How to manage tax disputes in Germany
The recently introduced German Act on Mediation and the introduction of a second senate of the Federal Tax Court with responsibility for VAT issues are giving German taxpayers plenty of food for thought in managing their disputes.
Gerhard Specker and Peter Haversath, of P+P Pöllath + Partners, speak with International Tax Review about how taxpayers should manage disputes in Germany.
International Tax Review (ITR): What advice would you give to companies operating in Germany about how to reduce the risk of becoming involved in a dispute with the German tax authorities?
Gerhard Specker (pictured below): Firstly, companies should attempt to establish a good working relationship with their tax office, so formal requirements like deadlines should be met and reasonable requests for information should be answered.
A respectful and polite communication is advisable, though in specific situations a more confrontational approach may be appropriate.
The risk of becoming involved in a serious conflict might be reduced by thoroughly observing the legal obligations, such as declaration requirements and due payments. This is particularly true for cross-border tax cases, which are more difficult to handle for the tax offices, hence why the tax legislator has increased the documentation requirements and tightened the burden of proof for cross-border cases.
To observe such formal requirements and be well prepared for tax audits and investigations, companies should establish internal tax compliance schemes and codes of behaviour with instructions on how specific tax-relevant situations should be dealt with. In cross-border cases it is advisable to have essential documents translated.
German tax law offers taxpayers the opportunity to ask for a binding ruling to avoid tax disputes on certain issues in the future.
If companies advise the tax office that they intend to pursue a specific project which has not yet been put into effect, the tax office can issue a binding ruling reflecting their own view on the tax consequences of the project.
The project has to be described in detail. In the field of complex corporate restructuring, it is also important to clearly set out the economic reasons. To obtain a tax ruling, a fee depending on the tax value of the issue will be charged, up to a maximum of €91,456 ($119,862).
ITR: What options do taxpayers in Germany have to resolve disputes with the authorities other than litigation? What are the positives and negatives of these options?
In principle, due to its binding character, tax law leaves no room for legal settlements. In practice, however, there should always be scope for negotiations with the tax office.
Due to the rising complexity of tax law on the one hand, and the variety of – especially cross-border – businesses on the other hand, the tax authorities are under enormous pressure to enforce all tax laws properly. In addition, tax offices have to cope with a shortage of qualified personnel.
Taxpayers should consider negotiations, especially if the dispute is about complex facts rather than legal questions, as the tax authorities may not deviate from tax guidelines issued by higher regional tax offices or the Federal Ministry of Finance.
Negotiations should be well prepared – with drafted settlement agreement, legal arguments and presentations – and be conducted with the tax officer or tax auditor directly in charge of the case.
Not even large companies should try to ignore these first contact persons. In particular, complex tax audits leave room for such negotiations and the final meeting after each audit offers opportunities to settle disputes over legal as well as factual issues and avoid legal proceedings.
Moreover, an agreement on the facts is obtainable, and is a common practice with regard to tax cases in which the factual circumstances are unclear, difficult to ascertain or subject to evaluation. An agreement on the facts can be reached in all stages of the tax procedure. They are binding on both parties insofar as an application against a following tax assessment is excluded.
Compared with the usual legal dispute procedures, negotiations offer various advantages:
· they take less time and money;
· agreements may have a broader result, such as by extending an agreement to subsequent assessment periods; and
· the bilateral nature of the agreement goes along with a higher degree of compliance on both sides which reduces the risk of future conflicts.
ITR: Are you seeing any trends in the cases the German tax authorities are taking up, and those where they are succeeding in the courts?
Peter Haversath (pictured below): As tax offices must enforce binding tax laws and observe quite detailed tax guidelines, there is, in principle, little scope for taking or not taking up cases with legal ambiguity.
However, due to formal or informal negotiations with companies and their willingness to compromise, tax authorities may influence the number and kind of tax disputes taken to court.
With respect to all tax court proceedings, the rate of fully and partly successful legal actions for the taxpayers is only about 10% and 20% respectively. However, this is also due to the many actions which are inadmissible or barely substantiated.
In cross-border tax cases with complex facts, taxpayers must comply with much higher documentation requirements and a tightened burden of proof. In contrast, with respect to complex or newly emerging pure legal issues, chances of success are much higher if the case is appealed to the Federal Tax Court.
As auditors usually try to achieve a surplus of tax collected, they tend to focus examinations on tax issues that promise higher tax yields. For example, the tax authorities give increased attention to VAT issues – the Federal Tax Court set up a second senate responsible for VAT in 2008.
VAT audits are often quite effective with respect to tax collected, because VAT exemptions as well as the VAT input deduction for companies depend on formal, even formalistic criteria, which are not fully observed in many cases. Therefore, VAT audits and related court proceedings are supposed to increase in number and importance.
ITR: What can German taxpayers expect from the German tax authorities in the future?
The Federal Tax Inspection, which is involved in the audit of larger and internationally operating companies, coordinates with the regional tax authorities on which kind of tax issues will be audited more intensively.
Also, due to the difficulties of enforcing complex tax laws, the tax authorities have started to adopt a cooperative approach. Therefore, it might now be easier for companies to avoid tax disputes. For example, with respect to tax audits, the tax authorities have introduced a so-called prompt audit.
The main objective is to shorten the term for which a certain tax assessment period remains open and subject to amendments resulting in additional tax payments.
Prompt audits are more effective and easier to handle for both the companies and the tax offices. A prompt audit offers a greater legal certainty and can reduce interest on subsequent tax payments.
However, the tax offices select tax cases for a prompt audit at their sole discretion using risk-oriented selection criteria. According to recent guidelines about tax audits of large companies, a prompt audit requires cooperation and observance of the tax obligations as well as “tax-honest” conduct in the past.
Mediation in tax issues is still rare in Germany. Since July 2012, the new German Act on Mediation allows the courts to appoint mediators. Hence, a few tax courts have appointed such mediators recently.
Especially in “deadlocks”, the participation of a third, neutral person might be helpful. As the new Act on Mediation is only just being implemented, it is too early to estimate its future role in the area of business taxation.