New requirements for tax compliance in companies against the backdrop of a stricter legal framework

Against the backdrop of stricter requirements for voluntary self-disclosure with exemption from punishment, the question of how to differentiate between this and the correction of negligent errors in the tax return or declaration is becoming increasingly important. The Application Decree to the Fiscal Code (AEAO), which contains the guidelines for the actions of the tax authorities and thus creates a self-binding obligation for the authorities, has now been amended for this purpose. The AEAO on Section 153 AO was previously unfilled. This gap has been closed by the amendment. It contains fundamental explanations on Section 153 AO, which regulates the obligation to correct tax returns and the like.

1. changed environment

1.1 Legislation

The law on voluntary declarations exempting from prosecution has been amended several times in recent years. The following periods of validity can be distinguished:

a) 01.09.2002 - 02.05.2011

Until the so-called Anti-Money Laundering Act (Gesetz zur Bekämpfung von Geldwäsche und Steuerhinterziehung vom 28.04.2011, BGBl I, 676, BT-Drucks. 166/11) that incorrect or incomplete information is corrected or supplemented by the tax authorities or that omitted information is made up for by the tax evader. The conditions for effectiveness had to be examined separately for each tax evasion offence. The offender was not forced to "wipe the slate clean", i.e. to disclose all evasion offences committed at once. Partial self-reporting was possible.

b) 03.05.2011 - 31.12.2014

The Anti-Money Laundering Act introduced the additional requirement that all tax evasions of the same tax type that are not yet time-barred under criminal law must be disclosed. In addition, the grounds for blocking a voluntary disclosure have been extended, for example by the announcement of an audit order or the new limit of EUR 50,000 combined with a penalty surcharge in accordance with the new Section 398a AO.

c) From 01.01.2015

The last reform of voluntary disclosure brought with it considerable tightening (cf. in detail Betz/Thiede NWB-EV 6/2015, p. 189 et seq.). From a reduced evasion amount of more than 25,000 euros, a voluntary disclosure has only been possible with payment of a penalty surcharge since 1 January 2015. The surcharge is staggered as follows:

The surcharge is in addition to the tax to be paid in arrears and the often not inconsiderable interest of 6% per year. In addition to the payment of tax arrears, a further condition for exemption from punishment is that the tax office is not already aware of the facts of the case and that the taxpayer fully corrects all offences of a type of tax that are not time-barred - or at least the last 10 years.

Exceptions to income tax and VAT

Labour errors cannot always be avoided. Especially in complex tax matters in companies, errors occur without any criminal intent. A special regulation was introduced on 1 January 2015 in Section 371 (2a) of the German Fiscal Code (AO) for VAT and payroll tax proceedings. According to this, a partial self-disclosure is possible for corrections to advance VAT returns and wage tax returns - as was generally possible until 2 May 2011. The barring ground of Section 371 para. 2 sentence 1 no. 3 AO, i.e. exceeding the limit of EUR 25,000, also does not apply if the tax evasion was committed by breaching the obligation to submit a complete and correct advance VAT return or income tax return in good time. The barring ground of discovery of the offence (Section 371 para. 2 sentence 1 no. 2 AO) does not apply if the discovery of the offence is based on the fact that an advance VAT return or income tax return was subsequently submitted or corrected. However, these simplifications do not apply to tax returns that relate to the calendar year, such as the annual VAT return.

1.2 Case law

In the meantime, the Federal Court of Justice has also decided to tighten the rules in its judgement of 27 October 2015 (1 StR 373/15, BeckRS 2016, 02436). It ruled that any tax evasion exceeding EUR 50,000 constitutes large-scale tax evasion within the meaning of section 370 para. 3 sentence 2 no. 1 AO. The amount above which tax evasion is considered to be on a large scale is not defined by law, although serious consequences are linked to this. Above this threshold, a custodial sentence of at least six months must be imposed (exclusively), which, according to case law, can no longer be suspended if the evasion exceeds millions. A fine is therefore no longer an option from an evasion amount of 50,000 euros. The BGH has thus tightened its own case law. According to previous case law, a limit of 100,000 euros applied here.

A further aggravation in this judgement lies in the fact that the Federal Court of Justice exceptionally assumes unity of offence if evasion is caused by the same declaration or if several tax returns are submitted at the same time through a physical act. In principle, in criminal tax law, the submission of each incorrect tax return is to be regarded as a separate offence depending on the type of tax, assessment period and taxpayer. In the present case, the tax types VAT and trade tax were added together to determine the penalty, so that the (new) limit of EUR 50,000 was exceeded. This is justified by the fact that the declarations contain the same incorrect information about the tax bases. The court itself recognises that this will generally be the case. This is because it is difficult to imagine making inconsistent statements in the VAT return, the trade tax return and the income tax return or the corporation tax return in the context of determining profits, as the taxpayer would otherwise become entangled in inconsistencies. The exception described above will thus become the rule and therefore represents an immense tightening of the rules. In view of the lowered threshold (see para. 1.1), the question of the "uniform physical act", which is regularly handled electronically in the modern tax world, will in more cases become a question of fate over mere financial losses or deprivation of liberty.

1.3 Tax administration - new AEAO on Section 153 AO

In the case of tax evasion, the conditions for a return to tax honesty are thus generally stricter, while the threat of punishment is more severe. In this environment, the new explanations in the AEAO are of particular importance.

Particularly relevant in practice are statements on the intent or recklessness required for tax evasion. It is interesting to note that a control system set up by the taxpayer is considered an indication (but only that) against intentional and reckless behaviour. There are also regulations on the scope of the correction obligation, the group of persons obliged to make corrections and the time of notification and correction. Reference is made to the interaction between correction and voluntary disclosure:

Compared to the discussion draft, a new passage has been added in para. 5.2 on the question of the obligation to report and correct in the case of conditional intent. In these cases, a notification in accordance with Section 153 AO is to be considered immediate for as long as the taxpayer would have a reasonable amount of time to prepare a voluntary disclosure in accordance with Section 371 AO.

If, on the other hand, in the case of a wilful breach of the duty of disclosure and correction, the incorrectness is recognised and no disclosure is made in accordance with Section 153 AO, this constitutes tax evasion by omission, which can only be exempt from prosecution if the other requirements are met.

The new explanations contain some clarifications, but in other places still leave open questions that were not clarified after the discussion of the draft. For practical purposes, it would have been particularly desirable to have explanations on the nature of an internal control system, which should be used as evidence against intent or negligence. There has been no change here in the new explanations compared to the discussion draft.

2. tax compliance in the company

An internal control system (ICS) is of central importance. This is not defined in more detail in the AEAO, so that a certain amount of uncertainty remains for taxpayers who want to behave in a risk-conscious and law-abiding manner. A number of systems and standards have already been established under the heading of "tax compliance" that can be referred to, such as PS IDW 980, which deals with compliance systems.

What was previously only mandatory for listed companies with the "Corporate Governance Codex" and was often dismissed as a buzzword has now become an indispensable part of corporate governance even in medium-sized companies and an important component of liability protection for managing directors and board members with the AEAO on Section 153 AO.

The first step in establishing a tax compliance system is to analyse the relevant fields of action and identify the regulations that are important for the company. On this basis, internal guidelines should be formulated and appropriate measures implemented. In many cases, existing structures can already be utilised. Foreign matters have emerged as typical risks in tax law. These are often a focus of tax audits and are particularly prone to errors, for example in the area of VAT with numerous verification requirements.

Once the risks have been identified, the existing regulations in the company should be analysed. Employment contracts, service instructions and company agreements, such as a travel expenses policy, can be helpful here. The requirements for an ICS must also depend on the size of the company in question. Commissioning a tax consultant to carry out ongoing bookkeeping is already a measure to fulfil tax obligations (according to the Federal Chamber of Tax Consultants in its statement on the discussion draft of an application decree on Section 153 AO). Based on the existing regulations and the corresponding structures, a need for action must be identified. One possible response is the drafting of a compliance manual or similar regulations. This can be drafted in-house. However, depending on the organisation of the company with or without its own tax department, it may be advisable to seek external expertise.

The labour law aspects must also be taken into account for implementation in the company. The question of how employees are required to comply with the new measures must be clarified under labour law. Are there regulations in the employment contracts? Should the works council be involved? Is training required?

In addition to implementing the new measures, monitoring compliance with them is also part of a functioning compliance system. The introduction of the "four-eyes principle" can be a component of a compliance control system. The appointment of a "compliance officer" is also conceivable. This position does not necessarily have to be located within the company. It can also be filled externally, for example by a lawyer or tax consultant.

Finally, it is important to keep the regulations in place up to date, particularly in the area of rapidly changing tax law. Measures must be taken to identify the relevant changes and how this information is communicated to the relevant employees.

A final part of a compliance system is an emergency plan. In tax law, this includes the arrival of the tax investigators. Such a plan must specify who informs whom, to whom investigators are to be referred, who is authorised to provide information and who is not.

Markus Betz is a lawyer and tax consultant at TAXGATE, a tax law firm specialising in transactions, investments and tax compliance.