The tax offices should be based on reality

The high interest rates for late tax payments to the tax office are unconstitutional and need to be corrected. The Federal Constitutional Court in Karlsruhe decided in a decision published on Wednesday. According to this, the interest of half a percent per month stipulated in the tax code (AO) from 2014 is a violation of the principle of equality. In view of the usual market interest rates, the interest rates are “evidently unrealistic”, it said.

However, the judges stated that the previous law would still be applicable until 2018. From 2019, interest should no longer be calculated accordingly. The legislature is obliged to make a new regulation by July 2022. Repayments from the tax office will only be made in cases in which tax assessments have not yet become final as of 2019. The same applies to refunds. Here it can happen that in individual cases taxpayers have to repay proportionally the sums that have increased in the past due to the interest income. The Federal Ministry of Finance announced that the court had “created legal clarity” and had “shown the legislature a resilient scope for action and design”. The ministry, together with the highest financial authorities of the federal states, will quickly make preparations to implement the decision.

Most of the time, the request for tax audits was due

There is interest in income, corporation, wealth, sales and trade tax. At present, both additional tax claims and tax refunds bear interest at 0.5 percent per month, i.e. a total of six percent annually. The interest is intended to offset the financial advantage taxpayers have if they delay making payments. Conversely, they should outweigh the disadvantages if creditors from the tax office are waiting for a refund and the money is not available to them. The regulation became relevant especially after tax audits, when the sums owed were determined for previous years. For a long time it was the tax office that benefited from the interest on arrears. This is probably one of the reasons why parliament and government initially saw no reason to lower interest rates. More recently, since 2019, the tax offices have paid more reimbursement interest than they received back-payment interest, according to a response from the federal government to a small request from the FDP parliamentary group.

The interest rate remained unchanged for 50 years

The lump-sum tax interest rate has remained unchanged since 1961. Interest is charged on sums from 15 months after the end of the calendar year in which the tax was incurred. For a long time there was no criticism of this because similar rates could be observed on the markets. However, this has changed fundamentally with the financial crisis and the subsequent low interest rate phase. The key interest rate of the European Central Bank (ECB) has been below one percent since 2011.

Two companies had sued in Karlsruhe that, after a tax audit, were supposed to pay six-figure interest. In one case the First Senate partially upheld the constitutional complaint, in the other it rejected it. In the different times of tax determination, sometimes within and sometimes outside of the waiting period of 15 months, there is unequal treatment that can only be justified according to “stricter proportionality requirements”.

The judges speak of a “structural low interest rate”

It is true that it is a legitimate goal to skim off fictitious interest rate advantages when the tax is set late, it continues. However, the full interest rate in the fixed amount was no longer required from 2014 onwards. After the outbreak of the financial crisis in 2008, a structural low interest rate developed that is no longer an expression of the usual interest rate fluctuations. This can first be seen in the development of the base rate. While it was still over three percent in 2008, it fell rapidly to 0.12 percent in the course of 2009. Since January 2013 it has been in negative territory.

The tax offices have been cautious since 2018

The Federal Fiscal Court (BFH) in Munich, Germany’s highest court for tax issues, had already decided in 2018 that the high interest on arrears could violate the general principle of equality in view of the otherwise applicable low interest rates and are likely to be unconstitutional. They were unrealistic, it was said even then. According to the BFH, the state received more than two billion euros per year in this way from tax audits in 2016 and in previous years. At the time, the tax authorities reacted to the judge’s ruling and are temporarily suspending the relevant notices.

The taxpayers’ association called for the interest rate to be reduced by at least half and for the amount to be checked regularly in the future. In order to map the liquidity disadvantage of the state, the so-called interest cost rates of the federal government can be used. A flexible interest calculation is technically possible today.