Returning to tax compliance through a voluntary disclosure without penalty sees tax consultancy offices face challenges that they appear unable to handle in many cases; see the Hoeneß case, for example.
Income from complex financial products, different legal situations within the subsequent declaration period, and confusing and unsatisfactory bank records are pitfalls for a successful voluntary disclosures. Simple manual entry or determination of income typically generate error potential and thus substantial risks for the success of the voluntary disclosure.
risk mitigation through a software developed in-house for creating voluntary disclosures – German Tax Reporting – greatly increases efficiency by automating the computation and assessment process. With this software and our professional expertise, we can calculate capital gains faster and more accurately. For our clients, this also implies cost savings in addition to the certainty of a successful voluntary disclosure.
Voluntary disclosure without penalty: the way back to tax compliance.
Voluntary tax disclosure has been in the public focus for quite some time – initially through state procurement of ‘tax offender CDs’, followed by discussions on a potential tax agreement between Germany and Switzerland, and finally due to the disclosure of cases affecting well-known persons, which partly ended with legal proceedings and convictions. This particularly affects German tax payers with capital gains abroad.
Pursuant to §371, paragraph 1 of the Fiscal Code of Germany, the taxpayer has the option of achieving impunity by through a retroactive voluntary declaration of previously untaxed capital gains. Exemption from punishment only takes effect if a various prerequisites are complied with – for example, complete declaration of all previously non-taxed earnings.
Group requests as a new instrument of Germany’s financial administration
Germany’s treasury recently took its information acquisition to a new dimension with the introduction of what are known as group requests. An amendment to the Amtshilfe-Durchführungsgesetzes (ADG) (Administrative Assistance Implementing Act) on 13 June 2014 laid down the foundations for such requests by foreign financial authorities in Austria. This means that tax authorities can use a standardised, cross-border enquiry to collect information about a large number customers of one or more banks without having to name or provide individual details of the persons who are the subject of the query.
It can be assumed that the German financial authorities will increasingly make use of this instrument in the coming months, most likely retroactively to the year 2011. This contributes enormously to the probability of discovery.
Bundesrat raises no objections to tightening initiated by the federal government
On 24 September 2014, the federal government adopted a draft law to tighten conditions for avoiding penalties in cases of voluntary declaration. In its session on 7 November 2014, the Bundesrat indicated that it would not be raising any objections to this. The following changes are therefore expected to come into force as of 1 January 2015:
- Extension of the rectification period to ten years (previously five years, in line with previous legal limitation periods) by increasing the legal prosecution period
- Extension of the blocking reasons through consideration of VAT and income tax reviews, as well as extending the announcement blocking reasons (audit instruction or opening of criminal or penal proceedings) from the immediate perpetrator to all persons involved in the act their representatives
- Reduction of the limit up to which voluntary disclosure of tax evasion remains unpunished without payment of an additional amount, from 50,000 euros to 25,000 euros
- Graduation of the sum to be paid depending on the actual amount of tax evaded
- Exemption from punishment only possible if the accrued interest (including interest on the penal surcharge) are paid in good time in addition to the outstanding tax
- Longer limitation period due to suspending the commencement of the limitation period for determination of capital income from states that are not Member States of the EU or European Free Trade Association (third countries)
For this reason, urgent action is required for some taxpayers who have not correctly taxed their foreign income from investments. We are happy to advise you on this.
Our expertise in implementation
As we have successfully accompanied a large number of voluntary declarations, we have broad experience and specific expertise in the computation of the income from investments to be taxed in this context. On top of this, we deploy our in-house developed tax computation software – German Tax Reporting.
The challenge: a complete statement of income
Stating the income from securities assets for tax purposes is a generally complex and detailed topic as all cash flows must be correctly disclosed and posted. German customers will typically receive annual statements of their securities accounts, but will be unable to derive the income subject to declaration in Germany for tax purposes from this. It is not uncommon for the persons involved to be more or less unable to understand the contents of such reports. The fact that managed assets may consist of various investment products also complicates the situation. Especially in the case of capital growth funds, it is often impossible to fully and correctly reflect the earnings based on typical bank documents. The task of drawing up a statement of income is also complicated by the fact that the tax records of foreign banks are not in tune with the German tax system.
Our solution: software – German Tax Reporting
This is the point at which German Tax Reporting (GTR) plays out its strengths. GTR is a database-based tax simulation tool developed by us that substantially facilitates precise determination and tax coverage of all transactions and payment flows. GTR performs a complete tax simulation for all conceivable investment products (e.g. in managed foreign accounts). The tool’s approach enables the processing of extensive managed account transactions, also over very long (retroactive declaration) periods.
Through numerous automatic functions (currency conversion, classification of securities, correct disposal gains based on the FIFO method, allocation of professional expenses, etc.), we are able to compute income with great precision and quickly. This translates to cost and time savings for our clients.
In addition to a detailed statement, GTR also provides an overall statement for each calendar year (also on official templates), disclosing in a summary the amounts that need to be entered in the lines of Annex KAP (capital gains) of the tax return for the year in question. The client does not need to perform any further computations. In this way, we can determine the correct amount of taxable income in a relatively short time.
GTR is a tried-and-tested tool that has seen several years of deployment and has proven its value in practical applications. Due to its depth of detail, the tool also guarantees that queries are extremely rare in case of reviews by the tax authorities.
Where further information relating to capital income is required as part of an ongoing procedure, GTR can be deployed retroactively as an instrument thanks to its exhaustive, detailed and transparent computations, thus quickly satisfying other demands and avoiding the risk of fiscal litigation in advance.
To sum up
Our software offers the fast computation that is often required, especially in the case of voluntary declarations, for all incomes, for example, from foreign securities accounts. Beyond this, the statements it provides are transparent and precise – an essential prerequisite for avoiding penalties in case of voluntary declarations. GTR provides our clients the prerequisites, in terms of quality and time, for a successful voluntary declaration and faster conclusion of the proceedings.
In addition to a direct mandating by taxpayers, we have also conducted a variety of voluntary declarations in cooperation with law firms, defence lawyers and third-party tax consultants in recent years. In these cases, we are tasked with computing the earnings for reasons of efficiency. The cooperation partner receives the annual income calculations (detailed statements as well as Annex KAP) for submission to the tax authorities.