Background
If you pay your VAT late, then you may become liable to pay interest on that delay (so-called ‘default interest’). On the other hand, if tax authorities are late in refunding your VAT, then you may become entitled to earn interest on VAT refunded late to you.
The ECJ has ruled that if laws of a Member State (MS) are in breach of EU law (and this MS consequently levies tax in breach of EU law), interest should be paid for the entire time during which the taxpayer was without funds levied in violation of EU law. According to the ECJ, this means that the tax authority should pay interest for the period between the date of undue payment of tax and the date of repayment thereof. This interest is also called an ‘Irimie interest’.
Facts of the case
A Dutch municipality (Gemeente Dinkelland) carries out both economic and non-economic activities. Its economic activities are either subject to VAT or exempt. Gemeente Dinkelland is entitled to a deduction on general costs by applying an allocation key (a so-called ‘pro rata’). Following changes in the legislation for municipalities, Gemeente Dinkelland was entitled for deduction of more VAT than it initially deducted in 2012-2016.
Furthermore, an audit of accounts of Gemeente Dinkelland revealed that it had showed an excessive amount of payable VAT in its VAT returns for previous five years. Therefore, the municipality requested a refund of VAT from the Dutch Tax Administration
The Dutch Tax Administration granted a refund of the requested VAT amount and also paid interest because the refund took place outside the legal time limits. However, Gemeente Dinkelland did not receive the interest from the moment that it had overpaid VAT but from the moment it had filed the VAT refund claim. The municipality appealed because it thought that it was entitled to ‘Irimie interest’, payable from the date of undue payment of tax.
Questions
The ECJ was asked to clarify whether a right to earn interest (and if yes, from when) arises where the refund is the result of:
- Administrative errors on the part of the VAT payer and for which the inspector cannot be blamed in any way;
- A recalculation of the pro rata for the deduction of VAT on general costs.
Decision/conclusion on overpaid VAT
The ECJ concluded that Gemeente Dinkelland’s VAT repayment stemmed from its failure to exercise a right of deduction, rather than from a breach of EU law. Therefore, interest on the repayment did not start to accrue from the date when VAT was originally overpaid.
The ECJ ruled that the EU law does not require the payment of interest to a taxable person upon the refund of VAT, if the refund is partly due to the taxable person’s errors in deducting input VAT and partly due to retroactive changes in rules established by the taxable person for calculating deductible VAT related to general costs.
Consequences for the practice
The taxpayers are entitled to interest payable on overpaid VAT, calculated from the time of overpayment of tax when this was collected. This is due to the application of "national legislation incompatible with EU law or a requirement on the part of the Tax Administration". However, if tax is overpaid because of errors of taxable person or because of retroactive changes in national rules, then the interest is due from the moment that the corrections are made in VAT returns, or a VAT claim is filed to the tax authority.
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