de en
Nexia Ebner Stolz

Services

Voluntary disclosure of tax evasion – it’s getting more expensive and more complicated

The debate about the voluntary disclosure of tax evasion and its exculpatory effect is not likely to end anytime soon given the prominent cases that have recently come to light. In fact, it may be one of the issues that the Grand Coalition addresses right away and enacts into law, even as early as the second half of this year according to several politicians.

Once again, the cen­tral ques­tion is whe­ther to com­p­le­tely abo­lish the pos­si­bi­lity of dis­c­lo­sing past tax sins to the fis­cal aut­ho­ri­ties and the­reby avoid punish­ment or whe­ther at a mini­mum to seve­r­ely res­trict the cir­cum­stan­ces in which vol­un­tary dis­c­lo­sure can be used.

Rep­re­sen­ta­ti­ves from the federal and state finance mini­s­tries are due to meet in March 2014 for intense debate on this issue. Details of this task force’s work were relea­sed recently.

First, the good news: The task force recom­mends pre­ser­ving the oppor­tunity to vol­un­ta­rily dis­c­lose tax eva­sion with excul­patory effect. Under cur­rent law, tax­pay­ers are requi­red, and if necessary can be com­pel­led, to notify the tax aut­ho­ri­ties in tax pro­cee­dings of any infor­ma­tion rele­vant to deter­mi­ning the amo­unt of taxes they owe. This is ent­i­rely rea­sonable from the per­spec­tive of the rule of law. Howe­ver, when tax­pay­ers pre­sent com­p­lete and cor­rect infor­ma­tion, this can easily lead to con­clu­si­ons about ear­lier instan­ces of tax eva­sion. In view of the fact that people gover­ned by the rule of law are pro­tec­ted from self-incri­mi­na­tion and are not requi­red to parti­ci­pate in pro­ving their own guilt, such swee­ping duties to coope­rate are only jus­ti­fied if the oppor­tunity for vol­un­ta­rily dis­c­lo­sing wrong­doing goes hand in hand with an offer of pro­tec­tion from cri­mi­nal prose­cu­tion. This aspect is rou­ti­nely igno­red in pub­lic debate when refe­rence is made to the uni­que nature of the vol­un­tary dis­c­lo­sure of tax eva­sion in Ger­man cri­mi­nal law and the alle­ged pri­vi­le­ging of tax eva­ders it entails. For unlike any other offen­ders, delin­qu­ent tax­pay­ers are obli­ga­ted to make con­ti­nual decla­ra­ti­ons about the object of their mis­con­duct in the con­text of lengthy admi­ni­s­t­ra­tive pro­cee­dings.

Of course, the requi­re­ments for excul­patory vol­un­tary dis­c­lo­sure are expec­ted to become much stric­ter. One item under con­s­i­de­ra­tion is expan­sion of the look-back period from its cur­rent five years to ten years, which means that, in order to be exempt from punish­ment, tax­pay­ers would have to com­p­le­tely cor­rect their returns for all assess­ment periods not yet sub­ject to the sta­tute of limi­ta­ti­ons. At first glance, this seems under­stan­da­ble. Howe­ver, it does raise some ques­ti­ons. Do the pro­vi­si­ons of tax law that govern the cal­cu­la­tion of time limits also apply for cri­mi­nal law pur­po­ses? Is a refe­rence to the tax law pro­vi­si­ons suf­fi­ci­ent for mee­ting the cla­rity requi­re­ments of cri­mi­nal law? One con­cern is that this type of an expan­sion of the look-back period will make effec­tive vol­un­tary dis­c­lo­sure vir­tually impos­si­ble in many cases. Ima­gine the dis­co­very of a cor­po­rate tax ano­maly from 2012 for which inten­tio­nal mis­con­duct can­not be ruled out. If the record is cor­rec­ted by filing an amen­ded return with excul­patory effect, records from the ten pre­vious years would have to be meti­cu­lously scree­ned in order to rule out the pos­si­bi­lity of cri­mi­nal prose­cu­tion. Any­body with even the sligh­test idea of what such a review entails in practice can guess that this is impos­si­ble. Con­trary to what many politi­ci­ans seem to believe, the world is not made up exclu­si­vely of vir­tuous pay­roll tax­pay­ers on the one hand and owners of unde­cla­red bank acco­unts in tax havens on the other.

Ano­ther item being con­s­i­de­red is modi­fi­ca­tion of the 5% pen­alty that must be paid on delin­qu­ent tax lia­bi­li­ties of 50,000 euro or more per offense if a tax­payer wis­hes to avoid cri­mi­nal prose­cu­tion. A reduc­tion in the exemp­tion limit, a sli­ding scale of penal­ties based on the amo­unt owed, and an inc­rease in the pen­alty are being dis­cus­sed. There is talk of asses­sing penal­ties at a rate of 2% to 10%, with the lat­ter being con­s­i­de­red for eva­sion amo­un­ting to 1 mil­lion euro or more. One criti­cism on this point is that tax­pay­ers already owe the pen­alty regard­less of whe­ther the tax advan­tage that bene­fi­ted them was long-term in nature or just a short-term advan­tage that was rever­sed as soon as they sub­se­qu­ently filed their input VAT returns.

There is a ray of hope from a busi­ness per­spec­tive. Con­sul­tan­cies (see novus bri­s­ant June 2013) and busi­ness asso­cia­ti­ons have been vehe­ment sup­por­ters of trea­ting tax return cor­rec­ti­ons, parti­cu­larly those con­cer­ning VAT and pay­roll taxes, as de facto vol­un­tary dis­c­lo­sure, and now the tax aut­ho­ri­ties also seem to think this makes sense. Under cur­rent law, vol­un­tary dis­c­lo­sure of tax eva­sion has an excul­patory effect only if all omit­ted or incor­rect infor­ma­tion wit­hin the look-back period is filed or cor­rec­ted. Now, the task force is pro­po­sing to treat the sub­se­qu­ent filing of omit­ted infor­ma­tion or cor­rec­ti­ons as par­tial vol­un­tary dis­c­lo­sure with excul­patory effect.
In con­clu­sion, if the task force pre­vails, tax­pay­ers will still be able to use vol­un­tary dis­c­lo­sure of tax eva­sion as a path back to tax com­p­li­ance. Howe­ver, it is highly likely that the con­di­ti­ons for taking advan­tage of vol­un­tary dis­c­lo­sure will become much more res­tric­tive in the fore­seeable future. The­re­fore, any­body wis­hing to take advan­tage of vol­un­tary dis­c­lo­sure in its cur­rent form in order to avoid punish­ment is well advi­sed to act soon.

back to top