Impact of a higher ECB base interest rate on penalties
27/06/23
On 21 June 2023, the European Central Bank (ECB) base interest rate was increased to 4%. This increase will automatically be reflected in higher penalties for errors in tax returns leading to a lower tax liability being reported.
If the tax administrator finds an error in a tax return and imposes an additional tax (e.g. as a result of a tax audit), the penalty will be 12% p.a. of the difference in taxes (3x the ECB base interest rate, rather than the flat rate of 10% p.a., which has been applied for a long time). In the event an amended tax return is filed outside of a tax audit, the penalty is 4% p.a., rather than the usual 3% p.a. If an amended tax return is filed after the commencement of a tax audit, the penalty will be 8% p.a. (2x the ECB base interest rate, rather than the flat rate of 7% p.a.).
Higher penalties will be applied to amended tax returns filed after 20 June 2023, and to an additional tax imposed by the tax administrator if the resolution on imposition is issued after 20 June 2023 (higher sanctions will also affect ongoing tax audits).
The current increase in the ECB base interest rate and the penalties follow on from the previous increases. Flat-rate penalties (3%, 7%, and 10% p.a.) have not been applied since March 2023, but the respective multiples of the ECB base interest rate are taken into account (in June 2023, the penalties amounted to 3.75%, 7.5%, and 11.25% p.a.).
The penalty imposed by the tax administrator may not be lower than 1% of the difference in taxes, i.e. there has been no change in this regard.
The increase in the ECB base interest rate also has a positive aspect as regards a higher compensation for VAT refund withheld unjustly by the tax administrator. If the VAT refund is withheld for longer than 6 months, the Tax Office will be obliged to pay compensation of 2x the ECB base interest rate rather than 1.5% p.a., which was applied until recently, i.e. 2 x 4% = 8% p.a. of the VAT refund withheld. However, this change will be taken into account no earlier than in 2024, as the rate valid at 1 January is applied for the entire year (for 2023, the rate of 2 x 2.5% = 5% p.a. will be applied).
What does that mean?
The increase in the ECB base interest rate automatically results in higher penalties for taxpayers after filing amended tax returns in which a higher tax liability was declared, and for the additional tax imposed by the tax administrator. As of 21 June 2023, the penalty is imposed as the corresponding multiple of the ECB base interest rate, i.e. at 4%, 8%, and 12% p.a. rather than the long-applied 3%, 7%, and 10% p.a.
The increase in the ECB base interest rate also results in a higher compensation for unjustly withholding the VAT refund (8% p.a.). However, this change will not take effect until 2024 after the application of the ECB base interest rate valid at 1 January.
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