Default interest: how it arises and how to reduce it
At the end of June, the Czech National Bank raised the repo rate again, this time to 7% p.a. This significantly affects the amount of interest under the Tax Procedure Code. From 1 July 2022, default interest will be calculated at a rate of 15% p.a. This increases the costs associated with the late payment of tax, but also the importance of steps that can be taken to reduce the interest.
How is default interest calculated?
Default interest on unpaid tax begins to accrue on the fourth day after the tax is due for each additional day of default and is calculated on the unpaid tax multiplied by the interest rate composed of the CNB repo rate applicable on the first day of the calendar half-year (i.e., 1 January or 1 July) plus a fixed part of 8 percentage points. The tax administrator assesses default interest if the interest has reached at least CZK 1,000 on the date the tax payable is settled.
The interest rate structure means that its amount varies depending on the repo rate, not only with respect to the specific due date of a particular tax but also during the period of default in the payment of a single tax underpayment. This is further confirmed by the Ministry of Finance’s Instruction (MF-18). Default interest under the Tax Procedure Code differs in this respect from default interest under the Civil Code where the moment at which the default occurred determines the rate. Therefore, this year there will be two rates of default interest: 11.75% until 30 June 2022 and 15% from 1 July. Despite the latest amendment to the Tax Procedure Code significantly reducing default interest from 1 January 2021 (the fixed part of the interest fell from 14 to 8 percentage points), interest rates will again exceed 14%.
More so now than in the past it is therefore necessary to ensure that all taxes are paid on time and in the correct amount. Default interest is calculated identically whether the tax is increased because of a voluntarily filed supplementary return or due to a lengthy tax inspection. However, filing a supplementary return offers the possibility of waiving up to 20% of the interest.
How to reduce interest?
Taxpayers can obtain a reduction in interest if they apply for a deferment of the tax payment, thus postponing the due date or spreading the tax into instalments. For the period of deferment, they only pay interest on the deferred tax amount, which is half the default interest (for the second half of 2022, the interest on the deferred tax amount will be 7.5%).
It is also possible to apply for a waiver of interest once the outstanding tax has been paid, in which case there is a fee. After considering the grounds stated in the taxpayer's application, the tax authority may grant the request and reduce the interest by 20 to 100%. When formulating the statement of grounds, it is advisable to consider GFD Instruction D-47, providing waiver examples including relevant percentages.
If a taxpayer is aware of potential additionally assessed tax (e.g., because of a tax inspection), the taxpayer may limit the interest expense by paying the tax amount to their tax account before the tax itself is additionally assessed. If there is such overpayment in the tax account, which then must really be used to pay the tax, default interest will only accrue for the period from the original due date of the tax to the date the tax was prematurely paid to the tax account.