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Interest on late payment of tax: new rules from 1 January 2018

A ‘late payment interest’ (LPI) is charged on any income tax or penalty that remains unpaid after it has become due and payable (Article 414 ITC).

The current LPI is 7% (a non-deductible expense). The LPI is assessed on every late payment of tax or penalty. Interest charges apply whether or not a penalty applies. Irrespective whether the taxpayer is dishonest or not, interest charges will be due in case there is a shortfall in the total amount due. Evidently the taxpayer should be aware of the fact that there is indeed an outstanding tax claim, otherwise the late payment cannot result in any additional interest charge.

Interest is calculated on a monthly basis, as from the first day of the month after the tax should have been paid until the end of the month including the day of payment. Every month started counts as a complete month, so it does not matter if you pay 1 day or 30 days too late in that month. Interest charges are automatic. However, there is no interest charged on interest itself (no compound interest).

On the other hand, when the tax office owes a refund to a taxpayer, the interest payable is also 7%. This interest is known as ‘compensatory interest’ (Article 418 ITC). It automatically applies and is also calculated on a monthly basis. Similar rules apply as for the LPI.

In the 2017 Summer Agreement, the legislator decided to update the existing system of LPI and compensatory interest. The recent draft of the ‘Law on economic recovery and strengthening of social cohesion‘ shows more in detail what is to be expected for 2018.

  1. Adjusted rate

First of all, the current LPI rate of 7% will be adjusted.

The LPI rate will be determined annually based on the 10-year Linear Bond Rate (OLO) of the months of July, August and September. The rate will vary between 4% and 10%. In the recent draft, it was indicated that for calendar year 2018 the default interest rate will be 4%.

The compensatory interest calculation will be based on the same formula, with the rate being reduced by another 2%. Probably because governments are presumed to be a better credit risk than defaulting taxpayers. The rate for the compensatory interest will therefore only be 2% for the 2018 calendar year.

  1. Notice of default is mandatory

In addition, the compensatory interest will no longer be automatically or legally due. The taxpayer himself will need to take the initiative to claim this interest by giving notice of default to the tax office by means of ‘a reminder or by another deed equivalent to this‘.

The preliminary draft indicates that this formal notice of default would only be required for assessments or tax bills that will be issued as from 1 January 2018 (so, logically, in respect to income year 2017).

  1. Payment details are required

Finally, it also appears that the tax office will not be required to pay any compensatory interest if the tax collector was ‘reasonably in the impossibility to pay the interest, because of, amongst other reasons, the absence of adequate information on the taxpayer’s identity or bank account details’.

At this stage it is not quite clear if this argument would also count in case the taxpayer’s accountant or tax adviser would have listed their trust account or client account as a valid bank account number for the refund.

When the taxpayer would then forward these details to the tax office to allow for a reimbursement, the compensatory interest will only apply as from the second month following that in which the notice of default with the relevant information was sent to the tax office by the taxpayer.

This new rule would also only apply as from 1 January 2018.