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.