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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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