inflation and interests

The effects of rising inflation on tax interest and court decision as a bonus

Barbora Halousková, Andrea Kleinová
inflation and interests
The repo rate is of three interest rates set by the Czech National Bank through which the central bank steers inflation in the intended direction. Nevertheless, today's article will not discuss the impact of changes in this rate on the monetary policy of the state, but rather its impact on taxpayers. Although it has been said that inflation favors debtors since assuming that the original interest amount is maintained,  their debts are repaid "faster", there is, on the other hand, a risk for debtors - taxpayers - who may find themselves in an uncomfortable situation due to the current repo rate being applied to their outstanding liabilities.

To start with, let’s have a look at the current repo rate. The last repo rate increase was adopted by the Czech National Bank on 23 June 2022, when the repo rate reached 7%. This is a significant increase not only compared to last year, when the rate was only 0.5% around the same time, but also to the situation at the beginning of 2022, when the rate was at the level of 3.75%.

Now we can look at the impact in the area of interests paid by taxpayers. Let us start with the late payment interest, which corresponds annually to the repo rate set by the Czech National Bank as of the first day of the calendar half-year, in which the late payment occurred, increased by 8 percentage points. The rate for the following half-year (1 July to 31 December 2022) is therefore 15% (7% repo rate plus 8%), which represents an increase of 6.5% compared to the second half of 2021. More information on interest on late payment may be found in our earlier article here.

Another type of interest paid by the taxpayer is interest on the amount subject to the extended payment period . This type of interest is paid when the tax administrator allows the tax payment to be postponed, either by postponing the payment of the total tax or by splitting the payment into instalments. Thus, if the taxpayer is allowed to postpone the payment of the tax upon request or ex officio, he will pay significantly lower interest, as the amount of interest is equivalent to half of the interest on late payment.

The opposite example is the interest paid by the tax administrator as presented below.

A refundable overpayment is defined as a taxpayer's overpayment of tax at a time when he or she does not have any underpayment on any other tax and thus, the taxpayer may apply for a refund of such overpayment. According to the law, the tax administrator has a 30-day deadline for the recovery of such refund. If the overpayment is not refunded after this period, the taxpayer is entitled to receive interest on the refundable overpayment, which is determined in a similar way as interest on late payment.

A different situation arises when the tax administrator makes a mistake in the assessment procedure and thus, sets the tax at an incorrect amount and thereby harms the taxpayer. If it is found out that the tax administrator has assessed the amount while not being fully compliant with the law, the taxpayer is entitled to interest on the incorrectly assessed tax, again at the same rate as in case of interest on late payment, which is further doubled for the duration of the execution procedures.

In general, the above can occur in these three situations:

  • Illegally increased tax

    The tax administrator unjustifiably assesses the additional tax exceeding the tax liability and the taxpayer pays the difference. Interest is calculated on the part of the tax paid which is in excess of the tax declared by the taxpayer and the time period is calculated from the alternative due date or the date on which the overpayment was made until the date of recovery of such amount by the tax administrator.

  • Illegally reduced deduction

    The tax administrator unjustifiably assesses the tax deduction in a lower amount, which results in the refund of a lower deduction than the one claimed by the taxpayer in the tax return. The basis for calculating interest is, of course, the difference between the amount claimed and the amount actually received. The time limit runs from the date on which the correct amount of the deduction should have been refunded until it is actually received.

  • An unlawful or void order of seizure

In case an order of seizure has been issued by the tax administrator in violation of the law and the taxpayer has paid the amount on the basis of the order, the taxpayer is entitled to interest in the amount from the due date or the actual payment until the amount is recovered by the tax authority.

Interest on the tax refund will be assessed if the tax authority withholds the excessive refund for an unreasonable period of time. The Tax Code considers such an unreasonable delay to be anything after the day following the expiry of a period of 4 months since the last day of the period for submission of the relevant tax return, or from the day on which the relevant tax return was submitted if submitted with delay. In other words, if we take the standard time limit for recovery of the tax refund in the length of 30 days from the due date for submission or from the actual submission of the relevant tax return, if it was submitted late, an unreasonable delay represents in fact a delay of more than 3 months. If, during this period, the taxpayer receives a call to correct irregularities in the submission or a decision in relation with tax inspection, the relevant period is paused. The amount of interest on the tax refund is equal to half of the late payment interest.

Read also about the institute of advance payment for excessive tax refund.

If this were not enough, we have also prepared a summary of the Supreme Administrative Court's decision 1 Afs 80/2021-45, which deals with compensation for excessive VAT refund held by the tax administrator for an unreasonably long period of time. The subject matter of the dispute was the question for which period and in what amount this compensation is to be paid to the claimant company.

The judgment relates to two previous cases. The first of them is the groundbreaking case of Kordárna, where it was first established that the tax administration was obliged to reimburse the taxpayer the withheld amount with interest, namely at the rate of 14% + repo rate, from the beginning of the fourth month following the end of the relevant tax period until the date of refund of the VAT deduction, even though at that time such an obligation was not stipulated by law.

It was in this context that the Tax Code was amended in 2015, what resulted into introduction of  the institute of interest on tax refund, on the basis of which taxpayers were entitled to compensation in the amount of 1% + repo rate. Following a further amendment effective from 1 July 2017, the compensation was increased to 2% + repo rate. The inconsistency between the interest rate in the Kordárna case and these amendments did not take long to emerge and there was a lot of discussion and arguments.

This ambiguity was clarified by another important judgment of the Supreme Administrative Court in the EP ENERGY TRADING case. In this case, the court found the amount of interest on the tax refund granted by the tax administration in the period from 1 January 2015 to 31 June 2017 at 1% + repo rate to be not only insufficient but also contrary to EU law. Thus, the Supreme Administrative Court upheld the validity of the compensations for the relevant period as in the Kordárna case. 

 The last of a series of judgments in this specific  area is the case of CarTec Ostrava, which, as of 1 July 2017, was granted interest according to the then amended wording of the Tax Code, i.e. 2% + repo rate. The court's verdict in this case was that if the tax returns with a submission deadline before the amendment in question came into effect on 1 July 2017, the taxpayer was entitled to compensation at the rate of 14% + repo rate, for the entire period of the interest period until the date of the refund of the retained refund.

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Andrea Kleinová
Andrea Kleinová
Certified Tax Advisor

Tax Advisory