A clear path towards interest on retained deductions
The taxpayer’s entitlement to interest on long-retained excess deductions has been repeatedly confirmed by the Supreme Administrative Court (SAC), despite the financial administration’s displeasure. The General Financial Directorate (GFD) finally had to admit that the SAC’s decisions were not isolated. Nevertheless, VAT payers should not expect that interest on retained deductions will ever be paid automatically and on a general basis.
Current practice has shown that the GFD has set 1 January 2015 as the cut-off date for awarding interest on long-retained deductions. On claims arising before this date, interest of more than 14% p.a. pursuant to SAC case law is awarded to taxpayers, starting from the beginning of the fourth month following the end of the taxable period. But taxpayers must be vigilant and must apply for this interest themselves. The tax authorities will only make their decisions based on justified applications for compensation of difficulties caused to the taxpayer by unreasonably long inspection procedures. The application thus must always be properly substantiated. If the taxpayer does not file the application within six years of the date an excess deduction was refunded, the taxpayer’s entitlement to interest will cease to exist. This year, it is thus still possible to claim interest on excess deductions refunded in 2011.
As a result of a special legal regulation effective from 1 January 2015, the interest rate fell dramatically to 1% and the interest-free period over which the tax authority may examine excess deductions was expanded to five months of the date an examination was initiated. From 2015, the low interest rate should also be applied to deductions whose examination was commenced earlier. For example, an excess deduction for September 2013 that was refunded at the beginning of December 2015 will bear interest of 14.05% p.a. for the entire year of 2014 and 1.05% p.a. for 2015. For illustrative purposes, an excess deduction of CZK 1 million would result in interest of CZK 140 thousand for 2014 and less than CZK 10 thousand for 2015. Effective from 1 July 2017, taxpayers should be awarded slightly higher interest (2% + repo rate) for the period exceeding four months of the deadline for filing a tax return.
The above point-in-time application of various interest rates has been the subject of a large number of counterarguments, supporting the application of the higher interest rate also on excess deductions retained in 2015 and in subsequent years. However, significantly higher interest on retained deductions after 2014 would most likely have to be claimed in court.
Taxpayers themselves must try to remember periods for which their excess deductions were retained and their entitlement to interest arose and, subsequently, file the appropriate application with the tax authority. Where such an application has previously been dismissed by the tax administrator, the taxpayer may file it again. In practice, it is quite common that interest is awarded to the taxpayer even if only part of the excess deduction was refunded to the taxpayer after the examination. We recommend reviewing the tax administrator’s examinations of excess deductions over the last few years. It is also worth considering claiming more than one or two percent from the tax administrator, as these do not equal the cost of money retained by the tax administrators over the time of the examination.