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Many businesses are currently facing a difficult situation due to high inflation, which has risen to more than 13% annually from 2022. One of the measures used by the European Central Bank (ECB) to mitigate the impact of inflation is to increase the basic interest rate. The level of the basic interest rate announced as of September 20, 2023 is 4.50%, with a direct impact on the amount of penalties levied by the tax authorities for administrative offences and interests on late payment.
Administrative offense pursuant to Article 154 Section 1 letter i) of the Act No. 563/2009 Coll. on tax administration (hereinafter referred to as the “Tax Administration Act”) is committed by a taxpayer who, in a supplementary tax return, indicates an amount which represents:
The tax administrator shall impose a penalty for the above administrative offense at the rate of the ECB basic rate per annum on the difference between the amount stated in the supplementary tax return and the amount stated in the regular tax return. The penalty shall be calculated for each day from the day following the deadline for filing the tax return or the due date until the filing of the supplementary tax return or any other event relevant for the imposition of the penalty.
This means that in case of filing a supplementary tax return, the penalty will be 4.5% p.a. instead of the 3% p.a. stipulated in the Tax Administration Act. If the supplementary tax return is filed after the tax audit has been initiated, the penalty will be 9% p.a. instead of 7% p.a. If the tax administrator identifies an irregularity during the tax audit and assesses the additional tax, the rate of 13.5% p.a. will be applied instead of 10% p.a.
At the same time, the penalty levied by the tax authority may not be lower than 1% of the amount of the tax difference.
An example: On September 9, 2023, XYZ, s.r.o. filed a supplementary VAT return for March 2022, in which the company increased its tax liability by EUR 1 300 compared to the regular tax return. The deadline for filing the March 2022 tax return was on April 25, 2022. The basic ECB rate on September 21,2023 was 4,50% p.a.
The penalty is calculated as follows: outstanding amount x ECB rate x number of days delayed / 365 = 1 300 x 4,5% x 514 / 365 = EUR 82.30 (penalties are rounded down to the nearest ten euro cents).
The increase in the ECB basic rate also significantly impacts the calculation of interests on late payment. The tax administrator will levy interest on late payment according to the provisions of Article 156 Section 1 of the Tax Administration Act if the tax subject fails to pay within the specified period, the correct amount or the amount specified in the tax administrator’s decision:
The tax administrator shall levy late payment interest at the rate of four times the ECB basic rate of interest per annum applicable on the date the tax arrears arise. If four times the ECB basic interest rate does not reach 15%, a penalty of 15% p.a. shall be imposed. This means that in case of late payment of tax liability due after September 20, 2023, the tax authority will levy interest on late payment at the rate of 18% p.a. on the amount due instead of 15% p.a. resulting from the Tax Administration Act. Interest on late payment shall be calculated for each day of delay in payment, starting from the day after the due date until the date of payment.
An example: Company XYZ, Ltd. failed to pay value added tax on time for the tax period August 2023. The VAT was due on September 25, 2023. The delay in payment was 10 days and the amount of VAT to be paid was EUR 100 000.
The calculation of interest on the late payment is as follows: outstanding amount x number of days delayed x interest rate / 365 = 100 000 x 10 days x 18% / 365 = EUR 493.10.
A positive aspect of the increase in the basic interest rate is the increase in the compensation for the excess deduction withheld. If the tax authorities withhold your company’s excess VAT deduction for more than 6 months, the company is entitled to a compensation of 2 times the basic interest rate announced by the ECB, at a minimum rate of 1.5% p.a. However, for this purpose, the basic interest rate announced on the first day of the calendar year for which the interest is calculated is taken into account. Assuming there is no change in the announced basic interest rate by the end of the year, VAT payers will receive a compensation of 9%, instead of the 1.5% defined in the VAT Act for the excess deduction withheld as of January 1, 2024.
In this context, it is important to note that in order to control inflation, the ECB may continue to raise interest rates further. For this reason, we recommend that companies wishing to avoid potential penalties and interest on late payments comply with their tax and administrative obligations, e.g., timely filing of tax returns, not delaying submission of supplementary tax returns and making tax payments on time and in the correct amount.