Germany: Tax risks for management

Carsten Rössel

As in other countries, company directors are under duties of due care, both towards the tax authorities for ensuring that tax liability is correctly declared and towards the shareholders for ensuring that taxes are not overpaid. This latter includes penalties for under or late reporting, so that, at this level, the two duties are not in conflict. However, the current discussion on aggressive tax planning along with the recent tightening of the provisions governing exemption from criminal penalties for tax wrong-doers coming forward of their own volition has encouraged tax auditors to see tax avoidance attempts in estimates or assumptions which they consider to be unfounded. The high cost of refuting such accusations can appear to shareholders as an avoidable expense.

The answer is for the directors to protect themselves and their company with an appropriate tax risk management system. This encompasses a complete schedule of all tax filing and payment deadlines together with appropriate backups to ensure compliance in the event of unexpected absence of the individuals responsible. It also includes a complete register of all known tax risks, the measures taken to identify and contain them and full documentation of the position to be taken in the company's defence. This documentation should explain in full the reasons for the position taken. In many ways it is similar to that required under the transfer pricing rules, although it does not demand the same degree of formality. Of particular importance is the establishment of a clear division of duties within top management. Naturally, the system must be monitored.

It should also be realised that outsourcing functions does not absolve management of its compliance duties. This particularly applies to accounting (in agreement with the tax office) and other functions assumed by group shared service centres as these are almost invariably not covered by any form of professional liability insurance.

Carsten Rössel (carsten.roessel@de.pwc.com)
PwC
Tel: +49 211 981-7141

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