Let us start with a simple question: what was the reason for creating § 254a Act No. 280/2009 Coll. Tax Code (“TC”) referring to interest of tax deduction. And why is the Government aiming to amend this act again?

First, it is necessary to remember the well know judgement known as the KORDÁRNA verdict on whose basis was this regulation created. The Supreme Administrative Court (“SAC”) said that undue deductions often lead to tax evasions and therefore the tax administration (“TA”) is given some time to verify the legitimations; but the taxpayer is to endure this without financial reparations only for a certain amount of time. However, the length of this period has not been further specified by national legislation and according to the SAC its literal interpretation “has unacceptable impact with respect to constitutional law and laws of the EU”. So then the SAC turned to the judicature of the Court of Justice of the European Union (“CJEU”) and made following conclusions: “the three-month period, starting after the tax period during which the right to deduct was claimed, is in accordance with the judicature of the Court of Justice” and at the same time “allows the tax administration enough time to carry out a basic investigation of this claim”.
This verdict invoked a reaction from the tax authority in the form of the TC amendment which came into force on 1^st of January 2015 containing the new § 254a. As a reason for the formation of this paragraph the explanatory memorandum listed the fact that the TC didn’t explicitly state the length of the time period after which the taxpayer is eligible to some compensation (interest). In reality this usually concerns cases where the tax administration is taking inappropriately long and withholding the return of excess VAT because of the long lasting process of removing of doubts (“PRD”). The tax deduction interest is thus seen as a compensation to the taxpayer who cannot use his or her finances, withheld by the state, for their own business.

Because this regulation received a lot of criticism from experts for not being in accordance with European law, the Government drafted an amendment which should come into force on 1^st January 2017. As opposed to the original text of § 254a, paragraph 1 TC: “If the process of removing of doubts relating to a tax return or an additional tax return, which serves as its basis, lasts for more than 5 months, the taxpayer is eligible to the tax deduction interest determined by the tax authority.” the new proposal suggests a much clearer definition.

According to the new text the taxpayer is eligible to interest for delay (in particular) from the day following the end of a four-month period starting on the last day of the period for submission of tax returns. This period, however, is interrupted by

• Invitation for putting the submission in order (within PRD);
• Invitation for allowing the commencement of tax inspection;
• Decision which determines the time period for proposing a statement to inspection findings.

The interest for tax deduction does not emerge after an issuing of these documents.

The current provision specifies the interest which is yearly equivalent to the interest rate on repos specified by the CNB increased by one percentage point. The new amendment should raise this to two percentage points. As stated in the explanatory memorandum this amount is different in comparison to other interest rates, the reason being its purpose. The point of this interest is then to motivate the tax authority to avoid unnecessary prolongation of PRD.

The amendment aims to react to the judicature of the CJEU, where the same problem has been discussed several times already. Even though, according to the CJEU, specifying the tax deduction interest is within the member states’ authority exclusively, the CJEU is of the opinion that this autonomy should be somehow limited. Thus the voice supporting the strengthening of taxpayers' rights is growing stronger.

The following conclusions can be drawn from the current state of the development of said judicature:

• Delay of return of deduction caused by a control procedure is possible if it lasts for an appropriate amount of time. After this period has passed the taxpayer becomes eligible to a compensation in the form of interest;
• The beginning and de facto also the course of the “appropriate amount of time” is not given by actions of the tax authority but by an objectively determined moment (i.e. the last day of tax return submission);
• The CJEU and its existing judicature consider such national registration appropriate which allows for a transfer of the excess VAT (which according to given national legislation de facto meant settlement) to move to up to three following tax periods if those are month periods; and
• The exact moment of emergence of the interest and its amount is, if the rule of adequacy is observed, defined by national legislation.

The question still stands whether the amendment is working more for the taxpayer of the tax authority. Can we now say that § 254a TC will finally be in accordance with the judicature of the CJEU? Will the Government’s predictions come true and will the amendment supply clearer and more easily predictable regulations, which won’t be a cause for litigations?

We must say that despite the fact that the amended text of § 254a TC is now more beneficial for the taxpayer, in light of the CJEU judicature the new text leaves us feeling rather skeptical.