Late filing surcharge in cases of tax refunds

Background

If someone fails to submit a tax return by the deadline, the tax office may, pursuant to section 152(1) of the German Fiscal Code (AO), impose a late filing surcharge. ‘May’ means that the tax office has what is known as discretionary power, i.e., it must weigh up whether the late filing surcharge is justified in the specific case. The reasoning behind discretionary decisions should make it clear that the tax authority has exercised its discretion and set out the factors on which it based its decision. If the taxpayer can credibly demonstrate that the delay is excusable, no late payment surcharge shall be imposed. In certain cases, the tax office is obliged to impose a late payment surcharge. This obligation does not apply, amongst other things, where the tax is assessed at zero euros or at a negative amount.

Facts

The claimant, who had received professional tax advice, did not submit the 2020 annual VAT return until 30 January 2023, although it was due on 31 August 2022 (extended deadline during the COVID-pandemic). The return showed a surplus of € 7,333.41 and a refund of € 168.24. The tax office imposed a late filing surcharge of € 125, i.e., the statutory minimum amount under Section 152(5), second sentence, of the German Fiscal Code (AO) of € 25 for each month or part thereof that the return was late. Both the appeal and the legal action were unsuccessful.

The tax office pointed out that the claimant had already submitted the VAT return for 2019 several months late. The claimant argued, amongst other things, that the tax office had failed to meet the requirements for setting out the grounds for a discretionary decision.

Federal Fiscal Court (BFH) ruling

The late filing surcharge, by its very nature and purpose, is a unique form of pressure with both a repressive and a preventive character. The late submission of the tax return is to be penalised, and the taxpayer is to be encouraged to submit it on time in the future – hence it is permissible even if the tax return does not result in a payment.

For the claimant, who had received tax advice, the notice should have been understood as a discretionary administrative act, even though the tax office had not cited a legal basis, because the notice stated as grounds that the tax return had not been received until 30 January 2023 and the filing deadline had expired on 31 August 2022. The conditions for a binding decision under section 152(2) of the German Fiscal Code (AO) were clearly not met. The Federal Fiscal Court (BFH) emphasises on several occasions that a claimant advised on tax matters, in particular, would have been able to recognise this. 

The tax office exercised the discretion granted to it in assessing the case without error. Within the scope of its discretion, the tax office may take into account a merely minor delay by, exceptionally, not imposing a late filing surcharge. The frequency of missed deadlines is also relevant. If the tax office decides to impose a late filing surcharge, this requires no further justification. In view of the preventive nature of the measure, the tax office was entitled to impose a late filing surcharge without misusing its discretion, even if the claimant had submitted other returns, such as the advance VAT return, within the deadline. No further discretionary considerations were required.

Analysis

It is a common misconception that a late filing surcharge cannot be imposed if the return does not result in a tax liability, although the law expressly provides for this possibility. This applies to both preliminary VAT returns and annual VAT returns. Where a deadline has been missed, the tax office is not required to provide any further justification for the late filing surcharge beyond this assessment. The Senate clarifies that, in the case of a refund, only the minimum amount may be assessed as a late filing surcharge.

It is also interesting to note what the Federal Fiscal Court (BFH) did not rule on, as the late payment surcharge of €125 was very small: it was not necessary to decide whether the late payment surcharge might be unreasonable in the specific case when the amount of the refund and the late payment surcharge were weighed against one another. 

The case raises the question of why the claimant pursued legal proceedings for such a small amount. It may have been a test case, in which the claimant sought to gauge the prospects of success for further cases by using a case with a low value in dispute and low costs. 

Author: Nadia Schulte