No more excessively high interest rates: tax offices should be guided by reality – politics

The high interest rate for late payment of tax to the tax office is unconstitutional and should be adjusted. This was decided by the Federal Constitutional Court in Karlsruhe in a decision published on Wednesday. Accordingly, the interest rate of half a percent per month provided for in the Tax Code (UO) of 2014 is a breach of the principle of equality. It stated that interest rates were “clearly unrealistic” in view of market interest rates.

However, the judges stated that the previous law would remain in force until 2018. From 2019, interest should no longer be charged accordingly. The legislator is obliged to issue a new regulation by July 2022. Returns from the tax office will be made only in cases where tax settlements have not yet become final after 2019. The same goes for returns. It may happen that taxpayers in individual cases will have to proportionally pay back amounts plus past interest income. The Federal Ministry of Finance announced that the court “created legal clarity” and “showed legislators flexible options for action and design.” The ministry, together with the highest financial authorities of the Länder, will quickly prepare for the implementation of the decision.

In most cases, the request for a tax audit has become due

There are interest rates for income tax, corporate tax, property tax, sales tax, and commercial tax. Currently, both the additional tax claims and the tax refund are subject to monthly interest of 0.5 percent, or a total of six percent annually. The interest is intended to compensate for the financial benefit to taxpayers in the event of late payment. Conversely, they should outweigh the disadvantages if the tax creditors are waiting for a refund and the money is not available to them. The regulation became effective after conducting tax audits, when the amounts due for the previous years were established. The tax office used the interest on arrears for a long time. It was not only for this reason that the parliament and the government initially saw no reason to cut interest rates. More recently, as of 2019, tax offices have paid more interest on reimbursement than they have received interest on reimbursement, according to the federal government’s response to a small question from the FDP parliamentary group.

The interest rate remained unchanged for 50 years

The flat-rate income tax rate has remained unchanged since 1961. Interest is calculated on the amounts starting 15 months after the end of the calendar year in which the tax arose. There has been no criticism for a long time as similar interest rates have been observed in the markets. However, with the financial crisis and the next phase of low interest rates, the situation changed significantly. The main interest rate of the European Central Bank (ECB) has remained below one percent since 2011.

Two companies in Karlsruhe complained that after a tax audit they were to pay six-figure interest. In one case, Senate I partially upheld the constitutional complaint, and in the other, rejected it. Different time limits for determining the tax, sometimes within and sometimes beyond the 15-month waiting period, constitute unequal treatment that can only be justified by “strict proportionality requirements”.

Judges talk about “structurally low interest rates”

It is true that a legitimate goal is to ignore the bogus benefits in terms of interest rates if the tax is late, it is said. However, full interest at a fixed rate was no longer necessary from 2014. Following the outbreak of the financial crisis in 2008, there was a structurally low level of interest rates that no longer reflected mere fluctuations in interest rates. This is initially reflected in the evolution of the base interest rate. While it was still above 3% in 2008, it fell sharply to 0.12% in 2009. As of January 2013, it is negative.

Tax offices have been cautious since 2018

The Federal Tax Court (BFH) in Munich, the highest tax court in Germany, already ruled in 2018 that high late payment rates could violate the general principle of equality due to the low interest rates that would otherwise apply and are likely to be unconstitutional. They were far from reality, it was said even then. According to BFH, in 2016 and in previous years, the state collected over two billion euros annually from tax audits. The tax authorities reacted to the judge’s decision and temporarily suspend the relevant decisions.

The taxpayers’ union called for the interest rate to be cut by at least half and for the amount to be checked regularly in the future. In order to map the unfavorable liquidity situation, the so-called federal government interest cost rates. Flexible interest calculation is technically possible today.

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