The tax authorities did not respect the ruling of the Constitutional Court and withheld the entire excessive VAT deduction from entrepreneurs, including the unexamined part
Press release on audit No 22/23 – 18 December 2023
The SAO audited how the Ministry of Finance (MoF), the General Financial Directorate (GFD) and selected Tax Offices (TOs) managed excessive value added tax (VAT) deductions in the years 2019-2022. An excessive VAT deduction, i.e. a claim for a refund from the state, arises for entrepreneurs when the tax deducted on their purchases exceeds the tax on their sales. The SAO auditors found that the MoF, the GFD and the TOs did not respect the ruling of the Constitutional Court (CC) for almost two years (22 months) and even after it was issued, they withheld the entire amounts of the claimed excessive VAT deductions from some entrepreneurs for a long time, even though they examined only a part of them.
The average annual VAT collection before application of excessive VAT deductions reached CZK 817.8 billion in the audited years. The average annual excessive VAT deductions amounted to almost CZK 358 billion. The total amount of withheld excessive VAT deductions at the end of the individual years 2019-2022 was on average CZK 1 billion.
The GFD was waiting for an amendment to the law to come up with a solution that would comply with the ruling of the Constitutional Court. However, the amendment did not come into force until February 2021. It made it possible not to withhold the entire excessive VAT deduction and to pay the taxpayer the unexamined part of the deduction, where no doubts or uncertainties arose.
The SAO auditors examined 80 specific cases. The audit showed that in ten cases, tax administrators unjustifiably withheld unexamined excessive VAT deductions totalling CZK 15 million. As a result, the GFD spent CZK 909,000 on interest and court costs. If the tax administrator withheld excessive VAT deductions for a long period of time, it was then obliged to compensate the taxpayer in the form of interest. This interest is calculated on the higher base, i.e. also on the unexamined part of the excessive VAT deduction. According to the SAO, the GFD did not proceed in the most economical way. These shortcomings reduced the effectiveness of VAT administration in the area of excessive deductions.
The following example shows how the practice of the TOs has affected the income of individual entrepreneurs and also the expenses of the state treasury. As part of the tax audit, the tax administrator withheld the entire excessive VAT deduction in the amount of CZK 10.7 million. On the basis of the audit, the tax administrator did not find any errors in the value of the excessive VAT deduction. Although the tax audit continued with the investigation of the facts not affecting the amount of the excessive VAT deduction, the tax administrator withheld the tax deduction until all audits and proceedings were completed. As a result, the tax administrator subsequently spent more than CZK 730.5 thousand from the state budget for the payment of interest on the tax deduction for 157 days, during which it illegally withheld the excessive VAT deduction.
Communication Department
Supreme Audit Office