VAT news: tax deduction advance
An amendment to the Tax Code brings a new tax institute effective from 1 January 2021, which allows the payment of a tax deduction advance (“advance”) before the tax deduction is determined, i.e. before a tax assessment decision is issued. Although the possibility of obtaining a portion of the excessive deduction even before the tax procedure is concluded is positive for some VAT payers in terms of cash flow, we find it important to point out the difficulties that can be associated with the payment of the advance.
When is a VAT payer entitled to the advance?
A VAT payer is entitled to the advance by law if the prerequisites are met. However, compliance with the conditions is checked by the tax administrator, who thus essentially decides whether the VAT payer is entitled to the advance in a specific case. The tax administrator is required to check regularly whether the conditions of the entitlement to the advance have been met.
The tax administrator can provide the advance in cases where it intends to verify the tax deduction claimed by the VAT payer as part of a tax audit or doubt elimination procedure. However, the advance can only relate to the portion of the excessive deduction that will not be, or has already been, audited. Therefore, the VAT payer is usually not entitled to the advance if the tax administrator is performing a full-scope tax audit.
The entitlement to the advance can arise only if it were to amount to at least CZK 50,000. The tax administrator does not issue a ruling about the entitlement to the advance, but it will prescribe the advance in the tax records without undue delay. The tax administrator will then inform the VAT payer about the prescription of the advance in a suitable way, which may also include an informal email. If a refundable overpayment arises as a result of the advance, the tax administrator will refund this overpayment to the VAT payer without a request within 15 days. Therefore, the advance is actually paid out only if the tax administrator does not record any arrears on the VAT payer’s personal tax account.
What are the advantages of the advance?
The advantage of the advance payment is undoubtedly the VAT payers’ ability to use a portion of the excessive deduction as they see fit even before the resulting excessive deduction is assessed. Alternatively, after the advance is prescribed in the tax records, it can be offset against the arrears of another tax liability, thereby partially or completely eliminating related default interest.
For the tax administrator, the advantage of the advance consists in the fact that no compensatory interest on withheld excessive deduction will usually have to be paid to the VAT payer from the prescribed advance.
What are the disadvantages of the advance?
When determining the amount of the advance, the tax administrator does not assess whether or not the claimed excessive deduction is justified. The actual amount of the excessive tax deduction or tax liability will only be set by the tax assessment decision, which also includes the settlement of the advance. This can lead to a situation where the amount of the advance exceeds the determined excessive deduction. In such case, the VAT payer is obliged to refund the resulting overpayment within 15 days from the tax assessment decision coming into force and simultaneously to pay default interest to the tax administrator.
Prescribing the advance in the tax records and offsetting it against the tax arrears of another tax also affects the possibility of payment deferment and default interest reduction on this other tax.
Can the possible risks arising from the advance be mitigated?
If the tax administrator prescribes the advance, it may pose a risk for the VAT payer of having to pay default interest in case that the audit procedure does not have the result corresponding to the VAT payer’s tax assertion. VAT payers should therefore make active use of the tax information box (which should be additionally improved according to the amendment) and set up suitable informal communication with the tax administrator and appropriate internal processes. Potential default interest can be prevented by a timely request not to pay out the prescribed advance.
It is also advisable to consider beforehand the potential impacts of prescribing the advance in the tax records with respect to the possible deferment of another tax that is already due and default interest reduction.
However, even if the excessive deduction is determined in an amount equal to or exceeding the prescribed advance, it is suitable to verify whether the VAT payer could still be entitled to the interest on the VAT deduction and whether the interest amount is in line with legal regulations and the case law.