National rules in respect of a Tax Control Framework, differences due to size
Despite the fact that there is an OECD report dated 2013 and the OECD guidance was issued on 13 May 2016, there is no German national legislation but only guidance from the Ministry of Finance issued in May 2016. This deals with one article of the German Fiscal Code regarding correction of tax returns and has to be considered in close context with the allegation of tax fraud. Tax fraud is connected to penalties on both financial and personal (criminal) liability, in addition to reputation damage.
According to this guidance, a certain benefit may be seen: “If a tax control framework is implemented to comply with the tax duties, this may been considered as an indication against deliberate intention or recklessness. It does, nevertheless, not release from checking the particular case.” Unfortunately, no clear further guidance has so far been given by the tax authorities either on the form or size of the TCF or on differences for companies of various sizes.
Benefits for the taxpayer resulting from a TCF
In Germany, no benefits – such as an instruction to speed up tax audits, get advance certainty due to faster rulings or material benefits – are laid down in writing. Nevertheless, there is clear commitment from the German tax authorities to look into the implemented TCF. Also, once the timely tax audit (“zeitnahe Betriebsprüfung”) is in place (currently only if all past tax audits have already been completed) there is a strong focus on tax audit checking and on processes implemented by the taxpayer such as a TCF.
Are the tax authorities bound to check or consider the TCF? If yes, also for past years?
In Germany, no clear instructions from the Ministry of Finance have yet been received by the tax auditors but broad training is planned as, in the past, there was strong pressure on tax auditors to involve the tax fraud investigation departments. With the new guidance, it will be clearer in which cases there is no initial suspicion – in default of intention or recklessness. In their own interest, the tax authorities will also consider an implemented TCF in order to get a better insight into the structure and organisation of the taxpayer.
In Germany there is also no clear guidance on this yet, but we expect that TCFs may be considered by the tax authority only for future years. Nevertheless, the implementation of a TCF may be considered as an indication that a taxpayer is following the rules, mainly not evading tax either with intent or out of carelessness.
Cooperative compliance – is it agreed by the fiscal authority? Cross-border applicability of cooperative compliance
In Germany, there is a clear concept of hierarchy of the tax administration towards the taxpayer, even more so as large companies are under ongoing scrutiny by the tax audit, not only randomly as in other countries. Hence, no risk-based selection of taxpayers is applied. Nevertheless, in most cases there is now already a fair relationship between the tax administration and taxpayers based on mutual respect and trust.
Despite the fact that there are not even local rules on cooperative compliance in Germany, the German Ministry of Finance has realised that, in a globalised world and with the implementation of BEPS, tax audits also need to cooperate globally on a grand scale. A high level of success can be seen in the “joint audits”. The Cooperative Compliance Model may even be widened cross-border, possibly also with the testing of systems and processes.
Are there any rules regarding digitisation of tax processes?
In Germany, digitisation is already a reality in most areas of taxation. Especially in mass areas such as VAT and wage taxation, digitisation was already implemented some years ago. Electronic filing of corporate tax returns and tax balance sheets has also been required since 2015 and is also highly appreciated for personal income tax returns. Tax auditors are bound to get an insight into the IT tools that are used and they have had data access on the accounting system for more than 10 years.