Tax authority’s obligation to pay late fee for VAT overpay seized during control measures

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In conducting taxpayer controls, such as a tax audit or a review of grounds for refunding a tax overpay, the State Revenue Service (SRS) tends to seize any overpaid VAT and other taxes. The Taxes and Duties Act is silent about the SRS’s obligation to pay a late fee for the period in which control measures are taken. Yet the CJEU and the Latvian Supreme Court’s Administrative Division find that the SRS is liable to pay a late fee on an overpay of VAT they seized for the duration of the control measure if a refund is eventually approved.
A taxpayer filing the current VAT return and asking for a tax overpay owed from the government may face a situation where the SRS seizes the overpay until the control measures are completed. Our experience shows that such control measures may take even more than a year.
SRS actions
The trader’s funds are in fact removed from his turnover, which adversely affects his future business, especially if the seized amount of VAT is substantial. On completing the control measure and finding that a VAT refund claim is valid (in whole or in part), the SRS often incorrectly calculates the late fee owed to the trader. The SRS typically calculates it for the period from the date the control measure is completed to the date a VAT refund is made.
The legal framework
The SRS’s power to seize an overpay of VAT and the obligation to make a refund are laid down by Chapter XII of the VAT Act as well as by sections 28 and 29 of the Taxes and Duties Act. The relevant EU law is found in article 183 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.
Analysing these rules may lead to the mistaken conclusion that where a trader undergoes a control measure and the SRS decides that a VAT refund claim is valid (in whole or in part), a late fee should be charged only from the date of that decision.
Under section 15(4) of the Administrative Procedure Act and in the light of EU law (in this case article 183 of the VAT directive), the SRS should rely on the CJEU’s case law.
Under the case law of the CJEU and the Latvian Supreme Court’s Administrative Division, the taxpayer should not care about the reason why the overpaid VAT is refunded late.
The case law finds that it is not permissible that a taxpayer having requested a refund of overpaid VAT is unable to obtain a late fee in respect of the SRS’s late refund for the effective period of administrative instruments that ruled out the obligation to make a refund and were later cancelled by decision of the SRS or the court.
Latvian law is basically silent about how to charge late fees for the period in which control measures are taken. Latvian administrative case law finds that sections 28(1) and 29(2) of the Taxes and Duties Act aim to provide for the SRS’s responsibility for reimbursing the taxpayer for any loss caused by the seized money for each day any incorrectly collected amounts have been withheld or seized.
Under section 28(2) of the Taxes and Duties Act, applied in conjunction with the CJEU case law on how to interpret article 183 of the VAT directive, the SRS should, simultaneously with refunding the approved overpay of VAT, pay the trader a late fee for the period running from the statutory (normal) date of refund of the overpaid amount of VAT to the date the overpay was refunded.
Our experience shows that the SRS will turn down a request for paying a late fee in such circumstances and the taxpayer can obtain payment only by suing the SRS.
The right to seek a late fee for the seized overpay of tax would arise where that overpay was seized for the control period and approved in whole or in part as a result of the control measure or by decision of the SRS Director General cancelling the original decision or by a court ruling cancelling the SRS Director General’s decision.
Another case where we believe a late fee could be obtained involves the SRS eventually refunding a seized overpay of tax that was subject to a means of security for the taxpayer’s potential liability (e.g. to secure payment of a fine the taxpayer is not liable to pay until the dispute is finished in court). If this security is removed from the taxpayer and the overpay is refunded, the SRS should also pay a late fee for the period of seizure.
If your company has faced a similar situation, i.e. an overpay was refunded to you (in whole or in part) after control measures and you have not asked for a late fee under the relevant case law, we would be happy to help you obtain a late fee owed to your company. A late fee is charged at 0.03% of the seized amount for each day of seizure, coming to 10.95% a year.
Please call Olegs Spundins or Matiss Auzins on +371 67094400.
Olegs Spundins
Senior Tax Consultant
Tel: +371 67094400
Matiss Auzins
Senior Tax Consultant
Tel: +371 67094400
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