Tax administrations must reduce their interest on additional tax claims. “Given the phase of low interest rates since 2014, the monthly interest rate of 0.5% is clearly unconstitutional,” said the Federal Constitutional Court in its judgment, which was released on Wednesday. This applies to both tax refunds and tax refunds. However, the rate can still be used until 2018. Only on tax notices that are not final from 2019, the payment of additional interest of this amount is no longer possible. These should be corrected. The Federal Constitutional Court has not determined how high the interest rate can be. However, the legislator must adopt a new regulation by July 31, 2022.
The flat interest rate of 0.5% per month – that is, 6% per annum – has been in place since 1961, which was a reasonable amount for the first 50 years of its validity. But the interest rate environment has changed dramatically. The phase of low interest rates in Germany and Europe is now in its tenth year. In the fight against the economic consequences of the global financial crisis and the euro crisis, the ECB lowered the key rate below 1% for the first time in 2012, and since 2016 the value is even 0 %. Many savings deposits in banks are now subject to negative interest. In this environment, tax administration interest rates seem to have fallen for a long time. For the years 2014 to 2018, the Federal Constitutional Court left the contested provision in force. Here, the legislator is not obliged to retrospectively create a constitutional regulation. In the years leading up to 2013, interest rates had already fallen low. At that time, however, the fixed interest rate was “always in the right proportion,” he said. As of 2014 at the latest, however, it is “patently unrealistic”.
In Karlsruhe, two companies had lodged a complaint whose business tax had been significantly revised upwards after a tax audit. “The Federal Ministry of Finance, together with the highest financial authorities of the Länder, will quickly prepare to implement the decision of the Constitutional Court,” said State Secretary Rolf Bösinger. The state earns around one billion euros per year thanks to default interest.
“Once again, Karlsruhe must make sure that things taken for granted apply again.”
The FDP and the Greens criticized the government for not lowering interest rates for a long time. “Once again, Karlsruhe must ensure that things are taken for granted again,” said Florian Toncar, FDP finance officer, Reuters news agency. “The verdict is not surprising – the Federal Finance Court had already expressed its first doubts in 2018,” said environmental politician Lisa Paus.
In 2018, the Federal Finance Court questioned the constitutionality of high interest rates, when the judges spoke of an “unrealistic assessment with regard to the general principle of equality in the Basic Law”. Given this unclear legal situation, the tax authorities have only been setting interest rates provisionally since May 2019. “The federal government and especially Olaf Scholz did not take action early enough,” Paus said.
“The interest rate must be reduced to significantly less than half of the current interest rate. In addition, the legislator must regularly check the interest rates so that they are fair”, demanded the president of the Taxpayers Association, Reiner Holznagel. A flexible interest calculation is now technically possible, we can orient ourselves on the current level of interest at the beginning of the year. “The fact that the federal government used high administrative costs as an argument against the corrections has now turned out to be a boomerang,” said the medium-sized enterprises association BVMW.
Default interest accrues if a taxpayer files their income, corporation, sales, or property and trade tax return late and must pay additional tax. After a waiting period of 15 months from the due date, taxpayers must pay 0.5% interest per month on the additional payment. It does not matter whether the delay was the sole responsibility of the taxpayer or whether it took a long time for the tax administration to process or that an external audit by the tax administration resulted in an additional payment. In principle, the first Senate of the Federal Constitutional Court approved the default interest. This should reduce the benefit that the taxpayer could keep and invest the money for the additional payment. But a six percent annual return has long been unattainable in financial markets with little risk.