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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