Interest on interest in tax proceedings
In its recent judgment, the Supreme Administrative Court confirmed that taxpayers are entitled to compensation for late declared and paid interest on the tax administrator's unlawful conduct – again, in the form of interest on the tax administrator's unlawful conduct. Until the end of 2020, its annual amount was 14% + the CNB's repo rate.
Tax disputes entail not just the litigation and related costs, but also a significant disruption to taxpayers’ cash flow: the additionally assessed tax usually must be paid within 15 days from the decision on the appeal, which means that throughout the subsequent court case, the tax authority has considerable financial resources at their disposal. If the court then annuls the decision assessing the additional tax, the taxpayer is also entitled, in addition to the refund of the tax paid, to interest on the tax administrator’s unlawful conduct (after the amendment effective January 2021, ‘interest on the incorrectly determined tax’). The interest should be granted automatically, but in practice, this is not always the case. The taxpayers may be up for another dispute – this time over the interest.
In a recent judgment, the court dealt with the question of whether, following a successful litigation over the interest, the taxpayer should also be entitled to additional compensation in the form of interest on the late declared and paid interest. The case in question involved a refund of gift tax after filing an additional tax return. Following a judicial review, approximately CZK 100 million was returned to the company. However, the tax administrator was reluctant to award interest (on their unlawful conduct) on this amount, which for more than two years amounted to more than CZK 35 million. The company won this dispute too, and was awarded the interest, by a court decision, in 2019. However, they were not satisfied with this and demanded from the tax administrator a second payment of interest for the period during which they did not have the first awarded interest at their disposal.
The Supreme Administrative Court thus asked themselves a question: "Is it possible to charge interest on interest on the tax administrator's unlawful conduct?" The answer was an unequivocal yes – if the tax administrator had acted unlawfully twice regarding two different amounts (on one hand, the original principal, and on the other hand, the first awarded interest), they cannot compensate these two incorrect procedures by awarding a single (the first) interest payment. Awarding interest is not prevented by the prohibition of anatocism (charging interest on interest), as the financial administration argued.
However, not all disputes over interest on interest are won by taxpayers. In contrast to the above, in a case concerning interest on late declared and paid interest on a withheld VAT deduction (as in the ‘Kordárna’ judgment), the court denied the second interest payment. As for the future, the issue has been most likely resolved by this year's amendment to the Tax Procedure Code, under which no further interest shall be charged on interest not awarded by tax administrators. However, old disputes continue to be governed by the old rules, and it is often still possible to demand interest in these old disputes.