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German self-disclosure rule amendments 2015

Hilmar Erb and Sebastian Lattmann of PwC explore new amendments to Germany’s self-disclosure rules, which have contributed to an increased compliance burden for taxpayers in 2015.

Tax fraud is a serious crime that can be punished with a custodial sentence of up to 10 years in Germany. However, the perpetrator might gain exemption from punishment by filing a self-disclosure (sec. 371 German Fiscal Code, "AO"). Basically, a valid self-disclosure has to meet two requirements: the perpetrator needs to retroactively disclose the complete basis of taxation of one tax type (for example, income tax, VAT, wage tax, and so on) and he has to retroactively pay any taxes understated. If the amount of taxes evaded exceeds a certain amount the perpetrator must pay an additional surcharge to gain exemption from punishment (sec. 398a AO).

In recent times, the regulations concerning the self-disclosure underwent significant modifications due to intense discussions in the media, the political environment, and a wider society that is more keenly aware of the harmful effects tax fraud brings along. In 2011, revised regulations were installed that made the self-disclosure significantly more complicated (Law Combating Unreported Income, Schwarzgeldbekämpfungsgesetz dated April 28 2011). Nevertheless, the public opinion called for an even stricter handling of the self-disclosure. As a result, the German legislation tightened the self-disclosure provisions again. The amendments have been in place since January 1 2015.

In essence, the self-disclosure will be more difficult, more burdensome, and more expensive in the future because of the latest amendments outlined below.

Correction period extended to 10 years

A valid self-disclosure needs to be comprehensive; a fractional self-disclosure is deemed to be legally void and will not provide exemption from punishment.


"If taxes have been deliberately understated and exceed a certain amount, a self-disclosure will prevent criminal prosecution only if the offender pays the treasury a surcharge on the amount of taxes avoided"


In the past, the perpetrator was obliged to deliver the correct basis of taxation concerning one tax type for all taxation periods that were not time-barred yet. Regularly, this meant a correction going back five years. The correction period was 10 years only in particular cases of severe tax fraud (described under sec. 370 para 3 sent. 2 AO), for example in instances when income taxes exceeding €100,000 had been understated deliberately.

From now on, any self-disclosure must cover a 10 year period in order to be accepted as complete. Obviously, it has become much more difficult to gain exemption from punishment. Uncertainty will arise where relevant tax data and documentation of the past 10 years no longer exists, for example where bank institutes have no more information on undisclosed accounts as the legal obligation to hold such documentation has expired. For example: the retention period for Austrian banks covers seven years only, so it is very likely that data for the remaining three years will not be kept by the bank; a self-disclosure would have to be produced on an estimation basis – including the risk that information might be incomplete. Other problems will occur as a result of, among others, memories vanishing or fading, data getting lost, management (and therefore their knowledge and expertise) leaving a company.

As a practical consequence, the risk of filing a self-disclosure that is incomplete and thus legally void has increased significantly.

Blockers

In certain situations (described by sec. 371 para. 2 AO) a self-disclosure cannot provide exemption from punishment (so-called "blockers"). In these situations, the law assumes that undisclosed tax sources will be discovered even if the taxpayer does not assist the tax authorities in gathering tax relevant facts. Then, the perpetrator shall not benefit from his taking action and exemption from punishment shall be denied even if a complete self-disclosure is being filed.

Such blockers are in effect:

  • where the tax authorities have issued a notification that such tax audit shall be held at the company;

  • where a tax audit has started at the taxpayer's premises;

  • where a tax fraud has already been detected and the perpetrator or his abettor had to assume that the deed was detected; or

  • where the prosecutor has notified about criminal investigations having started.

Notification of a tax audit

In the past, the notification of a tax audit triggered a blocker only when it was provided to the perpetrator or his representative but not if it was issued to the beneficiary of a tax evasion. In practice, this was always the case where taxes were evaded for the benefit of a company: The blocker was not effective in such cases while the notice of tax audit had been provided to the company as the taxable entity – or its (tax) representative – but not, however, to an individual who is the sole potential perpetrator.

Now, the blocker is in place if the taxpayer, the perpetrator, his representative or any accomplices (principals or secondary participants) have been notified about a tax audit (sec. 371 para. 2 no. 1a and c AO).

Scope of the tax audit decisive

According to the former provisions the tax audit and its notifications was deemed to block the self-disclosure completely as far as one tax type was concerned. The new regulations will grant more latitude to companies, in particular for those who are under tax audit continuously:

According to the new regulations, the start or the notification of a tax audit will hinder the self-disclosure only for those periods of taxation and tax types that are part of the tax audit or the notification. For all other periods and tax types a self-disclosure can still be filed (sec. 371 para 2 sent. 1 no. 1 a and c AO).

For example: A company has received a notification about a tax audit covering corporate income tax of the years 2009 up to 2011. A self-disclosure will be void for these periods as far as corporate income tax of the years 2009 to 2011 is concerned but can still be filed for the years before 2009 and after 2011 and concerning all other tax types, for instance VAT.

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Self-disclosure will not always provide relief. An exemption ‘blocker’ comes into play if it is assumed that undisclosed information would have been discovered without the taxpayer coming forward

Tax examinations

In the past, a self-disclosure was not possible if "an official had appeared for a tax audit". What had been in dispute was whether a tax examination included a VAT examination, wage tax examination or other tax-related examination.

The new regulations now clarify that these forms of tax examination will trigger a blocker (sec. 371 para. 2 no. 1e AO).

Interest payment

In the past, the effectiveness of a self-disclosure did not depend on whether the offender paid late payment and evasion interest in addition to the taxes previously avoided (sec. 371 para. 3 AO).

According to the new regulations, the perpetrator has to pay interest accruals on tax deficiencies and tax refunds (sec. 233a AO) as well as interest accruals on evaded taxes (sec. 235 AO). Given that the interest rate is 0.5% per month, and the period of limitation is 10 years, the interest charge might sum up to 60% for the most aged tax claims.

In many cases, this burden will lead the taxpayer to question the choice of a self-disclosure as it might cause his economic ruin.

Surcharge

If taxes have been deliberately understated and exceed a certain amount, a self-disclosure will prevent criminal prosecution only if the offender pays the treasury a surcharge on the amount of taxes avoided (sec. 398a AO).

According to the former regulation the surcharge was 5% of the amount of taxes understated if more than €50,000 had been evaded.

The regulation now in place claims for a surcharge if taxes of more than €25,000 have been evaded intentionally. Further, it provides a staggered percentage depending on the amount of taxes evaded: 10% if taxes exceeding an amount of €25,000 have been evaded; 15% if taxes exceeding an amount of €100,000 but not exceeding €1,000,000 have been evaded; and 20% if taxes exceeding an amount of €1,000,000 have been evaded.

Contrary to the former regulations, the surcharge is intended not only to apply to cases of large-scale tax evasion (more than €25,000), but similarly to all other cases deemed to be particularly serious in the statute (sec. 370 para 3 sent. 2 AO). This relates to tax evasion with the involvement of an official, continuing evasion with the assistance of falsified documents and organised VAT or consumption tax evasion.

Presumably, any perpetrator and abettor has to pay the full surcharge for any evasion he or she committed. However, it is still subject to discussion how the surcharge basis has to be calculated, that is, whether the total amount of understated taxes is decisive or the amount per taxation period.

Obviously, the financial burden of the surcharge will increase doubts over whether self-disclosure is the proper means to deal with a situation where taxes have been evaded.

Self-disclosures concerning wage tax and preliminary VAT returns

One of the primary criticisms of self-disclosure under the former provisions was that the law did not distinguish between forms of tax. This means that a business owner, who was not thorough enough when filing his VAT had the same rules applied to him as a "tax fugitive" with investment accounts in Switzerland.

The uniform treatment of all tax types frequently resulted in conflicts because, in particular, prosecutions were initiated in VAT and wage tax filings even though these types of taxes are especially vulnerable to error and are hardly controllable by undertakings.

The new regulations now provide for a distinction: in the event taxes are avoided via incorrect or belated preliminary VAT returns or wage tax returns (both potentially leading to tax fraud allegations), the person submitting the self-disclosure is intended to be exempted from penalty to the extent he or she corrects inaccurate information provided to the tax office. It shall now be possible to file a self-disclosure for certain periods only so that the requirement of completeness is suspended here (sec. 371 para. 2a AO). This effectively reintroduces fractional self-disclosures for preliminary VAT returns and wage tax returns which had been rescinded as part of the tightening of the self-disclosure law in 2011. This means that a corrected or late preliminary VAT return or wage tax return, respectively, is once again treated as an effective self-disclosure. In addition, an annual VAT return is intended to function as a self-disclosure for inaccurate preliminary VAT returns from the preceding year without applying to the preliminary VAT returns for the current year.

Furthermore, neither the surcharge regulations nor the obligation to pay interest accruals are applicable in these cases.

These simplifications only apply to wage tax returns and preliminary VAT returns. The stricter, general rules continue to apply in the event taxes are avoided via an annual VAT return.

More burdensome

The amendments will make the self-disclosure less attractive for individuals as well as for companies when it comes to disclose understated taxes. Given that taxes have to be retroactively declared and paid covering a period of 10 years and that interest payments and an additional surcharge of up to 20% will be due, many taxpayers will refrain from disclosing understated taxes not simply by choice but, significantly, because they cannot afford a self-disclosure anymore. In some cases, the payable amount might exceed the amount of taxes understated by 300%.

The amendments meet the zeitgeist of the current political and social debate in Germany. As a response to former times when tax fraud was considered nothing more than a trivial offence they come across quite rigid. German legislation holds the view that the new rules do not represent additional burdens for business. This forecast overlooks the reality of the situation: every business owner who has previously submitted a self-disclosure in order to mitigate any criminal risk knows the enormous effort associated with providing complete documentation. The new regulations will make this path more rocky.

Hilmar Erb


erb.jpg

 

PwC

Tel: +49 89-57906752

Email: hilmar.erb@de.pwc.com

Hilmar Erb is an attorney-at-law in PwC's Tax and Legal Services team in Munich. Specialised in tax criminal and white collar criminal law, Hilmar provides legal advice to individuals as well as companies of all industries confronted with criminal allegations.

Hilmar has more than 10 years of professional experience as a defence lawyer and criminal legal advisor. He holds a doctorate in criminal law and is approved as a certified expert lawyer for both tax and criminal law. He is a frequent speaker on international tax issues and publishes regularly in relevant law gazettes.

Since the start of 2015, Hilmar has been head of the group for PwC Germany's white collar crime litigation practice.


Sebastian Lattmann


lattmann.jpg

 

PwC

Tel: +49 30-26363937

Email: sebastian.lattmann@de.pwc.com

Sebastian Lattmann is a senior consultant working as an attorney-at-law for PwC Legal Berlin in the area of tax criminal law and commercial criminal law.

Sebastian has more than three years of experience in advising companies and individuals within the field of tax law, tax criminal law and commercial criminal law.

After finishing his studies in law in 2010, Sebastian became a lawyer in 2011 and additionally earned a Master's degree in commercial criminal law in 2011. He gained his first experience in tax criminal law at another Big 4 firm. In 2012 Sebastian joined PwC Legal Berlin. In addition to advising in tax law and tax criminal law, Sebastian is experienced in tax compliance as well a criminal compliance.


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