Need for an Effective Tax Compliance System in Germany?

By Bernhard Schwechel, FACT GmbH

Germany’s Tax Authorities issued a decree in 2016 on the procedure for amending a tax return under sec. 153 of the General Tax Code (AO). It raised the issue of an internal control system for tax purposes and contains general guidance about the conditions that must be fulfilled to use the provision, as well as the criteria for distinguishing between a simple amendment procedure and a voluntary self-disclosure procedure (VSP).

Sec. 153 AO provides that, where a taxpayer realises that the tax return submitted is incorrect, he is required to make the necessary amendments to the return without undue delay.

Sec. 370 AO provides that an incorrect tax return, due to a wilful act or gross negligence, constitutes tax fraud. The rectification of this kind of tax return will ensure impunity for the taxpayer only if he or she fulfils the tightened requirements of sec. 371 AO (VSP).

In both options, the tax authorities have to determine whether the reporting of the taxpayer fulfills the strong requirements of a VSP, which recently have been tightened. If these requirements are not met, there is a high potential for criminal prosecution or administrative charges.

The balance between potential tax evasion caused by incorrect tax returns and the possibility to enter in a “simple” correction or in a VSP has been destroyed by strengthening of sec.371 AO. The hurdles to be deemed as somebody who has committed tax evasion are low, as it has been in the past, but the conditions and requirements to enter in impunity VSP are now tightened.

In the directive the differences between a simple correction of a tax return and a VSP are explained.

For the authorities the existence of an internal tax compliance system would initially be taken as evidence against any intentional or negligent tax evasion. Thus, it is time to implement a tax compliance system.

Bernhard Schwechel

FACT GmbH - Steuerberatungsgesellschaft, Wirtschaftsprüfungsgesellschaft, Kassel, Germany
T: +49 561 316 686 0
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FACT GmbH is a tax consultancy, public auditing company and law firm located in Kassel, known as the heart of Germany. FACT provides German and international accountancy and tax services to companies and individuals. The experienced team works on cross-border issues for German clients as well as for foreign clients. FACT works closely with its clients and responds rapidly to their needs.

Bernhard Schwechel is a Managing Partner of FACT. He is experienced in the field of International Taxation. His areas of expertise include Tax and Business Advice for large multinational corporations and mid-sized companies, as well as for internationally-oriented individual clients. He supports his clients in inbound and outbound M&A projects.

Published: Winter 2017 l Photo: Benjamin ['O°] Zweig - Fotolia.com