| Author: |
Radek Buršík |
| Publication: |
Czech business weekly |
| Date: |
12. 3. 2007 |
At the end of May 2006, a new amendment was issued to the Act on Statistical Services that, among other things, amended the Administration of Taxes Act effective Jan. 1, 2007. This amendment introduced new penalty provisions to the Administration of Taxes Act for incorrect or late tax payment. In this connection, one should be reminded of the decision of the Constitutional Court that repealed the amendment to the Bank Act because a single bill was used to amend a completely unrelated piece of legislation, as is also the case here. Nevertheless, it’s worth examining the main difference between the original and new legislation, and seeing who are most affected by the changes.
According to legal regulations that were valid through Dec. 31, 2006, so-called tax penalties were assessed in the case of an incorrect tax return or failure to pay tax. There was a basic penalty rate of 0.1 percent of the amount of the tax arrears for each day of delay, provided the tax liability indicated in the tax return (or tax advance) wasn’t paid by the deadline stipulated in legal regulations for each type of tax. The penalty rate increased to 0.2 percent of the amount of the tax arrears for each delayed day, provided that the tax error was identified by the tax administrator. This is the most common additional assessment of tax based on the results of tax audits. The penalty rate decreased by 0.05 percent of the amount of the tax arrears, provided that the tax was assessed on the basis of an additional tax return filed by the tax subject.
The above method was used to calculate penalties for the first 500 days of any tax shortfall. For each additional day of delay (after this period), the tax administrator assessed penalties in the amount of 140 percent of the discount interest rate of the Czech National Bank (ČNB) valid on the first day of the calendar quarter. Discrepancies in the rates It’s apparent from the above that the legal regulation on penalties valid until the end of last year barely differentiated between penalties. An incorrectly declared tax liability and penalties for a “mere“ delay in payment are differentiated only in the tax penalty rate.
The penalty interest imposed after the first 500 days is modest in comparison at the current 1.4 percent and, thus, may not be considered a penalty at all but more of a “cheap loan“ from the state.
For comparative purposes, it’s worth converting these penalty rates to an annual rate. Using the basic penalty rate of 0.1 percent, the effective annual interest rate was 36.5 percent; using the penalty rate of 0.2 percent, the annual interest would be double, i.e., 73 percent. In the case of the increased penalty rate, the amount of penalty would equal the tax underpayment in less than 17 months.
The new legal regulation effective starting Jan. 1, 2007, partially resolved the above deficiencies. It especially differentiates between penalties in terms of sanctions for filing a tax return with an incorrect amount or, as the case may be, for failing to file a tax return and default interest for failing to pay the tax liability on time.
Penalties may be assessed by the tax administrator as a one-off fine resulting from the administrator’s own activity-that is, not on the basis of an additional tax return filed by the taxpayer himself. This is where an additional tax liability or a decreased tax loss is assessed. The fines are 20 percent of the additionally assessed tax liability if tax is increased, 20 percent of the additionally assessed tax liability if a tax deduction is decreased, and 5 percent if a tax loss is decreased.
When the rates apply In addition to the penalties, the Administration of Taxes Act contains the new term “default interest,“ which is applied and assessed by the tax administrator always in the event that the tax liability due isn’t paid by the statutory deadline. The amount of default interest is determined individually for all of the possible variants above and is based on the repo rate of the ČNB, as it corresponds to the repo rate valid on the first respective calendar day of each calendar half year, increased by 14 percentage points. The repo rate of the ČNB for the first half of 2007 amounts to 2.5 percent; therefore, the default interest rate is 16.5 percent at this time. As compared to the previous wording of the penalty system, the default interest rate can now be applied for up to five years following the year of default.
The total amount of the penalties imposed in the case of an incorrect tax return or failure to pay tax on time comprise default interest, to which, in some cases, a one-off fine is added (as mentioned above).
The new penalty rules will be used for the first time for those tax liabilities in which the payment due date occurs-or for which a tax return, notification or calculation must be filed-after Jan. 1, 2007. For example, for a corporate income tax taxpayer (for which the taxation period is the calendar year), the penalty regulation will apply for the first time to his tax liability for 2006; for a monthly value-added tax (VAT) payer, the penalty regulation applies to the tax period of December 2006. Conversely, in the event of a tax inspection of a tax liability whose original due date occurred before Jan. 1, 2007, and the tax subject didn’t file an additional tax return for this period, the original penalty system valid until Dec. 31, 2006, applies.
For the sake of completion, it can be mentioned that, effective Jan. 1, 2007, a change in the interest rate occurred with respect to tax deferral or permission to pay a tax liability in installments: the new repo rate of the ČNB increased by 7 percentage points, as opposed to the former 140 percent of the discount rate of the ČNB. Where interest is due on overpayments refunded, the interest rate is the new repo rate of the ČNB increased by 14 percentage points, as opposed to the former 140 percent of the discount rate of the ČNB.
The new penalty regulations provide for a logical differentiation in the approach taken toward those taxpayers who acknowledge an incorrect tax liability voluntarily or who have failed for whatever reason to pay a tax liability by the statutory deadline, and those taxpayers who are found by the tax administrator to have evaded tax. As the interest rate is based on the ČNB repo rate, the Czech legal regulations come closer to the legal regulations of a number of other countries. Penalties are based on the official national bank interest rates, for example in Austria and Slovakia. The significant decrease in the penalty interest rate from the original 36.5 percent per year (or, as the case may be, 73 percent per year) to the current 16.5 percent per year also means that the penalty interest rate comes closer to the interest rates applicable in regular, civil business relationships.
It’s clear from the above differences that the new penalization system is more beneficial to all individuals and for most legal entities. If we take, as an example, a monthly VAT payer who pays his VAT liability in the Czech Republic a few days late, the assessed default interest will now be almost half the amount that previously would have been assessed.
