What the Federal Constitutional Court's tax interest ruling means

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The Federal Ministry of Finance in Berlin

Photo: Schoening / imago images / Schöning

How expensive is it now?

Almost everyone who has ever been in arrears with their taxes should be familiar with this fearful question.

In fact, the delay has so far cost considerable sums of money.

Because in addition to a late payment penalty, the tax authorities can also charge interest on late tax payments after a waiting period of 15 months.

The same interest rate has applied to them since 1961: 0.5 percent per month, i.e. 6 percent per year.

Six percent interest - you can hardly find that outside of the Federal Ministry of Finance on Wilhelmstrasse in Berlin.

For years, the central banks and global demand for investments have kept interest rates close to zero, and in some cases even negative interest rates are due.

And so the constitutional judges in Karlsruhe decided that the state usury must come to an end.

How does the Federal Constitutional Court argue?

The language of the judges is clear: the previous interest rate has been "evidently unrealistic" since 2014 at the latest.

Since then, it is no longer possible to earn the interest demanded by the state on the capital market.

But that was actually the prerequisite for the tax interest: This arises regardless of who is responsible for the late assessment and should not act as a penalty. Rather, the interest should ensure that all taxpayers are charged equally. Because whoever pays taxes later than others could theoretically have invested the money in the meantime. Interest should compensate for this advantage. They apply to income, corporation, wealth, sales and trade tax.

In 1990 the six percent could actually still be achieved, write the judges.

After the outbreak of the financial crisis in 2008, however, a “structural low interest rate level developed that is no longer an expression of the usual interest rate fluctuations”.

According to the judges, tax interest has been unconstitutional at this level since 2014.

What does this mean for taxpayers?

Lower interest rates will benefit many taxpayers, especially businesses.

So far, these could result in significant interest debts if the tax liability was re-assessed after a so-called external audit.

In Karlsruhe, two companies had sued whose trade tax liability had been revised upwards significantly after an audit - in one case from 423 euros to more than 194,000 euros.

The second case also involved a six-figure amount.

In the case of private citizens, the sums are significantly smaller, but the interest burden can be considerable. However, the legislature only has to make a new regulation for tax assessments from 2019. Since May 2019, the tax authorities had only set the interest rates temporarily due to the unclear legal situation - they can therefore be changed retrospectively.

Lowering the interest also for notices in earlier years would involve "considerable administrative effort," argue the judges.

In addition, such a regulation must then also be applied to those cases in which taxpayers benefit from the previous regulations.

Because the six percent interest has so far also applied when the state reimbursed taxes with a delay.

Anyone who expected such a reimbursement and made their tax return voluntarily has so far been able to delay the submission - and thus invest their money with the tax authorities.

This option is no longer available either.

What does this mean for the state?

The ruling puts the legislature under pressure, because the judges are calling for a new regulation by the end of July 2022. In the coming days, the federal and state governments want to discuss what this could look like.

It is already foreseeable that the tax authorities will lose revenue as a result of the new regulation. Because the bottom line was that the high interest rates were a profitable business from the government's point of view. Between 2010 and 2018, the income from the interest on arrears was always higher than the sum of the interest that had to be paid on reimbursements. In some cases, the difference was more than a billion euros. Only in 2019 did the tax authorities pay a good 550 million euros on it, according to a response from the federal government to a small request from the FDP.

In addition to the financial consequences, the political symbolism of the verdict is also unpleasant for Federal Finance Minister Olaf Scholz (SPD): once again, tax policy problems are only addressed under pressure from Karlsruhe.

It was similar before with decisions on inheritance, nuclear and property taxes.

For the latter, the state even worked with values ​​from 1935 in some cases.

There had been calls for an adjustment of tax rates for a long time.

In 2018, for example, the Federal Fiscal Court (BFH) reported “serious doubts about the constitutionality” for interest periods from 2015 onwards.

Clemens Fuest, head of the Ifo Institute in Munich, accused politicians of "happy to demand fair taxation, but does not advocate it when it comes to its own clientele."

FDP parliamentary group vice Christian Dürr calls the judgment a "slap in the face for the federal government", which has "massively neglected taxpayers in recent years."

Lisa Paus, financial policy spokeswoman for the Greens, said: "After the decision on property tax, this is the next gossip for Olaf Scholz from the Federal Constitutional Court." The ruling is also "a signal that the low interest rates in recent years are not only temporary, but probably structural will be".

How high will the interest be in the future?

The judges leave the future amount to politicians, it is still unclear.

A possible orientation point could be the so-called base rate, which the Bundesbank publishes twice a year and which is currently -0.88 percent.

It is clear that a fixed interest rate will continue to apply, so the level will not fluctuate constantly as with a market interest rate.

However, politicians are likely to review this interest rate more frequently in the future - and certainly not again after 60 years.

With material from dpa