Lithuania: Court Rules on VAT Fines and Late Payment Interest

Can a taxpayer avoid steep penalties even when a tax assessment itself isn't disputed? A recent decision by the Supreme Administrative Court of Lithuania clarifies the delicate boundary between financial damage to the state budget and procedural compliance, shedding light on when late payment interest and fines can be successfully challenged.

Exemption from Tax Fines: When “No Damage to the Budget” Applies

In this case, value added tax (hereinafter – VAT) was assessed, but the validity of the tax assessment itself was not disputed.

The SACL held that, when applying the ground for exemption from a fine on the basis that no damage was caused to the state budget, it is important to establish whether any damage was caused to the state budget during the period in which the tax should have been paid. If the taxpayer’s overpayment equals or exceeds the VAT payable, it may be concluded that no damage was caused to the state budget.

Article 141(2) Condition: Tax Must Be Paid, Set Off, Deferred or Paid in Instalments

However, in the case under examination, there was no evidence that the conditions laid down in Article 141(2) of the Law on Tax Administration had been met. Under that provision, exemption from a fine is granted only where the taxpayer has paid the amount of tax related to the fine imposed (including where the tax has been set off and/or recovered by enforcement), or where payment of that tax has been deferred or arranged in instalments in accordance with the procedure laid down in the Law. In circumstances such as those of the present case, there was therefore no basis for exempting the applicant from the fine or from late payment interest. 

The SACL also emphasised that this did not prevent the applicant, once the conditions laid down in Article 141(2) had been met, from applying to the tax administrator for exemption from payment of those amounts, in whole or in part (Articles 100 and 141(3) of the Law on Tax Administration). The Court noted that this position is consistently reflected in its case law.

When considering the summaries of late payment interest calculations submitted to the case file by the tax administrator, the SACL found that they were, first, insufficiently informative and, second, unsupported by evidence, because no evidence confirming the correctness of the calculations had been submitted in the case.

Late Payment Interest: Tax Administrator’s Calculations Lacked Evidence

Under Article 56(1) of the Law on Administrative Proceedings, a fact may be recognised as proven where, based on the evidence in the case, the court is satisfied that the fact exists. The assessment of evidence under Article 56(7) means that the court determines the probative value of any information relevant to resolving the dispute according to its internal conviction, based on a comprehensive and objective examination of the circumstances established during the proceedings and guided by the law and the principles of justice and reasonableness. 

In assessing the evidence, the court must evaluate the probative value of each item of evidence and conclude the body of evidence as a whole. When evaluating each item, the court must determine its connection with the subject matter of proof, whether it is admissible and reliable, whether there are indications of falsification, whether the burden of proof has been properly allocated, whether any statutory presumptions remain unrebutted, and whether any facts have preclusive effect. When assessing the evidence as a whole, the court must be satisfied that there is sufficient information to conclude that particular facts did or did not exist and that there are no material contradictions undermining those conclusions.

How Courts Assess Evidence Under the Law on Administrative Proceedings

Applying those procedural rules on proof and the assessment of evidence, the panel of judges of the SACL concluded that the applicant had disputed the calculation of late payment interest from the outset of the dispute, including the amount, the start date and duration of the calculation, the supporting evidence and so on. However, the documents submitted by the defendant did not establish when and why late payment interest of the stated amount had been calculated. 

The tax administrator was required to substantiate its position but failed to submit the necessary evidence. The Court also took into account that the case was being heard by the SACL for the third time and that the principles of procedural rationality and efficiency had to be ensured. It therefore annulled the part of the local tax administrator’s decision concerning the calculated late payment interest. Accordingly, the corresponding parts of the decision of the central State Tax Inspectorate and the decision of the Commission on Tax Disputes concerning the late payment interest payable by the applicant were also annulled.

Court’s Decision: Interest Calculation Annulled Due to Burden of Proof Failure

It should also be noted that Article 87(1) of the Law on Tax Administration provides that amounts of tax overpaid by a taxpayer are set off against the taxpayer’s tax arrears in accordance with the procedure established by the central tax administrator. Any overpaid amounts remaining after the overpayment has been set off against tax arrears are refunded at the taxpayer’s request […] (Article 87(5) of the Law on Tax Administration). 

If the taxpayer wishes an overpayment to be set off against taxes whose payment deadline has not yet expired, or against taxes administered by customs in accordance with the procedure established by the Minister of Finance, the taxpayer must submit a corresponding request (Article 87(10) of the Law on Tax Administration). The procedure and forms for submitting a request for the refund or set-off of a tax overpayment are established by the central tax administrator. The central tax administrator may also establish the list of documents to be attached to such a request and the cases in which a tax overpayment is refunded to the taxpayer without a separate request (Article 87(11) of the Law on Tax Administration).

Overpayment of Tax: Set-Off and Refund Rules (Article 87)

More generally, the Court recalled that Article 141(1) of the Law on Tax Administration provides the following grounds for exemption from fines imposed under Articles 139 and 140 of that Law: 1) the taxpayer proves that it was not at fault for the violation committed; 2) the tax law was violated due to circumstances beyond the taxpayer’s control that the taxpayer did not and could not have foreseen. 

Acts or omissions of the taxpayer or its employees, as well as the taxpayer’s insolvency, are not regarded as such circumstances; 3) a specific act of the taxpayer, although in breach of the provisions of tax law, causes no damage to the budget; or 4) the taxpayer violated the tax law because of an erroneous general explanation of the tax law or erroneous advice on tax payment matters provided by the tax administrator in writing or by telephone, provided that the advice was recorded in accordance with the procedure established by the central tax administrator and the caller – the taxpayer or its representative – can be identified. 

Exemption from a fine is granted only where the taxpayer has paid the amount of tax related to the fine imposed (including where the tax has been set off and/or recovered by enforcement), or where payment of that tax has been deferred or arranged in instalments in accordance with the Law on Tax Administration (Article 141(2)). 

A taxpayer may be exempted from fines by the tax administrator and, during a tax dispute, also by the institution examining that dispute. Where the decision falls within the competence of the tax administrator, the procedure for exemption from fines is established by the central tax administrator (Article 141(3)).