Minimising sanctions: other options to reduce default interest
As a sanction associated with an additionally assessed tax, default interest can often be more severe than a penalty. Default interest waiver options, discussed in the previous issue of the Tax and Legal Update, are very limited where tax inspections are involved. However, there are other options available to taxpayers to further reduce, or even eliminate, default interest: applying for the deferment of the tax payment or paying the tax before its substitute due date.
What is deferment? What are its benefits? How to apply for deferment?
Deferment is the permitted postponement of the tax payment and may take two forms: deferment of the tax payment or the payment of tax in instalments. During the deferment period, no default interest arises, rather interest on the deferred tax amount; the latter amounting to half the default interest. This type of interest accrues over the entire period of deferment. The Tax Procedure Code also allows for retrospective deferments of tax payments, from the original due dates, ultimately resulting in a reduction of the entire default interest. However, retrospective deferments are rather rare in practice; tax administrators most often agree with deferments from the date an application for deferment is filed. It is also possible to apply for a waiver of the interest on the deferred tax amount under similar conditions as in the case of default interest. The mere existence of deferment constitutes grounds for waiving 20% of the interest on the deferred tax amount, provided that other waiver conditions have been met. The ultimate reduction of interest may therefore be even higher.
It is only possible to defer a tax payment in situations specified by law, such as when the prompt payment of tax would severely harm the taxpayer, or if the outstanding tax cannot be collected all at once. Deferment applications have no prescribed form or structure; taxpayers may use the example posted at the financial administration’s website as a template. When filing an application, it is essential to state the legal grounds on which the taxpayers ask for deferment and provide all necessary supporting documentation. We also recommend outlining how the taxpayer will pay the tax in the future to prevent the tax authority from coming to the conclusion that the tax will be irrecoverable, which may, in extreme situations, result in a securing order or enforcement proceedings. The submission of an application is liable to an administrative fee of CZK 400.
Early tax payment
Another option to reduce default interest is the payment of an expected additionally assessed tax before its substitute due date. In the case of a tax inspection, any additionally assessed tax is payable within 15 days of the date of a final and conclusive judgment (typically in appeal proceedings). However, default interest starts accruing from the original due date, i.e. the deadline for filing an ordinary tax return. Tax paid early constitutes an overpayment on the person’s tax account that is to be used to settle additionally assessed tax. To avoid any potential doubt, we recommend explicitly requesting the use of this overpayment. This early tax payment may completely stop the accruing of default interest from the date the tax was paid. If the tax was not additionally assessed by a final and conclusive judgment, the taxpayer may apply for a tax overpayment refund. The money ‘saved’ in this manner with the tax authority does not bear any interest, and no entitlement to interest arising from the tax administrator’s unlawful conduct arises over the time of the early tax payment, even if the additionally assessed tax is subsequently cancelled by the court.
According to the legal regulation effective until the end of 2020, any other tax overpayment should have the same effect as the early payment of tax, irrespective of whether such an overpayment was refunded in the meantime and thus not used to settle any additionally assessed tax. Excess VAT deductions were typical examples. We therefore recommend reviewing in detail the calculation of default interest, especially with respect to tax additionally assessed some time ago, and demand the use of tax overpayments via an appeal.