How to minimise additional tax assessment sanctions?

The conclusion of a tax inspection resulting in an additional tax assessment is associated with sanctions: a penalty plus default interest; the latter, while technically not a sanction, may be many times higher than the penalty. The Tax Procedure Code offers a variety of options to mitigate these negative effects. Below we provide a practical summary of these options, which will also be discussed in more detail in the upcoming issues of Tax and Legal Update.

If the tax administrator assesses additional tax based on the results of a tax inspection, the duty arises to the taxpayer to pay a penalty equal to 20% of the additionally assessed tax (reduced tax deduction) or 1% of the amount by which a tax loss was decreased.

Additional tax assessments result in tax underpayments subject to default interest, calculated from the date the tax was originally due. In compliance with the amendment to the Tax Procedure Code effective 1 January 2021, the current annual default interest amount equals the CNB repo rate increased by 8 percentage points, i.e. currently 8.25% p.a. However, until the end of 2020, the repo rate was increased by 14 percentage points, sometimes resulting in default interest significantly exceeding the additionally assessed tax in the case of lengthy tax inspections.

The Tax Procedure Code offers a variety of options to minimise penalties and default interest, in particular:

  • waiver of tax-related charges (penalties and interest);
  • deferment of tax payment;
  • early tax payment.

Waiver of interest or penalties: The taxpayer may apply to the tax administrator for a waiver of up to 75% of a penalty. If the maximum waiver is granted, the penalty may decrease to 5% of the additionally assessed tax. The waiver is conditional upon the taxpayer’s good tax morale and collaboration during the tax inspection. It is also possible to apply for a waiver of default interest and interest on the deferred tax amount if the tax was paid late for justifiable reasons.

Deferment of tax payment: Subject to statutory conditions, the taxpayer may apply for a deferment of the tax payment or ask to pay the outstanding tax in instalments. The taxpayer is given a chance to pay tax later while significantly decreasing the accrued interest: instead of default interest, interest on the deferred tax amount arises, which is roughly half of the default interest amount. The Tax Procedure Code also allows for retrospective deferments of tax payments under certain conditions.

Early tax payment: The payment of expected tax even before its assessment or due date, i.e. during the course of a tax inspection or appeal proceedings, stops further accruing of default interest. If the tax inspection is not developing positively for the taxpayer and additional tax is assessed, we recommend, apart from challenging the conclusions of the inspection itself, also considering the above options to mitigate the effects of the related sanctions.

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