SAC ruling: ‘mistakes can cost you’ also applies to excess deductions
The Supreme Administrative Court (SAC) continues the trend of defending taxpayers against unlawful or incorrect practices of tax administrators. In its recent judgement 1 Afs 28/2018, it awarded a taxpayer interest on the wrongful conduct of a tax administrator at 14% (plus repo rate) p. a., even though the excess deduction declared by the taxpayer was only acknowledged in court.
The taxpayer reported an excess deduction (of approximately CZK 10 million) in a VAT return, but, following a procedure to remove doubts, the tax administrator instead assessed additional tax (of approximately CZK 0.5 million). The taxpayer’s appeal against the order to pay tax was unsuccessful. A favourable result was only achieved in court, which reversed the tax administrator’s decision. The tax was then assessed as reported in the tax return originally filed.
However, the original order to pay tax was only overruled more than four years after the filing the tax return. For the entire time, the taxpayer was prevented from using not just the amount of the incorrectly assessed tax, but also the amount of the excess deduction that had not been paid to him.
Upon the taxpayer’s request, the tax authority acknowledged the taxpayer’s entitlement to interest on the wrongful conduct of the tax administrator (pursuant to Section 254 of the Tax Procedure Rules), but only on the tax paid, not on the much higher excess deduction denied. The tax administrators applied a very formalistic linguistic interpretation of the law, arguing that, according to the wording of the law, interest should only be awarded if the incorrectly assessed amount had been ‘paid’.
SAC disagreed with this interpretation, referring, among other things, to the well-known Kordárna judgement. According to the court, it follows from economic logic that taxpayers should be compensated for the tax administrators’ wrongful conduct also in cases where they did not actually pay anything, but were denied the right to use the funds in the form of excess deductions.
The SAC judgement is certainly positive. Considering the average length of court proceedings in the Czech Republic, taxpayers often accept tax administrators’ decisions rather than embarking on a lengthy court dispute. However, in view of the compensation in a form of potentially high interest, waiting for justice may eventually pay off.