Overpayment caused by a failure to take tax relief gives rise to late-payment interest
Tax Newsletter - March 2018
Pursuant to the General Taxation Law, taxpayers are not entitled to late-payment interest on refunds resulting from the application of the related tax law, provided that the refunds are paid by the statutory deadline. For example, in connection with personal income tax, if the amount withheld on the pay statement is higher than the tax, the excess is refunded by the Public Finance Authority without interest; the same occurs in connection with corporate income tax, where the refund results from prepayments made in excess of the final tax.
The difficulty lies in interpreting the difference between a refund resulting from the related tax law and a refund of tax overpaid, since the latter does entitle the taxpayer to late-payment interest.
On January 15, 2018 the National Appellate court handed down a judgment on the case of an entity that had not taken relief from double taxation on its corporate income tax return. When it realized what had happened, it requested the rectification of its tax return and the resulting refund of the tax overpaid. The Public Finance Authority admitted the refund, but took the view that the taxpayer was not entitled to late-payment interest, in the understanding that the refund was a result of the mechanics of the tax.
Against this position, the National Appellate Court (citing Supreme Court case law) concluded that this is indeed an authentic refund of tax overpaid because, among other reasons, tax relief cannot be taken on prepayments. Accordingly, a refund resulting from tax relief can never be due to excessive prepayments.
The National Appellate Court added that, because the taxpayer did not obtain late-payment interest when the refund was paid, further late-payment interest will have accrued thereon (interest on interest).
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