Interest on long-retained excess deductions liable to income tax?
Interest on long-retained excess deductions of up to 14% p.a. was first awarded to a taxable entity by the Supreme Administrative Court more than two and a half years ago. Since then, a number of administrative courts proceeded similarly and confirmed taxpayers’ entitlements to interest on retained excess deductions. Nevertheless, this interest still evokes considerable uncertainty and heated discussions not only within the state administration.
The road towards awarding interest on excess deductions retained by the tax authority for an unreasonably long time is usually quite bumpy, mostly ending in a courtroom. The SAC’s decisions in this respect show that it is necessary to choose the right procedure, depending on the specific circumstances and the relevant tax authority’s steps. Therefore, if you consider claiming interest on long-retained excess deductions, we recommend selecting the appropriate procedure carefully.
And once you succeed in the battle, the question arises how to handle such interest in your income tax return. The GFD is currently dealing with the issue whether the awarded interest should be taxed and, if so, how. The Income Tax Act explicitly exempts from income tax income from interest on overpayments caused by the tax authority. The exemption of interest on long-retained excess deductions from income tax therefore ended up on the table of the coordination committee of GFD and Chamber of Tax Advisors representatives. The GFD distinctly dismissed the idea of income tax exemption of interest on retained excess deductions, claiming that this does not involve interest on overpayments caused by the tax authority. The taxpayers’ joy over the awarded interest will therefore probably be spoiled by the state administration taking something back in the form of income tax. The GFD justifies its decision by the absence of the tax authority’s faulty or unlawful action. It also points to a possible non-cooperation or obstructions by taxpayers resulting in the prolongation of the period over which excess deductions are examined, i.e. the period for which interest accrues.
Further conflicts between taxpayers, tax advisors and the tax administration are expected in this area, especially with respect to deductions relating to taxable periods started after 1 January 2015. Since this date, pursuant to the Tax Procedure Rules, interest of 1% on VAT deductions has been in effect on procedures to remove doubt lasting more than five months.