Voluntary self-disclosure vs. correction of tax returns: BMF publishes decree on distinction between a voluntary self-disclosure of tax evasion and a correction of returns according to Sec. 153 Fiscal Code / Relief by way of an Internal Tax Control System
Given intensified statutory requirements on a voluntary self-disclosure in cases of tax evasion, there has been increased focus on another instrument provided by the German Fiscal Code (AO): according to Sec. 153 AO taxpayers are allowed and even obliged to make a correction of returns. In the past, neither Tax courts nor the Tax authorities have paid much attention to the distinction between those two legal instruments.
Now, with a decree released on 23 May 2016, the German Federal Ministry of Finance (BMF) gives its view on this topic. The BMF clarifies when there is a need either for a voluntary self-disclosure of tax evasion or for a “simple” correction of tax declarations. The BMF also sets out under which conditions a taxpayer’s declaration has to be qualified to constitute which of the instruments. For the first time the tax authority also mentions that implementing an Internal Tax Control System might help to relieve company’s managers from criminal allegations.
Important decision: self-disclosure or correction?
The distinction between a voluntary self-disclosure in order to avoid penalty on the one hand and a “simple” correction of a former return on the other hand is an important turning point for the further dispute with the tax authorities or at worst the prosecutor. It can be noticed that tax authorities more often consider simple and commonly made corrections of tax returns to have criminal relevance and, thus, the taxpayer might be accused of a tax offence. Furthermore the penal surcharge according to Sec. 398a AO up to 20% of the subsequent payable taxes only applies in cases of voluntary self-disclosures, but not when doing a simple correction of returns.
Additionally, self-disclosures are only valid and thus relieve from criminal prosecution, if they are complete. Otherwise, such self-disclosures may be ineffective and might lead to legal penalties – even for the company’s managers. For companies, providing correct tax returns is becoming increasingly difficult due to complex corporate structures and ever increasing regulations on taxation. That said taxpayers might often have a duty for a correction, but no need for a voluntary self-disclosure. Of course there are exceptions to this rule, for example when taxpayers continue with filing incorrect returns although the apparent mistake had already been challenged in a former tax audit. But those situations do not frequently arise and therefore do not usually induce companies to make a risky self-disclosure.
BMF’s decree points out specific legal issues
In the decree the BMF gives its view on several specific legal issues and provides instructions on how the tax authorities in Germany will handle the topic in the future. In detail, the BMF sets out under which conditions taxpayers have to make a self-disclosure because of a criminal conduct. In particular the BMF describes its point of view regarding several types of criminal actions and at which time the taxpayer has to recognize any failures. The BMF stresses that the amount of the tax evasion or the number of corrections are, on their own, not a sign for criminal behavior. It is said explicitly that every case has to be subject to a review by the authorities, which gives some room for negotiations with the tax office. In addition the BMF clarifies that taxpayers are allowed to make a detailed correction in due time after having made a notice to the authorities. Moreover and in particular for practical purposes the definition of recklessness will be helpful, which is now officially defined as negligence to a highly considerable extent. Thus, the correction of returns according to Sec. 378 para 3 AO in order to avoid fines might become more relevant for groups.
Relief by Internal Tax Control System
As being reproached with tax evasion does not require deliberate intent, but merely accepting that tax returns might be understating taxes, there is a need to protect management of corporates from unwarranted criminal prosecution. The decree therefore mentions a possibility for relief via an Internal Control System with its focus on taxes. This enables taxpayers to demonstrate that they did not act intentionally or negligently. Unfortunately, the BMF does not give further information on how to implement such system in detail. Existing mechanisms (e.g. SOX controls) might already be helpful and might moreover act as a starting point to develop a tax focused control system, even when they do not fully concentrate on taxes at the moment. It remains to be seen, whether the statements in the draft position paper published by the German Institute of Public Accountants (IDW) on the implementation of an Internal Tax Control System becomes a standard.
The decree and the statements contained therein, in particular concerning the distinction between a voluntary self-disclosure and a correction of returns do benefit taxpayers. Not only does the BMF clarify some questions, but it also creates a fair balance between both the taxpayers’ and the tax authorities’ interests. By providing for an Internal Tax Control System, the BMF gives Taxpayers an opportunity to decrease tax risks.