08.06.10

No one questions that it is possible to offset the overpayment of one federal tax against the payment of another federal tax.

However, when attempting to offset the overpayment of, for example, VAT or Income Tax by putting the overpaid amount towards one’s Personal Income Tax (PIT), organizations  frequently face uncomprehending tax officials. This article examines how tax officials explain their refusal to allow such offsets and whether the taxpayer can challenge their refusal.

Motives for Refusal

The logic is simple: the overpayment of a federal tax by an organization cannot be put towards PIT because its amount is calculated according to the funds withheld from the organization's income rather than the individual's.

In addition, the tax authorities will indicate that paying PIT using funds transferred by the tax agent is prohibited.

The Reality of the Situation

If PIT has been withheld from an individual’s income, then that individual no longer owes a debt to the state. The tax agent is now responsible for transferring the PIT payments to the Treasury. The agent can fulfill this obligation the same way as the taxpayer does: to pay the tax or offset the present overpayment against another tax. The tax agent has the right to decide independently how exactly to fulfill this obligation. One option is to offset the overpayment of the personal federal tax against outstanding or future PIT payments.

Therefore, when  tax collectors say that this kind of offset cannot be performed, they infringe upon the right of an organization to independently manage its own money. This is the first important point.

The second important point which regulatory authorities neglect is that the Tax Code does not prohibit offsetting an organization’s overpayments. As the taxpayer, the organization should simply transfer the overpayment just like a tax agent would. Moreover, Article 78 of the Tax Code does not differentiate between tax paid by an agent and tax paid by a taxpayer. The overpayments and arrears  both relate to a federal tax.

Court decisions supporting these arguments are proof of their legality. Although extensive arbitration practice regarding these types of disputes has not been fully formed yet, there has still not been a court case which has ruled that this kind of overpayment offset procedure is prohibited by law.

These arguments make it possible to defend the right to deduct overpayments of personal federal taxes from PIT owed. However, this practice will most likely have to be defended in court. 

Translated by Alinga Consulting Group.

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