Businesses often find themselves in a situation where they become entitled to interest as a result of the tax administrator’s actions or negligence. However, in practice, we often come across cases where the tax administrator does not pay the interest to the taxpayer at all or pays an amount that is lower than the one to which it is entitled by law or based on the administrative courts’ judicature. When should the entitlement to interest be claimed then?
Interest on an Audited Excessive Deduction
In auditing an excessive VAT deduction claim made, the tax administrator must be aware of the “cost” of the time devoted to the audit if it transpires that the payer’s assertions are true. The “cost” consists of interest on the VAT deduction, which, in some cases, may amount to 14% of the excessive deduction per year.
The issue of compensation, which is supposed to balance out the taxpayer’s financial disadvantage resulting from an unreasonably long audit of the excessive deduction, which would not have occurred if the excessive deduction had been immediately paid out, has undergone significant development in the past five years. However, interventions by administrative courts, namely regarding the amount of the interest, may continue to be expected, for which reason we recommend that you actively enforce your interest claim against the tax administrator.
Interest on the Tax Administrator’s Unjustified Actions
Another situation when a business may become entitled to interest as a result of the tax administrator’s actions or negligence is the issuing of an unlawful ruling. If the tax administrator had issued a payment assessment that was subsequently cancelled for unlawfulness or an incorrect administrative procedure, the taxpayer becomes entitled to interest on the incorrect determination of tax from the amount that it paid based on or in relation to the unlawful payment assessment during the period from its payment to its refund. The entitlement to interest on the tax administrator’s unlawful actions may also originate if the tax administrator applies an incorrect administrative procedure.
At the annual rate of 14% or more depending on the Czech National Bank’s repo rate, the amount of interest on the tax administrator’s unlawful actions is not immaterial.
Businesses most frequently become entitled to the interest if the court issues a ruling that revokes the financial administration’s ruling for unlawfulness, for example when the period for determining tax has expired, a legal regulation has been incorrectly applied or a payment security order has been cancelled. However, the business may also become entitled to interest on the tax administrator’s unlawful activities if the payment assessment is cancelled or amended as early as during the appellate proceedings, for example owing to an income tax overpayment arising from tax prepayments made.
Interest on a Refundable Overpayment
The tax administrator is obliged to refund a tax overpayment within 30 days from receiving a request for the refund. In respect of a VAT overpayment (excessive deduction), the period is 30 days from its assessment, i.e. the delivery of the payment assessment. In some situations, the deadline for refunding the overpayment is only 15 days, for example in respect of overpayment refunds resulting from the expiry of the payment security order or the tax administrator’s unlawful actions.
If the tax administrator does not observe the deadline, the business becomes entitled to interest on the refundable overpayment also at 14% per year. To receive it, an application must be filed to the tax administrator.
Therefore, in practice, situations may occur when the business makes an overpayment as a result of the tax administrator’s unlawful ruling (e.g., owing to the expiry of the period for determining tax) which the tax administrator fails to automatically refund to the business within 15 days, and the business must actively defend itself against the tax administrator’s incorrect procedure. Besides interest on the tax administrator’s unlawful actions, the business will also become entitled to interest on a refundable overpayment. The tax administrator may further exacerbate the situation if it does not automatically refund the interest on its unlawful actions, whereby the interest also becomes a refundable overpayment following its allocation to the personal tax account and the tax administrator is obliged to refund it within 15 days.
Knowing the regulations and judicature is worth the effort
Therefore, it may be concluded that legislation compensates taxable entities for the tax administrator’s default and sanctions the tax administrator’s incorrect administrative procedures or unlawful rulings through interest that is applied to multiple situations. However, given the diversity of the situations, businesses that wish to enforce their rights must have a greater knowledge of legal regulations and the administrative courts’ judicature.
Deloitte Legal has practical experience and has achieved much success in enforcing interest claims as a result of the tax administrator’s actions or negligence, and may facilitate your journey towards winning your claims. For detailed information, contact our litigation attorneys-at-law at email@example.com.
The article is part of dReport – May 2019, Tax news; Grants and investment Incentives.