Interest on retained excess deductions – SAC agrees with KPMG
The Supreme Administrative Court (SAC) issued a breaking decision concerning retained excess VAT deductions, confirming that interest on a tax deduction of 1% + repo rate in effect from 1 January 2015 to 30 June 2017 is in conflict with EU law. The Kordárna interest (based on the well-known Kordárna judgement) equalling the repo rate + 14 percentage points should be applied in its stead.
Interest on retained excess deductions has seen turbulent developments over the recent years. An explicit regulation of this concept was absent in Czech law until the end of 2014. To rectify this constitutionally unacceptable imperfection, the SAC responded by issuing the Kordárna judgement, according to which taxpayers are entitled to interest of 14% + repo rate from the beginning of the fourth month after the end of the relevant taxable period for the period over which excess deductions were retained. Legislators subsequently responded to this judgement by introducing a new provision to the Tax Procedure Code from 1 January 2015, namely Section 254a, awarding interest on excess deductions at 1% + repo rate, and only from the fifth month after the commencement of a procedure to remove doubt. Interest in the case of tax inspections has not been dealt with at all.
In a case involving a client of KPMG, the financial administration awarded interest of only 1.05%. From the beginning of the case, we objected to the applicability of Section 254a of the Tax Procedure Code in effect from 1 January 2015 to 30 June 2017 for various reasons, one of which was conflict with EU law. However, the Municipal Court in Prague sided with the tax administrator and confirmed the low interest. Consequently, the dispute was brought before the Supreme Administrative Court. The SAC unambiguously arrived at the conclusion that the section in question was in conflict with the EU directive and its interpretation by the Court of Justice of the EU, according to which interest on retained excess deductions must correspond to an interest rate that would have had to be paid on a loan by a taxable person that is not a credit institution. The rate of 1% + repo rate in no way meets this requirement. Moreover, the beginning of the period of applying interest is also at variance with EU law. Since Section 254a of the Tax Procedure Code cannot be applied, the SAC concluded that rules regulating the entitlement to interest on retained excess deductions specified within the Kordárna judgment shall continue to apply, namely the interest rate of 14% + repo rate to be applied from the fourth month after the end of the taxable period.
The significance of the SAC’s decision is considerable, since the case is far from unique, as many taxpayers have been drawn into similar disputes. The financial administration has not yet expressed its opinion on the above court decision. Understandably, the decision has made our tax-litigation team very happy, as the SAC has agreed with our arguments.