By Torben Fischer – Forensic, Risk & Compliance Partner & Sandra Söbbing – Tax Advisory Partner at BDO AG Wirtschaftsprüfungsgesellschaft
Breaches of German tax law can result in serious consequences for a company and persons acting for the company. In the case of management, individuals can also often incur the risk of personal liability and even imprisonment, even where the offence is committed unwittingly.
A tax compliance management system (TCMS) can minimise risk in this area. Although such a system can, in practice, be implemented in a practical and pragmatic way, it is often given only limited consideration.
Tax is seldom the focus of compliance measures
Company directors are obliged to organise and supervise their companies in a manner that is compliant with the law. Multinational groups, in particular, have made great efforts over the last few years to design systems that ensure that employees and the corporate bodies of the company comply with regulatory requirements. This is clearly related to the considerable penalties and reputational damage that can result from breaches of the law. However, it can be seen that the systematic way in which compliance is addressed via management systems is often limited to the prevention of corruption and breaches of competition law.
Nevertheless, when it comes to tax compliance, it is regularly the case that the compliance function is often reduced to the timely filing of tax returns, which is often left to the tax department or an external tax adviser to perform satisfactorily. What is certain is that from a risk management point of view, this is insufficient, since tax risks regularly arise in the course of business operations that are not within the responsibility of the tax or accounts departments. These can extend, for example, from field service staff’s entertaining expenses, via IT structures, to falsely labelled events or the question of where goods were in fact sent. If the aim is to ensure that all the data necessary for timely, full and correct compliance with tax obligations will be available to the tax department or a tax adviser, a tax compliance management system must to this extent provide a process for so doing. For, even though an external tax adviser may provide additional assurance, in the event that incorrect and incomplete data are present, the adviser will, as a rule, have no possibility of spotting this and will correspondingly base his /her assessment on this erroneous data.
Until now, tax departments have rarely been involved in the analysis of complex business processes so that they may identify the tax risks and take the appropriate risk minimisation measures leading to complete, correct and timely compliance with tax obligations.
From a tax point of view, the complexity of business processes intensifies where internationally active businesses are concerned, due to the multiplicity of regulations, interpretations and viewpoints of the respective tax authorities involved.
Alongside numerous international initiatives, such as the OECD’s Base Erosion and Profit Shifting (BEPS) action plan, local legislators have also enacted laws and taken initiatives that address these issues in very different ways. In this respect, it can be concluded that the demands on taxpayers are constantly increasing. For this reason, it is precisely internationally active companies that are faced with a constant dilemma. On the one hand, they must comply with the law as it stands; on the other, they run the risk of paying too much tax. An appropriately designed system must therefore provide a solution simultaneously covering both central taxation concerns and adaptation to local systems and requirements.
Stricter rules in Germany – effects on international companies
In addition to general tax obligations such as
- Obligations to notify (Arts. 137-139 of the General Tax Code ([Abgabenordnung])
- Accounting and record-keeping obligations (Arts. 140ff)
- Document-retention obligations (Art.147)
- The duty of truthfulness (Arts. 150, 153)
- The duty of cooperation (Arts. 90, 200)
- The obligation to file tax returns (Arts. 149ff)
the taxpayer is also faced with a great number of constantly more complex documentation requirements and regulatory requirements (e.g. CbCR, e-accounting, etc).
In its letter of 23 May 2016, the German Federal Finance Ministry provided a commentary on the General Tax Code Application Decree (Anwendungserlass zur Abgabenordnung) on the application of Art. 153 of the General Tax Code. This clearly states: “Where the taxpayer has implemented an internal control system that provides for compliance with tax obligations, this can where applicable be a contra-indication against the existence of deliberate intent or carelessness. However, this does not preclude an investigation of any individual case.” This implies that, in the inverse case, that carelessness can be assumed in the event of potential errors or contentious interpretations where these are associated with an unsatisfactory tax compliance management system or indeed with the lack of one altogether, laying the taxpayer open to a charge of tax evasion. In this respect, in case of breaches of German tax law, the risk of material consequences for the company and individuals exists significantly more rapidly than heretofore. For the management, this
can also involve the risk of personal liability and even imprisonment, even where the offence is committed unwittingly.
Failure to comply with obligations can give rise to material consequences for the company and the individuals concerned.
In this connection, financial risks often come first to mind, such as penalty interest or late-payment surcharges. However, there may also be significant penalties by way of the fines on legal persons under Art. 30 of the Administrative Offences Code (Ordnungswidrigkeitengesetz) or sequestration of property under Art. 29a of the Code.
In connection with a Tax CMS, the so-called organisational defaults are of particular importance. Under Art. 130 of the Administrative Offences Code, it is not the tax defaults that are directly penalised but rather the failure to take appropriate measures that would have prevented the commission of such errors or, at least, have made it difficult.
In the event of an intentional or grossly negligent failure to comply with tax obligations, there is also the risk of a recourse to private assets. Careless tax fraud or tax evasion can result in monetary penalties as well as imprisonment. If the amount of tax evaded exceeds €1million, there is, as a rule, no possibility of a suspended sentence.
However, in its judgment of 9 May 2017, the Supreme Court (Bundesgerichtshof) emphasised the mitigatory effect of a Tax CMS and indicated that it can also be taken into account in cases where breaches of the law have already occurred. That is to say, it optimises controls and provides for internal processes to be so designed as to make the occurrence of comparable breaches of the law much more difficult in future.
Effective organisational measures aimed at compliance with tax regulations can thus reduce the risk to management in cases where there may be exposure to charges of deliberate intent or gross negligence.
How such a system can be designed will be explained in more detail in the next issue of Ethical Boardroom, in which we shall, in particular, focus on Practice Note 1/2016 of the Institute of Public Auditors in Germany (Institut der Wirtschaftsprüfer in Deutschland e.V.), which is based on the following seven essential elements:
- Tax compliance-culture
- Tax compliance-objectives
- Tax compliance-risks
- Tax compliance-program
- Tax compliance-organisation
- Tax compliance-communication and Tax compliance-monitoring and enhancement
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The BDO AG Wirtschaftsprüfungsgesellschaft is a founding member of the international BDO network (founded in 1963), which has more than 80,000 employees in 162 countries and in fiscal year 2018 generated sales of $8.9billion.