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Nexia Ebner Stolz

Federal Finance Ministry’s Position Paper on Tax Compliance: Interview with Prof. Ley

In a letter dated May 23, 2016, Germany’s Federal Ministry of Finance underlined the importance of tax compliance systems in companies to prevent enterprises from making mistakes that are punishable under criminal tax law. Companies are encouraged to implement and update a system that is designed to ensure that tax laws and the specifications of the tax authorities are complied with, something which presents companies with huge challenges.

Expe­ri­ence shows that the com­ple­xity of tax com­p­li­ance sys­tems can­not be sum­med up in a “one size fits all” pro­cess descrip­tion. A group of experts who deal with taxa­tion at a practi­cal level will dis­cuss the basic requi­re­ments for such sys­tems.

As repor­ted in the last issue of novus, Prof. Ursula Ley, audi­tor, tax advi­sor, and part­ner at Ebner Stolz in Cologne, has been appo­in­ted to the Tax Com­p­li­ance wor­king group for­med for this pur­pose at the Federal Cham­ber of Tax Advi­sors in Ber­lin. This wor­king group is tas­ked with deve­lo­ping a paper for tax advi­sors on how to set up a tax com­p­li­ance sys­tem. The work is expec­ted to be com­p­le­ted by the end of 2017.

Federal Finance Ministry’s Position Paper on Tax Compliance: Interview with Prof. Ley © Prof. Dr. Ursula Ley

We would like to con­g­ra­tu­late you on your appo­int­ment to the Tax Com­p­li­ance wor­king group of the Federal Cham­ber of Tax Advi­sors. Com­p­li­ance is a topic that con­cerns com­pa­nies in many respects. In the study we con­duc­ted on this mat­ter last fall in con­junc­tion with F.A.Z.-Insti­tut, com­pa­nies also told us that they believe they are fre­qu­ently expo­sed to com­p­li­ance risks in the area of taxa­tion. How do you view this?

That is cor­rect. The inc­rea­sing size and inter­na­tio­na­liza­tion of com­pa­nies on the one hand and the gro­wing com­ple­xity of tax law on the other is lea­ding to a pro­li­fe­ra­tion of tax risks.

Why is there grea­ter recogni­tion of these risks now than a few years ago?

I believe that the stron­ger focus is attri­bu­ta­ble to the fact that cri­mi­nal tax law has been tigh­te­ned up con­s­i­de­r­a­bly in recent years. Where the amo­unt of the tax eva­sion exceeds €1 mil­lion, a pri­son sen­tence may be impo­sed. Incor­rect tax returns can result in cri­mi­nal prose­cu­tion for the tax­payer or their legal rep­re­sen­ta­tive – some­t­hing which the par­ties in ques­tion are natu­rally keen to avoid.

In which areas of taxa­tion are the big­gest com­p­li­ance risks lur­king?

The big­gest com­p­li­ance risks lie in value-added tax, in wage tax due to the mass phe­no­me­non, and in cross-bor­der ser­vices, but also in with­hol­ding tax due to the level of com­ple­xity.

How did com­pa­nies and their advi­sors manage these risks in the past?

There was no ques­tion of tax risks being mana­ged reck­lessly. They, too, were iden­ti­fied in the past. Howe­ver, their iden­ti­fi­ca­tion prior to the filing of the ini­tial tax returns was not that important because in a worst case sce­na­rio the sub­mis­sion of cor­rec­ted tax returns was clas­si­fied as a vol­un­tary self-dis­c­lo­sure to avoid pen­alty, as no dis­tinc­tion was made bet­ween a sub­se­qu­ent tax decla­ra­tion and vol­un­tary self-dis­c­lo­sure. This situa­tion has chan­ged radi­cally. The requi­re­ments for a sub­se­qu­ent tax decla­ra­tion are much less strin­gent than those for a vol­un­tary self-dis­c­lo­sure. This means that for each sub­se­qu­ent tax decla­ra­tion a dis­tinc­tion must now be made bet­ween will­fully and neg­lect­fully incor­rect tax returns, requi­ring eit­her a sub­se­qu­ent tax decla­ra­tion or a vol­un­tary self-dis­c­lo­sure to be sub­mit­ted. The dis­tinc­tion that became necessary entails risks. The assess­ment risk can best be mana­ged by not filing incor­rect tax returns. Howe­ver, this inc­rea­ses the import­ance of tax com­p­li­ance, because the objec­tive of a tax com­p­li­ance sys­tem is timely sub­mis­sion of com­p­lete and cor­rect tax returns.

Parti­cu­larly in light of more strin­gent requi­re­ments for vol­un­tary self-dis­c­lo­sure to avoid pen­alty, the strict com­p­li­ance requi­re­ments may lead to hasty cri­mi­na­liza­tion. What is your opi­nion of the pace at which the tax aut­ho­ri­ties are moving? Does it not put exces­sive pres­sure on com­pa­nies in many cases?

Given the tax eva­sion cases that have come to light in recent years, I can under­stand the more res­tric­tive stance of the tax aut­ho­ri­ties; howe­ver, in many cases it does not make ade­quate allo­wance for the fact that huge num­bers of tran­sac­ti­ons need to be pro­ces­sed and avo­i­ding errors is vir­tually impos­si­ble. Exces­sive cri­mi­na­liza­tion of tax­pay­ers is the­re­fore inap­pro­priate.

Ever since the app­li­ca­tion dec­ree for Sec­tion 153 of the Tax Code was issued on May 23, 2016, eve­r­yone has been tal­king about tax com­p­li­ance. The Fede­ra­tion of Ger­man Indu­s­try has con­fir­med that com­pa­nies are wor­king tire­lessly to imp­le­ment tax com­p­li­ance sys­tems. Is this vigor jus­ti­fied?

Not in my view. There is no legal obli­ga­tion to imp­le­ment a tax com­p­li­ance sys­tem. As far as I am aware, most mid-mar­ket com­pa­nies have tax com­p­li­ance sys­tems in place. The pro­b­lem often lies “sim­ply” in the fact that the exis­ting sys­tems are not docu­men­ted in wri­ting and their app­li­ca­tion is rarely con­trol­led effi­ci­ently. Where a sub­se­qu­ent tax decla­ra­tion is filed, a sys­tem that is not docu­men­ted and con­trol­led will not rule out an accu­sa­tion of intent and reck­less­ness. Now is the time to catch up on docu­men­ting the exis­ting tax com­p­li­ance sys­tem and imp­le­men­ting effec­tive con­trols. At the same time, enter­pri­ses should also take the oppor­tunity to reas­sess exis­ting sys­tems and make any necessary impro­ve­ments.

Is there a “one size fits all” solu­tion for a tax com­p­li­ance sys­tem that can apply to com­pa­nies of any legal form or size?

No, there isn’t, unfort­u­na­tely, because the sys­tem does need to take com­pa­nies’ indi­vi­dual cir­cum­stan­ces into acco­unt.

Can you describe your ideal tax com­p­li­ance sys­tem?

The com­ple­xity of the sys­tem should be adap­ted to the size and com­ple­xity of the enter­prise. The smal­ler the com­pany, the sim­p­ler the sys­tem should be.

Which requi­re­ments must a posi­tion paper ful­fill?

Because a posi­tion paper pro­vi­des gui­de­li­nes for tax acco­un­t­ants that do not tend to have the really big cor­po­ra­ti­ons as cli­ents, the paper should not impose exces­sive requi­re­ments on small and medium-sized com­pa­nies.

On which topics will the paper focus?

I can’t say this for sure at pre­sent. A pro­cess-rela­ted descrip­tion of the tax risks based on tax types is envi­sa­ged. Parti­cu­lar empha­sis will be placed on value-added tax because it is tied to reve­nue and con­cerns large-scale issues that can­not be sub­ject to tests of detail, only sys­te­matic checks.

Which bene­fits will this posi­tion paper have for com­pa­nies?

The paper to be drawn up by the Federal Cham­ber of Tax Advi­sors is mainly inten­ded for tax advi­sors. It aims to pro­vide gui­de­li­nes to allow the advi­sors to imp­le­ment tax com­p­li­ance sys­tems at their cli­ents or help cli­ents imp­le­ment these sys­tems them­sel­ves.


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