Interest on interest according to SAC? Yes, sometimes
The Supreme Administrative Court (SAC) has recently dealt twice with the possibility of awarding a taxpayer interest on the interest that the tax administrator refused to award and pay for a long time. It is for sure good to know that this possibility exists and that the financial administration’s approach of persistently refusing to award and pay neither interest arising from its unlawful acts, nor interest on retained VAT deductions (referred to as ‘Kordárna’ interest, after the company who first won such interest before the SAC in 2014) may not pay off after all. For putting up a fight, taxpayers may be rewarded with interest on interest, again, at more than 14% a year.
In the first of the two cases before the SAC, a penalty was returned to a taxpayer, but the tax administrator waited more than nine months before awarding any interest on the penalty. The court first generally admitted that even interest due to the taxpayer may be viewed as tax, whose unlawful assessment shall be compensated by interest on the tax administrator’s unlawful act, at over 14% p.a. The court then proceeded to further specify its previous case law on the issue of interest on interest. This did not involve interest continuously charged on the gradually increasing first interest, but interest on a fixed amount, which has to be viewed as a new principal. The SAC emphasised that the tax administrator’s refusal to pay the initial interest cannot be tolerated. The taxpayer must also be entitled to the secondary interest, which is, by its nature, damage compensation.
The other case involved the ‘Kordárna’ interest on retained VAT deductions. This type of interest was first awarded by the SAC in the autumn of 2014, yet it took the tax administration nearly three years to change its approach and begin awarding it. Many VAT payers had to fight for this interest for a long time. The SAC now admitted the tax administrator’s duty to award additional interest – on the late payment of the initial interest, again amounting to more than 14% per year. The SAC denied that the ‘Kordárna’ interest would have to be paid by the tax administrator automatically, which would mean that there would also be an automatic entitlement to the interest on such interest. Yet, where a tax administrator repeatedly refuses to award and pay the ‘Kordárna’ interest despite the taxpayer’s requests, it has to be determined which of these requests can be viewed as a request to pay interest, and based on this, the taxpayer will then be entitled to interest on such interest.
The judges yet again sided with the taxpayers. Both judgements clearly indicate the effort of the court to compensate for any unreasonable delays by the tax administrator, as in extreme cases, defending themselves against the tax administration may cost taxpayers more that the interest they may end up winning. The SAC has thus sent a clear signal that it is impossible to delay awarding and paying interest without taxpayers being entitled to an adequate compensation.