interest paid by the taxpayer but also interest paid by the tax administrator. A significant change brought about by the amendment to the Tax Code is the introduction of a ban on interest on interest paid by the tax administrator. There has been a dynamic jurisprudential development in this area; until now, interest on interest paid by the tax administrator was allowed.

Penalty remission under the new legislation

The Tax Code allows the tax administrator to remit part of the penalty up to 75%. At the same time, the Tax Code provides that the obligation to pay the penalty does not arise if the tax is assessed on the basis of an admissible additional tax return or settlement. However, if the additional return is inadmissible for any reason (e.g. if it is filed during a tax audit or an additional assessment procedure), a penalty is set. An inadmissible additional return and thus the assessment of a penalty can easily occur, for example, in a situation where several additional returns are filed within a short period of time.

Even the legislator perceives the current situation as unsatisfactory and considers the incurrence of a penalty in the situation described to be a rather severe sanction. However, the change will not consist in a modification of the conditions for incurring the penalty but in a newly extended possibility to remit up to 100% of the penalty. In general, it will be possible to remit 100% for a justifiable reason. It can be expected that the Financial Administration of the Czech Republic will update the instruction on the remission of accrued interest on tax and specify other reasons to be considered justifiable in the case of remission of penalties.

Bulk remission

The proposed amendment to the Tax Code also introduces changes to the institute of bulk remittance. It will no longer be the Minister of Finance who will decide on the bulk remittance, but the Government of the Czech Republic as a collective body. Therefore, this change will allow, in the event such as a natural disaster, to remit not only taxes and accrued interest administered by the Ministry of Finance and the administrative bodies reporting to it, but all types of mandatory payments and fees, regardless of which body administers them.

Furthermore, the possibility of bulk deferment, i.e. postponement of tax due dates, is proposed. This is in response to the fact that postponement of the tax due date can help taxpayers in the event of an emergency. During the Covid-19 pandemic, the Ministry of Finance, in order to mitigate the negative effects of the pandemic, waived in bulk at tax accessories, i.e. interest and penalties. However, as this bulk remittance of tax accessories was not affecting the tax due date, taxpayers were at risk of tax enforcement in the event of non-payment. Bulk deferment can therefore solve, for example, this problem. Furthermore, the Government of the Czech Republic will be able to decide that no interest on the amount that is subject to deferment will be accrued during the period of bulk deferment.

In this article we have mentioned the most important changes in the area of tax sanctions brought about by the draft amendment to the Tax Code. However, there may still be changes to the draft during the legislative process and therefore, we will monitor further developments of this amendment.