1. Background
Who has not yet had this experience? An error occurred, resulting in a particular VAT return being mistakenly declared incorrect.
The question is then: How can the error be fixed? For such cases, the German General Fiscal Code (AO) provides the disclosure and amendment obligation in accordance with sec. 153 AO. The amendment is rather simple: Regarding VAT, the incorrect VAT return is required to be corrected. However, the problem is that the criminal tax law has been drastically intensified over the last few years. Therefore, the legal representative always needs to consider the question: What if the tax authorities – contrary to expectation – assume malice or recklessness? In this case, only an effective self-disclosure may provide impunity. However, the hurdles for self-disclosure are higher, especially regarding VAT, where bulk business transactions are made.
Effective self-disclosures require:
- declarations with respect to the preceding ten years;
- payment of an additional supplementary amount; and
- completeness.
Therefore, simple amendment may be a good solution, resulting in:
- avoidance of disputes with the tax office’s fraud department;
- amendment only for the respective years; and
- no risk of ineffectiveness of the amendment due to further undetected errors.
2. Message from the German Ministry of Finance
The German Ministry of Finance has attempted to extend the scope of the simple amendment declaration. It seems the Ministry of Finance has recognized that it is better, for all concerned, that companies make declarations voluntarily, rather than omitting the declaration due to the great hurdles associated with self-disclosure. The Ministry of Finance has stated that cases will be viewed objectively and that not every “instance of incorrectness” will automatically suggest that a tax offence has been committed. The fiscal authorities need to examine thoroughly whether there actually is the initial suspicion of an intentional act of tax fraud. It is important to note for VAT purposes that neither the amount of the declaration, nor the number of amendments, automatically leads to an initial suspicion of fraud.
On the other hand, only a legal representative, within the meaning of sec. 34 AO, namely the directors of a limited company, the board members of a stock corporation (AG) or the president of an authority, is obliged to amend tax returns. This obligation may only be exculpated by means of effective delegation. The latter requires defining rules and effective monitoring.
It is also important to submit the amendment declaration “immediately“. Unfortunately, the Ministry of Finance does not define this term. Legal literature assumes the declaration should be submitted within two weeks. According to the Ministry of Finance, a formal notification is the first step to be taken, followed by detailed processing and amendment at a later time.
However, the most important message of the Ministry of Finance is:
”If the taxable person implemented an internal control system which serves to fulfill tax obligations, this may be seen as an indication against malice or recklessness, however, he may still be required to examine the respective individual cases.”
This means that one is placed in a better position if an internal control system has been implemented which can be evidenced to the fiscal authorities upon request. Therefore, companies should implement such an internal control system without delay.
3. Requirements for an internal control system
There is no set legal definition for this system. Contrary to some current market advertising, there is no need for a special software solution. An internal control system – following the standard 261 by the Institut der Wirtschaftsprüfer - IDW PS 261 Audit standards – consists of an internal controlling system and an internal monitoring system. Regarding VAT, the internal controlling system includes all systematically defined technical measures and controls for the company in order to meet the legal requirements of VAT law. Therefore, it is clear that there cannot only be one internal control system. Every company needs to establish its own internal control system, which works the most effectively for its individual needs. It is vital, especially regarding VAT, to have the necessary and appropriate IT solutions in addition to an internal tax guidelines. The second part of an internal control system is the monitoring of processes. The internal control system does not work without monitoring (= control measure). Entrepreneurs are advised to document this monitoring (four eyes principle, VAT and input VAT validations, internal and external tax examination).
An internal control system is not witchcraft. These two principles apply: “It is the going, not the getting there, that matters“ and “less is more“. An internal control system keeps developing. Just start by documenting the first rules.
Contact:
Prof. Dr. Thomas Küffner
Lawyer, Certified tax consultant, Certified public accountant
Phone: +49 (0)89 / 217 50 12 - 30
thomas.kueffner@kmlz.de
As per: 02.06.2016
