Topics
You are here: Home / Topics / Tax

Document Actions

Tax

2017 Annual Report - spring report No. 12 - VAT control procedure – provide full coverage

Since 2010, the VAT control procedure has also covered intra-Community services. Due to a lack of ICT support, the tax authorities’ ability to control these services was inadequate. The Federal Finance Ministry should close the gaps in the system in order to ensure effective control.

Since 2010, the EU-wide control procedure has also covered intra-Community services. Accordingly, taxable persons have to report the delivery of services in their recapitulative statements. This concerns e.g. lawyers or experts who advise clients resident in other EU Member States. The Member States share data received in these statements for control purposes. Furthermore, taxable persons shall report their intra-Community turnovers in their preliminary VAT returns and their annual VAT returns.

Responsibilities for the processing of the returns are fragmented. The preliminary and annual VAT returns are filed with the tax office. The recapitulative statements are received by the Federal Central Tax Office. The tax offices periodically communicate the data on intra-Community services from the preliminary and annual VAT returns to the Federal Central Tax Office.

We found that the Federal Central Tax Office did not match the amounts of the recapitulative statements against those of the VAT returns. It was therefore unable to identify deviations between the recapitulative statements and tax returns. Control of cross-border services was thus not ensured. In the light of a turnover of more than €126 billion in 2015, this represents a considerable risk to tax revenues.

We recommended that the relevant data in recapitulative statements, the preliminary and annual VAT returns be compared electronically. The authorities should scrutinise any deviations found.

 

2017 Annual Report - spring report No. 11 - Improve involvement of the vehicle licensing authorities in the taxation of new vehicles imported from other EU countries

The vehicle licensing authorities fulfil their reporting duty in connection with the taxation of new vehicles imported from other EU countries only inadequately. This makes it difficult for the tax offices to control the acquisitions of vehicles. The vehicle licensing authorities should in future consistently fulfil their reporting duty to secure tax revenues.

Private individuals are liable to pay tax due when purchasing new vehicles in other EU countries. In addition to information exchange among the EU Member States, a national control procedure is in place to ensure taxation. Under this procedure, the vehicle licensing authorities have to report to the tax offices any new vehicles imported from other EU countries. This enables the tax offices to control whether the purchasers have paid tax due on these acquisitions.

We found that often the vehicle licensing authorities did not comply with their statutory obligation. Furthermore, they sent only hard copy reports to the tax offices. For this reason, tax offices were unable to adequately verify the vehicle acquisitions.

We therefore requested the Federal Finance Ministry to urge the Federal Transport Ministry to improve cooperation between vehicle licensing authorities and tax offices. To this end, the previously paper-based reporting procedure should be replaced by the electronic communication of data.

 

2018 Management Letter – VAT on e-commerce – offline sales from non-EU based traders

0 Executive summary

0.1
In earlier work we examined taxation regarding e-services (online sales) provided by traders located outside the European Union (non-EU based businesses). We found that only few e-commerce traders were registered to pay tax and that practically no checks were carried out. This was the driver for us to expand our audit work to non-EU based traders that deliver consignments (offline sales) to final consumers in Germany.

0.2
In general, non-EU businesses trade on e-marketplaces to offer their goods. The marketplace thus gathers relevant data on such traders’ turnover. In order to reduce delivery times, traders temporarily store their goods in fulfilment houses located in the target country. The customs administration imposes value added tax (VAT) on the import of goods. Once a customer has purchased an item over the internet, the consignment is sent from the fulfilment house to the customer. In Germany, VAT is due on consignments ordered over the internet.

0.3
We found that, as a rule, non-EU based online traders did not comply with their duty to pay VAT in Germany, irrespective of whether or not they paid import VAT. The tax authorities only captured data on businesses that had voluntarily registered with the tax authorities or on which operational data or intelligence was available. Tax authorities are neither aware of the actual number of non-EU based businesses selling goods in Germany nor of their offline sales that are subject to VAT. Therefore, the number of non-registered online retailers is likely to be largely understated.

0.4
We also found that even registered non-EU based businesses did not comply with their duty to pay VAT in Germany. They often failed to file returns or pay VAT. Frequently, tax authorities did not succeed in enforcing their tax regime. This led to number of cases of VAT shortfalls since the tax due was higher than the import VAT paid.

0.5
We considered it imperative that the tax authorities ensure that VAT revenues be collected from offline sales. To this end, we recommended that the Federal Ministry of Finance ensure that e-marketplaces in the European Union are also subjected to taxation. Such e-marketplaces should be held liable to remit the VAT imposed on the businesses to the respective member state’s tax authorities. In addition to that, we recommended that the businesses designate a fiscal representative in the target country.

0.6
The Federal Ministry of Finance stated that a working group composed of representatives of the Federal Government and the Federal States was discussing our recommendations. The Ministry stated that the Conference of the Ministers of Finance of the Federal States had requested it to develop a provision governing the liability of e-marketplaces and to consider the pros and cons of an additional fiscal representative rule. The Ministry intended to submit a Bill in the first quarter of 2018. According to the Ministry, at its initiative, in December 2017, the European ministers of finance had adopted far-reaching measures to ensure that tax revenue from online trading be collected in full.

0.7
We welcome the steps taken at European level according to which e-marketplaces will be covered by taxation of non-EU based online traders. In order to address tax erosion prior to the implementation of the EU measures in 2021, we hold that timely action needs to be taken at national level. The duty to designate a fiscal representative for non-EU businesses and imposing on e-marketplaces the liability to remit VAT are appropriate instruments for enforcing tax claims.

 

2017 Annual Report No. 25 - Monitoring system can hardly prevent losses of tax revenue

The Federal Ministry of Finance has so far not succeeded in fully securing VAT payments for goods or services delivered from other EU states. The monitoring system used for this purpose in the last 25 years does not cover most farmers who are subject to flat-rate taxation (‘flat-rate farmers’). Losses of tax revenue can therefore hardly be prevented.

Where German traders purchase goods or services from other EU Member States, they owe VAT for these deliveries. In order to secure the tax payments of the traders, the tax administration has for 25 years used a computerised monitoring system by which the deliveries declared by traders in preliminary and final VAT returns are checked against control data from other EU Member States. Such checks have been carried out annually since 1993 and, in addition, at quarterly intervals since 2016.

Using flat-rate farmers as example, we checked as to whether the monitoring system can prevent losses of tax revenue. When devising the monitoring system, the Federal Ministry of Finance expressly selected the flat-rate farmers as a target group.

We found that, as a rule, the monitoring system does not effectively cover flat-rate farmers. It is based on data which the farmers are not compelled to record. As a result, the annual checks cover only a small portion of the flat-rate farmers. The quarterly checks are even fully useless. For the last nearly 25 years, it has hardly been possible to prevent losses of tax revenue for flat-rate farmers. In view of the large number of 181,000 flat-rate farmers, we find this situation unacceptable.

We have urged the Ministry to ensure coverage of the flat-rate farmers by means of the VAT identification letters already in place in the tax offices. This would ensure that all flat-rate farmers are covered by both the annual and quarterly checks under the monitoring system.

 

2017 Annual Report No. 27 – Abolish tax privileges of tobacco industry

Tobacco products which the manufacturers give free to their employees are exempt from tobacco tax. This exemption is no longer justified, is contrary to tax equity and questionable in terms of health policy. Since 1989, we have repeatedly recommended that the exemption be abolished. The rejection of our recommendation by the Federal Finance Ministry has resulted in losses of tax revenue in the total amount of €171.7 million.

Cigarettes and cigars are subject to tobacco tax. Tobacco products given free by manufacturers of tobacco products to their employees are exempt from tobacco tax. Nationwide, this benefits about 11,000 employees in the tobacco industry. For instance, an employee receives 600 cigarettes per month (which is equivalent to about 31 packets).

The tax exemption was introduced after the First World War. It was to reduce theft by employees and boost working morale. This motive is now obsolete. Protecting the tobacco industry against theft by their employees or boosting their working morale is not the task of the taxpayer. By using this justification, the entire retail trade could claim tax exemption. Since only a small group benefits from the tax treatment, this is an issue of tax equity. Finally, the tax exemption is questionable in terms of health policy. It contradicts the goals of the Federal Government and WHO, i.e. to reduce the proportion of smokers in the population.

The Federal Finance Ministry has spoken out against abolishing the tax exemption for tobacco products given free by tobacco manufacturers to their employees, arguing that the reasons for the tax exemption were still valid and that the infringement of tax equity was negligible.

The Ministry’s opinion is not convincing. We therefore uphold our recommendation to abolish the tax exemption. We have made recommendations to this effect several times since 1989. The Ministry’s refusal to act has caused losses of tax revenue in the total amount of €171.7 million.  

 

2017 Annual Report No. 26 - Tax offices lack IT support for processing tax returns of large partnerships

As from 2011, tax returns for partnerships are filed electronically. However, the tax offices are unable to electronically receive and process tax returns where the number of partners exceeds the level of 500. The lack of IT support causes high administrative burden and leads to losses of tax revenue.

We noted with concern the lack of IT support. It is no longer acceptable that the tax administration is unable to fully implement the legal provisions because of technical weaknesses. For nine years now, the Federal Government and the federal states have had the time to address the problem.

The lack of IT support ties up valuable human resources in the tax offices. The proper inspection under aspects of tax law thereby loses priority and tax revenue is lost. For instance, it took one tax office more than one year to process the tax return of a large partnership. It had to manually enter 380 pages of hard copy tax returns. The resulting errors caused losses in tax revenue of more than €400,000.

We urged the Federal Finance Ministry to take steps, in conjunction with the federal states, to make sure that the tax offices are provided with the necessary IT support immediately.

 

2017 Annual Report No. 24 - Non-compliance with tax-related duties should be sanctioned more consistently

For many years, tax offices have not checked compliance with tax-related duties. In addition, legal uncertainties and lengthy reviews impede the consistent sanctioning of non-compliance with tax-related duties. The Federal Ministry of Finance should take speedy corrective action.

The VAT Act provides for fines to sanction non-compliance with tax-related duties. For instance, traders do not comply with their duties, if they do not issue an invoice or do so belatedly, do not observe retention periods or fully or partly fail to pay VAT to the tax office when due.

As early as in 2008, we found that the tax offices did not check whether non-compliance with tax-related duties was to be sanctioned. Legal uncertainties and lengthy reviews impede the consistent sanctioning of non-compliance with tax-related duties. The Federal Finance Ministry then promised to press for awareness campaigns to be launched by the federal states at the local tax offices and remove legal uncertainties. During a follow-up audit in 2015, we found that the weaknesses still persisted. Tax office staff rarely paid attention to legal provisions calling for sanctions and actually did not implement these provisions.

Given that the problems with the application of sanctions have been known for years, we find it unacceptable that no sizable improvements have been made in procedures for imposing fines for non-compliance with tax-related duties. The Federal Finance Ministry should therefore urgently press for a consistent implementation of the provisions on fines and arrange for the necessary legislative amendments.

2017 Annual Report No. 06 - Illegal fuel trade causes high fiscal damage

Diesel-like mixtures are illegally traded as fuel, resulting in fuel tax fraud amounting to several millions of euros. Germany serves as a hub for illegal fuel trade in Europe. The Federal Ministry of Finance has underestimated the problem for more than a decade. Up to now, it has not taken adequate steps to combat this type of organised crime.

Designer fuels are mixtures that consist of more than 70 per cent diesel and of other substances. They are mixed in such a way that they have similar characteristics to diesel and thus can be used as fuel. Perpetrators declare them to be industrial oils which are tax-free.

While diesel comes under customs oversight and is taxable, this does not apply to designer fuels. Tax exemption for designer fuels applies only as long as they are not declared or sold as fuel. Otherwise, the fuel tax – such as in the case of diesel – of 43 cents per litre applies. If designer fuels are illegally sold as diesel, the traders commit fuel tax fraud.

Tax fraud in connection with designer fuels has already been known since 2002. The scope of the resulting fiscal damage in Germany can only be estimated but according to the calculations of the Customs Criminological Office it may be an amount in the three-digit million euro range. This type of crime has been increasing for years. As a result, we expect an increasing amount of fiscal damage.

We hold that the actions taken by the Federal Ministry of Finance are not sufficient to sustainably reduce this type of crime.

We demand that the Federal Ministry of Finance take action at national or European level so that designer fuels become subject to customs oversight and that illegal trading in Germany is stopped. Furthermore, we request that, in order to combat this organised type of crime, staffing needs in the customs administration be reviewed and adjusted, where necessary.

 

2016 Annual Report Volume II No. 37 - Tax revenue on cross-border passenger flights

The Federal Finance Ministry intends to promulgate regulations ensuring that the tax offices proceed uniformly in the matter of VAT remission for cross-border passenger flights. Moreover, the Ministry intends to ensure that the tax offices assess VAT on taxable extra services provided by airlines. The Ministry is thus taking up our recommendations. This will achieve equitable taxation and generate additional tax revenue.

Cross-border passenger flights take place in both German and foreign air spaces. VAT is payable on the part of the flight that takes place within the German air space. Subject to certain conditions, the tax offices may remit the VAT on the transport services. Additional services subject to VAT provided by the airlines, e.g. the sale of food and beverages on board are not privileged. The airlines have to pay VAT on these sales.

We found that the tax offices followed differing practices where tax remission was concerned. Moreover, they did not check whether the airlines provided additional services for which VAT is payable. We recommended that the Federal Ministry of Finance ensure that the tax offices proceed uniformly in granting VAT remissions. The Ministry should also ensure that the tax offices levy VAT on additional services provided by airlines.

The Ministry has followed our recommendations. It announced its intention to address, in conjunction with the states, the shortcomings in the taxation practice. This includes promulgating regulations ensuring uniform practices in all tax offices in connection with the remission of VAT. This will achieve equitable taxation and generate additional tax revenue.

 

2016 Annual Report Volume II No. 36 - No more impediments to the assessment of interest in connection with the solidarity surcharge

In future, the tax offices will completely and accurately assess interest payable in connection with taxes evaded regarding the solidarity surcharge. This will be ensured by alerts in the IT systems and by administrative guidance.

Where persons have evaded taxes they are obliged to pay not only the arrears but also interests on them. The same applies to the solidarity surcharge.

We found that the tax offices assessed interest on evaded solidarity surcharge only in every second case they inspected. The reasons were:

  • Inadequate communication: The tax offices did not pass on information on evaded taxes or did so incompletely.
  • Ignorance: The tax offices did not know that interest on evaded solidarity surcharge had to be assessed in the same way as in the case of other tax evasion.
  • Unclear instructions: The tax offices erroneously assumed that other interest due had to be deducted from the interest on evaded solidarity surcharge.

We recommended that the Federal Finance Ministry take action to address these problems in conjunction with the states. The objective should be the accurate and complete assessment of interest on evaded solidarity surcharge.

The Federal Ministry of Finance and the states have implemented our recommendations. An alert built into the IT system reminds the tax offices to assess interest on evaded solidarity surcharge. Furthermore, the states have taken steps to ensure that communication within the tax offices is improved. They also clarified the relevant instructions.

 

2016 Annual Report Volume II No. 35 - Taxation of cumulative foreign investment funds has been simplified

The Legislature has taken up our recommendation to introduce the taxation directly at source of cumulative foreign investment funds held in domestic deposits. This reduces the administrative burden for citizens and for the tax administration. Moreover, it facilitates the accurate taxation of yields.

Cumulative foreign investment funds are funds which

  • have their registered office abroad; and
  • do not distribute their yields but plough them back, i.e. directly reinvest them in fund assets.


In contrast to other funds, it was not possible to impose tax on the yields of these cumulative funds directly at source. Instead, investors had to declare these yields in their annual income tax returns.

We noted that the tax offices frequently did not tax the yields from cumulative foreign investment funds or did so inaccurately, duplicating or even triplicating the assessment. Moreover, we highlighted the excessive administrative burden. We therefore recommended taxation directly at source of yields from cumulative foreign investment funds. This was in line with the taxation practice applicable to other funds.

The Legislature has taken up our recommendation and amended the law accordingly.

 

2016 Annual Report Volume II No. 34 - Legislature restricts banks’ scope for influencing the taxation of shareholding sales

In response to our recommendation, the Legislature has amended some provisions of the Income Tax Act and the Corporation Tax Act. These amendments also restrict the scope of banks for influencing the taxation of their shareholding sales.

Where an incorporated company e.g. a public stock corporation sells its shareholding in another incorporated company, the profits or losses of such transactions are always tax-exempt. There is an exception from this principle for banks and building societies. For them, the taxation of the sale of shares depends on the accounting treatment they apply to these shares, i.e. whether they assign them to the trading book or the banking book. Where shares have been assigned to the banking book, losses from a sale are not tax-deductible. Where the shares have been assigned to the trading book, the respective losses are deductible.

We found that some banks used this provision to reduce their tax liability. They reassigned shares from the banking book to the trading book if a sale threatened to generate losses. Non-tax reasons for this practice were not apparent. As a consequence, these losses were tax-deductible contrary to the general rule, thus reducing the tax liability of banks.

We recommended that the Federal Finance Ministry restrict the scope for reducing tax liability in this way.

The Legislature has taken up our recommendation and amended the legislation accordingly. Since 1 January 2017, there is no scope left for reducing tax liability by such reassignments.

 

2016 Annual Report Volume II No. 33 - Easier access to wage data

Effective from the year 2018, the fiscal administration will have easier access to wage data. It will then be able to check more quickly whether employers have accurately calculated and remitted wage tax. This will be made possible by amending applicable legislation which we recommended.

On a national scale, employers use about 260 different payroll programs. When conducting field inspections of wage tax, the fiscal administration must access data from these programs.

Because the programs structured the data in different ways, the inspection services of the fiscal administration had to rearrange them in a uniform structure. They were able to start their inspections only after this has been done.

We noted that the inspection services thus lose time. This time should be better spent on inspection activities.

The Legislature has taken up our recommendation. As from the beginning of 2018, employers must provide the wage data in a uniform structure. This obligation is imposed by the Taxation Procedure (Modernisation) Act of 18 July 2016. The inspection services will then be able to check more quickly whether employers complied with the requirement to remit wage tax accurately.

 

2016 Annual Report Volume II No. 31 - Taxation of the sale of businesses is being improved

Following our recommendation, the Federal Finance Ministry has introduced the obligation to declare the sale of businesses in the VAT returns. This enables the tax offices to assess the relevant tax liability more accurately. In addition, the Ministry will enhance risk management. This provides the tax offices with effective tools for securing VAT revenue in the sale of businesses.

A tax rebate is applied to the sale of businesses or of let buildings. The trader is not liable to pay VAT on such sales if certain conditions are met. One requirement is that the business is sold in bulk. If only individual assets are sold, these sales are taxable. Where businesses are sold, the tax offices have to thoroughly examine whether VAT is payable by both the seller and the buyer.

We found considerable shortcomings in the assessment by the tax offices of tax privileged sales of businesses. There were instances in which the tax offices were not able to identify the sales of businesses because the VAT return form did not assign a code to this type of transaction. In other cases, the tax offices did not sufficiently examine sales of businesses and did not pass on relevant information to other tax offices.

We noted that this results in losses of tax revenue. We recommended that the Federal Finance Ministry raise the awareness of the tax offices and ensure a more accurate assessment of the tax liability in connection with the sale of businesses. Furthermore, the Ministry should develop effective risk management.

The Ministry followed our recommendations. Since 2016, the declaration of sales of businesses in the VAT returns is compulsory. In addition, the Ministry announced its intention to enhance risk management.

 

2016 Annual Report Volume II No. 30 - Additional revenue from special VAT inspections

In cooperation with the German states, the Federal Finance Ministry will secure additional revenue generated by special VAT inspections, thus counteracting tax losses. To do so, it will strengthen the existing control system. The Ministry is thus implementing our recommendations.

By means of special VAT inspections, the tax administration intends to ensure that traders correctly remit their VAT. In 2015, the special VAT inspections carried out by the tax offices generated additional revenue of €1.7 billion.

Key issue in connection with special VAT inspections: The tax offices need to follow up on the additional revenue claims. If they fail to do so, traders may disregard their additional liabilities. As a result, traders do no pay the additional VAT they have to remit according to the results of the special VAT inspection.

We audited the way in which tax offices followed up on the additional VAT liabilities generated by special VAT inspections. We found several shortcomings, e.g. the lack of uniform guidance for the traders or the failure of tax offices to check the facts.

We noted that tax revenue is lost if traders succeed in ignoring the results of the special VAT inspections. We recommended that the Federal Finance Ministry strengthen the control system in conjunction with the states. For instance, the Federal Finance Ministry should urge the states to use identical forms for providing guidance to traders. Furthermore, the Ministry should press for a more thorough examination of the facts by the tax offices.

The Federal Finance Ministry has taken up all our recommendations. In conjunction with the states, it will secure the additional revenue generated by special VAT inspections. We will monitor the extent to which the tax administration has implemented the steps announced.

 

2016 Annual Report Volume II No. 29 – VAT risk assessment – better use made of information generated by inspections on company premise

The Federal Ministry of Finance has successfully ensured that the German states are enabled to make better use of the results generated by inspections on company premises for assessing VAT risks. For this purpose, it established, jointly with the states, the technical prerequisites needed for doing so and closed information gaps. New business processes make sure that risk-related issues do not remain exempt from inspection.

The tax offices use a risk management system (RMS) for processing preliminary VAT returns. This IT system assists the tax offices in their efforts to avoid VAT losses by assessing the default risk and enabling risk-oriented inspections to be performed. The necessary data are also obtained through special VAT inspections or general tax inspections on company premises. As a rule, the special VAT inspections (which do not cover other taxes) should be carried out in a timely manner. In contrast, tax inspections on company premises look into the comprehensive tax situation of the taxable person in question and may cover all taxes.

We found that general tax inspections on company premises also reveal facts that may be relevant for VAT risk assessment. However, this information cannot be adequately used for VAT risk assessment because it is not available in electronic format. The Federal Government and the states should therefore establish the technical prerequisites for feeding the relevant information from the inspection reports on company premises into the RMS.

Moreover, we found that the tax offices waived special VAT inspections if a general tax inspection on the premises of the taxable person was planned. However, since the units in charge of processing preliminary VAT returns did not systematically check whether the inspections on company premises had actually been carried out, high risk cases may not have been inspected. We therefore recommended that the units in charge of processing preliminary VAT returns be informed whenever a proposed inspection on company premises is cancelled.

The Federal Finance Ministry followed our recommendations by establishing, jointly with the states, the technical prerequisites for the electronic communication of reports on tax inspections carried out on company premises. The states may use the new IT component as from September 2017. This is a step in the right direction.

Furthermore, the Federal Government and the states have jointly adapted business processes. As a result, the units in charge of processing preliminary VAT returns are notified of the cancellation of scheduled inspections on company premises. This makes sure that the tax offices can initiate further inspection action and that VAT risks do not remain uninspected.

 

2016 Annual Report Volume II No. 32 - Put an end to manipulated electronic cash registers

Following our recommendation, the Federal Finance Ministry intends to put an end to the manipulation of electronic cash registers. New legislation is to prevent tax losses caused by such manipulations. Electronic cash register records will in future be protected from tampering by means of a certified protective device.

There is special software which enables taxable persons to manipulate electronic cash registers so as to evade taxes. Such manipulations lead to tax evasion in the range of billions of euros each year.

The Ministry has implemented our recommendations. The Act on the Protection against Manipulation of Digital Basic Accounting Records has come into force on 1 January 2017. It requires that electronic cash registers be equipped with a protective device that prevents tampering. This will be accompanied by unannounced cash inspections, the tightening of sanctions in case of tampering and an obligation imposed on businesses to issue invoices. This will effectively curb tax evasion resulting from tampering with cash registers.

 

2016 Annual Report Volume II No. 07 - Reduced VAT rate – Urgent need to eliminate competitive disadvantages in contract research

Contract research has for years been taxed unevenly. While research institutions established under private law have to pay only the reduced rate of 7 per cent on their contract research turnover, institutions governed by public law have to pay the standard VAT rate of 19 per cent. We have repeatedly drawn attention to the resulting distortions of competition and have recommended the consistent application of the standard VAT rate.

Apart from the state universities, there are more than 800 non-university research institutes in Germany. Most of these have been established under private law but some under public law. The state universities and the non-university research institutes secure external funding from third parties by doing research on behalf of external parties (contract research). In this field, they compete with each other.

Turnovers generated by contract research are subject to VAT. Research institutes established under private law may apply the reduced VAT rate of 7 per cent on such turnovers. In contrast, state universities and institutes governed by public law have to pay the standard VAT rate of 19 per cent.

In recent years, we have repeatedly drawn the attention of the Federal Ministry of Finance to the uneven tax treatment of contract research. Apart from the resulting distortions of competition, we also have held that this practice infringes European law. We therefore recommended that the Federal Ministry of Finance finally press for the uniform taxation of contract research with the standard VAT rate and adapt national law to the requirements of European Union law.

The Federal Ministry of Finance has continued to reject amending the provision granting the reduced VAT rate for contract research. The Ministry argued that such an amendment should only be made in connection with a comprehensive overhaul of the provisions granting the reduced VAT rate.

We assume that a comprehensive amendment of the provisions granting the reduced VAT rate cannot be expected in the foreseeable future. In that light, the abolition of the reduced VAT rate for contract research should not be postponed any longer. Only thus will it be possible to avoid tax discrimination and infringement proceedings before the European Court of Justice. The Federal Ministry of Finance should take the necessary steps to have VAT law amended as soon as possible.

 

2016 Annual Report Volume II No. 06 - Prevent VAT fraud regarding new vehicles of EU origin

Traders systematically circumvent the Internal Market control procedure when delivering new vehicles of EU origin across borders. This poses a risk to tax revenue. Together with the German states, the Federal Ministry of Finance should take steps to prevent VAT fraud regarding new vehicles and to secure tax revenue.

As a matter of principle, deliveries of goods between traders from different EU Member States have to be taxed in the Member State of the purchaser. This also applies to the delivery of new vehicles of EU origin. For that purpose, the purchaser has to declare acquisition of the vehicle in his Member State. A cross-national Internal Market control procedure is to ensure taxation and to prevent VAT fraud.

We found that several vehicle traders from other EU countries and from Germany colluded to systematically circumvent the Internal Market control procedure. They pretended that cross-border sales of new vehicles to private buyers had been made. However, the vehicles were actually received for resale by traders in Germany. Thus, the tax offices’ ability to check whether the acquisition of the vehicles was taxed accurately was partially or fully impaired. This implied a risk of large losses in tax revenues. In a single fraud case, the tax damage exceeded €3 million.

The Federal Ministry of Finance and the tax authorities of the German states had for years known that several vehicle traders circumvented the Internal Market control procedure. Nevertheless, they did not feel the need to take action because they assumed that, while the traders filed inaccurate declarations or none at all, they paid accurate tax on the intra-Community acquisition.

We demanded that the Federal Ministry of Finance, in conjunction with the states, take action to ensure that the tax offices check and consistently enforce tax compliance in connection with the acquisition of new vehicles of EU origin.

Only thus will it be possible to detect cases of VAT fraud and to secure tax revenue.

 

2016 Annual Report Volume I No. 68 - Ensure taxation of new vehicles of EU origin

Information exchange between the EU Member States about the intra-Community acquisition of new vehicles for private purposes is inadequate. As a result of gaps in cooperation and a lack of IT support, the taxation of the acquisition of vehicles is not ensured.

Private buyers have to pay tax in their Member State on their acquisitions of new vehicles in other EU Member States. They are obliged to assess the resulting VAT liability themselves, to file the VAT return with the tax office and to pay the tax due. Sellers of new vehicles must report any delivery to private individuals in other EU Member States to their responsible tax authority. For the purpose of cross-checking, the EU Member States exchange and match the buyer and seller data. Germany has opted for participation in this information exchange. The responsible German authority is the Federal Central Tax Office.

 

We found that the Federal Central Tax Office was unable to check whether all German sellers complied with their reporting duty. The necessary IT system did not exist. As a consequence, Germany was not able to ensure that it communicates complete data to the other EU Member States. There was the risk that vehicles bought in Germany remain untaxed in other EU Member States.

Moreover, several EU Member States do not participate in the information exchange. Therefore, the German tax authorities were informed insufficiently about the acquisition of new vehicles by German buyers. This implies the risk of losses of tax revenue in Germany.

We requested the Federal Finance Ministry to ensure that the IT system will be operative by not later than 2017. Moreover, it should advocate an enhanced information exchange at EU level. Only if all Member States feed data into the system, gaps in the taxation of new vehicles of EU origin can be prevented.

 

2016 Annual Report Volume I No. 67 - Germany brings up the rear once again in an EU tax project

The EU Member States were obliged to implement a central procedure for the assessment of VAT on internet services provided by foreign traders effective from 1 January 2015. Up to now, Germany has not implemented the procedure.

The assessment of VAT and internet services provided within the Single Market has largely been harmonised. This is based on an EU Directive from 2008, which provides for a new taxation procedure (ECOM-new) for internet and telecommunication providers from non-EU countries. The EU Member States were to implement this in their national law by 1 January 2015.

We found that Germany has so far not met its respective obligation under EU law. In contrast to most other EU Member States, Germany did not succeed in developing on time an IT system necessary for applying the procedure. As a consequence, the taxation procedure was not applicable on 1 January 2015. To participate in the electronic exchange of data with the other Member States, Germany had to rely on a makeshift IT solution provided by the European Commission.

We criticised this repeated instance of Germany not being idle to meet its European obligations on time. We had already noted similar shortcomings in our 2014 annual report. We also criticised that the Federal Finance Ministry had to seek technical assistance from the European Commission while nearly all other Member States were able to implement the project self-reliantly. This harmed Germany’s reputation within the EU.

We requested the Federal Finance Ministry to speedily complete the IT system for ECOM-new to enable the taxation procedure to be fully operative with the appropriate IT support on 1 January 2017.

 

2016 Annual Report Volume I No. 66 - Simplify the legal bases of insurance tax

The content of the Insurance Tax Implementation Ordinance does no longer justify a separate statutory instrument. The Federal Finance Ministry should therefore revoke the Ordinance and integrate its content into the Act.

The Legislature can authorise the Federal Government or individual federal ministries to supplement laws by statutory instruments. Such instruments are to unburden the respective law and can be changed easier than an enactment. In order to permit a simple application of legal provisions, these should be clearly structured and should not contain unnecessary references. Spreading legal provisions among several legislative acts should be avoided whenever possible.

We found that only three of the originally eleven articles of the Insurance Tax Implementation Ordinance were still in force. Since the last change of the Ordinance in 2009, the Federal Finance Ministry did not perceive any need for reform or adjustments.

We considered that an Ordinance on the Insurance Tax Act would only be justified if such statutory instrument contributes to unburden the Act. The Insurance Tax Implementation Ordinance does not conform to this requirement. We therefore recommended that the Ordinance be revoked for reasons of regulatory streamlining and that the few provisions of the Ordinance be integrated into the Insurance Tax Act.

 

2016 Annual Report Volume I No. 65 - Harmonise the taxation of broadcasting corporations

The Federal Finance Ministry has failed to sufficiently coordinate the taxation of public broadcasting corporations. It tolerated that the audited periods of the broadcasting corporations differed strongly. This resulted in inconsistent taxation of the corporations and consequential losses of tax revenues.

The public broadcasting corporations generate earnings of €960 million annually from business activities. They have to pay tax on these earnings. In the pursuit of their business activities, the broadcasting corporations regularly formed common areas of activity and entered into contracts with third parties with one corporation taking the lead responsibility.

The broadcasting corporations are subject to regular tax audits in which the Federal Audit Directorate takes part. We found that the states of progress of these audits differed considerably and the audited periods differed by up to eight years. This resulted in unequal taxation and losses of tax revenue, especially with respect to the common areas of activity. Concerning the latter, it was impossible to rule out that earnings were not taxed or expenditure was deducted twice.

The Federal Finance Ministry has known this for years. It has not made full use of its legal possibilities for better coordinating the taxation of the broadcasting corporations. Since 2006, the Federal Audit Directorate may initiate audits, regulate their implementation and determine audit contents.

We requested the Federal Finance Ministry to harmonise the audited periods with the assistance of the Federal Audit Directorate and to ensure consistency in taxation.

 

2016 Annual Report Volume I No. 64 - Procedures for the taxation of partners in partnerships imply high administrative burden and are error-prone

The taxation of partners in partnerships involves a high administrative burden and is error-prone. This increases the risk that income remains untaxed. No comprehensive electronic procedure will be available in the foreseeable future.

Income obtained by partnerships has to be declared by the partners in their income tax returns. In 2010, this applied more than five million partners with an aggregate tax base of euro 121 billion. Under the current procedure, the tax administration must print out computer-held data, send them by mail within the fiscal administration and subsequently enter them manually once again. We criticized this media discontinuity. It causes additional and avoidable work and increases error risk. The tax administration cannot make sure that it has all information about the tax base.

For the taxation of partners in partnerships, the Federal Government and the states intend to develop an electronic system for the communication and analysis of the tax base. A first stage of the system scheduled to be operative in 2017 solves only part of the problems. No further development steps have yet been scheduled.

We requested the Federal Finance Ministry to implement a comprehensive electronic system jointly with the states and to work out a time schedule for this.

 

2016 Annual Report Volume I No. 63 - Legislative clarification regarding tax privileged building projects required

According to recent court rulings, the tax authorities may no longer reject decisions about tax relief for building projects. This causes losses of tax revenue.

Owners may claim higher tax relief for the cost of building work performed on architectural monuments and buildings meriting preservation located in redevelopment areas. This tax subsidy totals euro 100 million annually. According to recent rulings of the Federal Fiscal Court, the certificates of the historic monuments protection authorities or the municipal authorities which are the prerequisites for the claim to higher tax relief are binding for the tax offices. Even where such certificates are obviously erroneous, the tax offices were not allowed to reject them. While the currently law situation permits the tax authorities to remonstrate against the decisions of the historic monuments protection or municipal authorities, the tax offices scarcely use this possibility because they saw little chance of success for such remonstrations. This diminished tax revenue.

We recommended a legislative clarification that will permit the tax authorities to finally review decisions about tax relief for building work. The Federal Finance Ministry should advocate such legislative clarification.

 

2016 Annual Report Volume I No. 62 - Unequal taxation of employees posted abroad

Germany taxes German employees posted abroad unequally, thereby renouncing tax revenue. A decree issued by the Federal Finance Ministry makes it possible that, in certain cases, employees need not pay taxes on their wages or salaries. This creates “white incomes”.

German employees working abroad remain liable to pay tax in Germany on both their domestic and foreign pay. To prevent that they are both in Germany and abroad, Germany has concluded double taxation agreements with many countries. These agreements almost always stipulate that the pay is taxed according to German law, if no or little tax is levied in the foreign country.

In the absence of the double taxation agreement, the Decree on Employment Abroad permits the exemption of foreign pay from German taxation. This applies irrespectively of whether the pay is taxed abroad. This may lead to untaxed “white incomes”. Employees to whom the Decree on Employment Abroad applies are almost always unduly treated more favourably than those that work in countries covered by a double taxation agreement.

We consider the Decree on Employment Abroad no longer commensurate with current conditions. On an international level, Germany advocates the prevention of “white incomes”. It is therefore unacceptable that German tax law expressly permits such incomes.

In our opinion, it is necessary to fundamentally question the Decree on Employment Abroad. In any case, it should be revised to the effect that it will no longer be applicable in case of no or little taxation abroad.

 

2016 Annual Report Volume I No. 61 - Limit investment deduction to small and medium-sized enterprises

With the investment deduction, the Legislature introduced a tax privilege designed to improve the competitive position of small and medium-sized enterprises (SMEs). The current legal provision treats businesses of equal size differently and regularly enables larger businesses to benefit from this tax privilege.

SMEs may claim an investment deduction for planned capital expenditure from their tax liability. The delimitation between the privileged SMEs and the non-privileged larger businesses depends on the nature of the business. The thresholds applicable to traders and self-employed professionals differ from those applicable to farmers and forest owners.

The differing thresholds favour some large farm and forestry enterprises. These are classified as SMEs even where their size clearly exceeds the thresholds applicable to traders and self-employed professionals. Ultimately, investment deductions can be claimed by farming and forestry businesses of a given size while traders and self-employed professionals whose businesses are not of the same size are not entitled to the deduction.

We consider this an infringement of the requirement of uniform taxation. In this case, the relevant provision also fails to accomplish its original goal of strengthening the investment capacity of SMEs and to compensate for competitive disadvantages vis-à-vis larger enterprises. The Federal Finance Ministry should advocate a change in the legislation providing for uniform thresholds and limiting the tax privilege to SMEs.

 

2015 Annual Report – spring report - No. 10 - Preliminary VAT returns: need to simplify procedure for processing refund claims

Local tax offices may not clear VAT refunds above a specified threshold without a check by tax office staff. This also applies to cases where the computerised risk management system has not identified any risk of loss of tax revenue. Given the huge caseload, the tax offices are not nearly capable of appropriately checking all refunds. We therefore recommend that processing by staff focus on critical refund claims so as to prevent losses of tax revenue.

A graduated procedure is in place for approving tax refunds:

  • Refunds up to a threshold set internally by the tax administration are processed and paid by a computerised procedure.
  • Where refunds exceed the threshold, the IT system refers the case to staff and submits proposals for approval. These must be checked and approved by tax office staff.
  • Where large amounts are involved, repayment requires the approval of the section head.


In parallel, refund cases – like all preliminary VAT returns – are processed by means of a computerised risk management system. The system evaluates the filed preliminary returns and produces a report on every case involving a high risk.

We found that the IT system for the refund approval procedure is exclusively governed by the amounts involved independently from the risk management system. A huge number of cases were not processed by computer although the risk management system had not identified any risks. Therefore, the tax offices carried out only sample checks of approval cases or isolated checks in complex cases. They approved refunds in particularly complex cases without any checks. In these cases, too, the approvals implied administrative burden.

We criticised that many proposals for approval concern low-risk preliminary VAT returns or returns that can only be appropriately checked by field work. In our opinion, desk work should focus on critical refund cases so as to prevent losses of tax revenue. We recommended a reduction of the number of proposals for approval. For this purpose, the thresholds should be modified and supplemented by risk factors.

The Federal Finance Ministry abides by the existing procedure, arguing that checks by staff had in the past proved to be the best way of assessing risk when processing large caseloads.

This does not convince us. In practice, the rigid threshold only leads to false security and avoidable administrative burden in low-risk cases. The number of proposals for approval should therefore be limited in a meaningful way and by making the rigid threshold flexible and supplementing it by additional risk factors.

 

2015 Annual Report – spring report - No. 09 - Urgent need to limit the risk that the government may have to pay interest in connection with the taxation of foreign unit trusts

According to a ruling of the European Court of Justice, the unequal taxation of dividends paid by domestic and foreign limited companies and unit trusts contravenes EU law. The Federal Finance Ministry has failed to implement proposals for an urgently needed reform of German investment tax law. Since the government has to pay interest on tax refund claims, this may mean that it may have to pay additional interest in the annual amount of at least €120 million.

While investment trusts domiciled in Germany are exempt from capital yield tax, unit trusts domiciled abroad do not benefit from this tax exemption. Since 2006, foreign investment trusts have filed numerous applications with various authorities for the refund of capital yield tax deducted at source.

During our field work in the Federal Central Tax Office and the tax offices of the German states, we found that no decision has been taken concerning any of these applications for a refund. It is unclear which tax authority is responsible for considering these refund claims. The Federal Finance Ministry estimated that, in 2012, the volume of refunds under all claims already totalled €2 billion. Since interest at a rate of 6 per cent is payable on justified claims, there is the risk that the government will have to pay interest of at least €120 million.

One of the reasons adduced by the Ministry for the omission to process the claims is the fact that, so far there is no ruling of the European Court of Justice on the relevant German legal provision. However, the issue will not be clarified in court as long as the applications are not processed.

We asked the Ministry to ensure that the responsibility for considering the claims are clarified and that the applications are processed without delay so as to make the way clear for a rule by the Court.

 

2015 Annual Report No. 88 - Better cross-checking of data prevents duplication of tax refunds

Following our recommendation, the Federal Central Tax Office will give certain local tax offices read access to its data about refunds of input VAT. This will facilitate the cross-checking of data by local tax offices in connection with the general taxation of foreign traders. Such cross-checking can largely prevent the duplication of refunds of input VAT.

Subject to certain conditions, foreign traders may claim the refund of VAT paid in Germany (input VAT) from the Federal Central Tax Office. Where this is not the case, they can only claim the deduction of input VAT from the competent 22 central tax offices in the course of the general taxation procedure. Depending on whether the conditions for the input tax refund procedure are met, the foreign traders must switch from the general taxation procedure to the input tax refund procedure or vice versa. The input tax refund procedure is a mass procedure with more than 100,000 applications each year.

We found that the Federal Central Tax Office had access to the database of the tax administration, enabling it to cross-check whether a general taxation procedure in respect of an applicant was already pending at one of the central tax offices. Conversely, the central tax offices had no access to the data of the Federal Central Tax Office. Therefore, they were unable to self-reliantly ascertain whether and for what period the Federal Central Tax Office had already refunded input VAT to a foreign trader. During our audit, we detected several cases of duplicative tax refunds. We recommended that the Federal Finance Ministry should without delay make arrangements for giving the 22 central tax offices read access to the data of the input VAT refund procedure held by the Federal Central Tax Office.

The Federal Finance Ministry has followed our recommendations. The Federal Central Tax Office will give the central tax offices read access to the electronic data of the input VAT refund procedure not later than in mid-2016. Then both the Federal Central Tax Office and the central tax offices will be able to cross-check data in order to prevent duplicative refunds of input VAT to foreign traders. We will follow up on whether cross-checking actually works.

 

2015 Annual Report No. 87 - Fighting VAT fraud with the European EUROFISC network

The EUROFISC network serves the purpose of fighting VAT fraud in the European Union due to a fast exchange of information. The Supreme Audit Institutions of Austria, Hungary and Germany conducted a joint audit on how the network had been implemented in their countries. They developed recommendations for improvement. The Federal Ministry of Finance will further develop the information system in Germany and advocate improvements at EU level.

VAT tax fraud causes a significant economic loss within the European Union each year. A part of this arises from fraud in intra-Community trade. In order to be able to limit this kind of fraud, the administrations of the Member States have to cooperate closely. They have shared information at bilateral level on cross-border transactions for a long time. Additionally, they transmit information on suspected traders to all Member States in order to disclose fraudulent business relations in good time. For this purpose, they established the EUROFISC network in 2011.

The SAIS of Austria, Hungary and Germany conducted a joint audit on how their countries implemented EUROFISC. They found that EUROFISC improves the chances of national administrations to convict fraudsters in good time. However, as expected, the new system is not yet perfect after only a few years of operation. The SAIs developed recommendations on how the network can be improved. This applies for example to the quality of the shared data sets.

The Federal Ministry of Finance will further refine the exchange of EUROFISC data between the Federal Government and the states in Germany. Furthermore, it will support necessary improvements of the entire network at EU level.

 

2015 Annual Report No. 86 - Splitting income tax liability: Federal Ministry of Finance intends to secure tax revenue through an electronic procedure

The Federal Finance Ministry intends to introduce an electronic procedure for the exchange of information about alimony payments to divorced or permanently separated spouses. This is to replace an expensive paper-based procedure and to prevent losses in tax revenue.

A taxable person’s payments of alimony to the divorced of permanently separated spouse can reduce the income tax base every year. Where the payments made are deducted from the payer’s tax base, the recipient of alimony must pay tax for the payments received (an arrangement known as ‘real splitting’).

To make sure that the tax claim is enforced, the tax office to whose jurisdiction the payer of alimony belongs must each year send an information return to the tax office responsible for the recipient of alimony payments. The tax offices fulfilled this duty only inadequately. Therefore, recipients of alimony often did not pay tax on the payments received, although the payers of alimony had claimed the deduction.

We recommended that the paper-based procedure for sending information returns be replaced by an electronic procedure. The Federal Finance Ministry has taken up our recommendation and requested the development of software for an electronic procedure to be used by the tax administrations of the states.

 

2015 Annual Report No. 84 - Lack of data analysis provides opportunities for evading compulsory assessment for income tax

The Federal Finance Ministry and the states have so far not created the prerequisites necessary for preventing losses of tax revenue in connection with the application of tax class V. Many cases in which employees have opted for tax class V but not met their obligation to file a tax return remain undetected. Where tax claims still exist in these cases, they come under a statute of limitation unless the tax administration takes timely steps to enforce them. Due to the lack of adequate IT support, the tax administration is unable to systematically analyse existing electronic data. We have asked the Federal Finance Ministry to ensure that the necessary IT prerequisites are created not later than in 2016.

Spouses or partners of a registered civil partnership must file an income tax return, if

  • they are assessed jointly for income tax pursuant to Arts. 26 & 26b Income Tax Act,
  • both have drawn wages or salaries from employment,
  • the deduction of wage tax by either spouse or partner has been made in accordance with tax class V (Art. 46.2, subpara. 3a Income Tax Act).


Since 2004, employers annually inform the tax administration electronically about which employees they have deducted wage tax in accordance with tax class V. By means of this data, the tax administration is able to check which employees are obliged to file an income tax return. We found that many states analysed these data in isolated cases only. They did not check whether all employees in tax class V complied with their obligation to file an income tax return. The states justified this by the lack of adequate IT support for systematic data mining.

We estimate that in more than 10,000 cases employees whose tax class was V omitted filing income tax returns in the period 2004-2007. The tax administration cannot take corrective action in these cases because subsequent assessment is barred by a statute of limitation. Since data mining cannot be expected to take place in 2015 either, tax claims from the 2008 assessment period will also lapse.

We urged the Federal Finance Ministry to ensure that the IT prerequisites for data mining are created not later than 30 June 2016. Only this will give the states sufficient time to check data from the year 2009 before the lapse of the tax claims on 31 December 2016.

 

2015 Annual Report No. 83 - VAT control procedures – simplifications for tax authorities and traders

Traders have to declare their intra-Community deliveries in two VAT returns with different filing deadlines. Amalgamating the declarations with a unified filing deadline would substantially simplify the procedure. We see a considerable potential for reform in this field. The Federal Finance Ministry should exploit this potential and, in conjunction with the states, enable the procedure to be simplified for both the tax authorities and the traders.

Traders have to declare their deliveries of goods within the European Union in recapitulative statements. In addition, they have to declare their intra-Community turnovers in preliminary VAT returns. We found that the double duty to declare has been an additional administrative burden on both tax authorities and traders. Due to different filing deadlines and declaration periods, the tax offices were unable to effectively match the information in the returns and counteract losses of tax revenue. We therefore have for years advocated an amalgamation of the returns. When auditing this issue again in 2015, we found that there were no plans for implementing any reform proposals.

We noted that no reform has been implemented in spite of extensive preparatory work.

The Federal Finance Ministry stated that, in conjunction with the states it had decided against a reform for financial management reasons. Certain VAT payments would be received later, if filing deadlines were postponed. Moreover, a reform would result in shifts between financial years since receipts of payments would have to be entered into the accounts after yearend.

In our opinion, the arguments of the Federal Finance Ministry do not justify abandoning any reform efforts. According to our findings, the delay in the 148 receipt caused by different filing deadlines would not exceed three weeks. The financial advantages of such a reform would clearly outweigh the disadvantages stemming from the delay in VAT receipts. Given the importance of intra-community trade for Germany, an effective VAT control procedure in the Single Market is of major importance for the German treasury. A reform could address weaknesses and counter-act losses of tax revenue.

Concerning the shifts between financial years cited by the Federal Ministry of Finance it needs to be taken account, taking a multi-year perspective, tax revenue does not decline. The reform could be designed so as not to jeopardize compliance with the constitutional debt limit in the year when the procedure is changed. We therefore hold that potential shifts between financial years are no reason for fully abandoning the project of uniform filing deadlines. Rather than that, the Federal Finance Ministry should liaise with the states to look for a solution that realizes as much reform potential as possible without leading to unacceptable shifts within financial years.

 

2015 Annual Report No. 82 - Tax haven internet – Secure German VAT revenue

The German tax authorities have tax claims against foreign traders who provide internet services in Germany. However, the tax authorities lack a strategy for ensuring systematic fiscal control of these vendors. An internet search engine does not provide appropriate support for such control. There is an urgent need for the Federal Finance Ministry to develop new strategies in order to prevent losses of VAT revenue in connection with the provision of internet services.

In our 2013 annual report, we addressed the issue of internet services provided in Germany by traders domiciled outside the European Union. We noted the lack of any systematic fiscal control in these cases. The detection of internet vendors that do not declare their turnovers to the tax authorities is either impossible or possible only by coincidence. When auditing this issue again in 2015, we found that systematic fiscal control is also lacking in respect of internet services provided by EU traders. The tax authorities process only tax cases they are aware of. They considered investigations to detect unknown tax cases as requiring a very high input of resources. Furthermore, there is no clear rule whether the Federal Government or the states have the task to detect such tax cases.

We noted that the tax authorities do not seek to ensure full taxation of internet services. We also pointed out that an internet search engine that has been in use for more than a decade does not support the search for unknown tax cases. Therefore, foreign vendors of internet services that do not declare their turnovers run a very small risk of being detected.

While the Federal Finance Ministry has admitted deficiencies in the VAT-related control of foreign internet vendors, it feels that a systematic search for unknown tax cases and an upgrading of the internet search engine would not make sense.

Based on our findings, we are concerned that many foreign providers of internet services do not register with the tax authorities, thereby evading taxation in Germany. Therefore, the Federal Ministry of Finance should, in conjunction with the states, develop new strategies to secure the German tax revenue from internet services. To do so, a clear rule must be established to determine which tax authority is to be responsible for the necessary internet research. If the existing internet search engine cannot be upgraded to become a suitable search tool, technical alternatives need be developed.

 

2015 Annual Report No. 81 - Avoid undue VAT advantages for farmers

The Federal Finance Ministry calculated an excessive VAT rate (flat-rate addition- FRA) for farmers to whom a flat-rate scheme applies. An excessive FRA unduly favours these farmers and is not admissible under EU law. Moreover, it implies a risk of considerable losses in tax revenue. The Ministry must therefore correct its calculation and report to the Legislature accordingly, enabling it to fix an appropriate FRA.

“Flat-rate farmers” are farmers that have opted for the VAT flat-rate scheme. They may add a flat rate (FRA) to the price of their deliveries. They are not required to remit the VAT thus collected to the tax office. The flat rate addition is designed to compensate for losing input tax they have to pay on purchases from other traders.

EU law requires the FRA to be calculated on the basis of the turnovers and the input VAT of all flat-rate farmers in Germany. The flat-rate scheme must not be tantamount to a subsidy, i.e. the flat-rate farmers’ aggregate revenues from the FRA must not exceed their aggregate expenditures on input VAT.

The FRA is to reflect the financial burden on German flat-rate farmers caused by their having to pay the input VAT charged by their suppliers. We found that the Federal Finance Ministry had inaccurately calculated the input VAT burden of flat-rate farmers, thereby fixing an excessively high FRA. According to our calculation, the current input VAT burden amounts to 9.3 per cent, 1.4 percentage points less than the current FRA of 10.7 per cent. These 1.4 percentage points are equivalent to a VAT amount of more than €200 million annually by which the flat-rate farmers overcharge their customers, thus receiving it as revenues. The excessive FRA also results in the loss of considerable tax revenues each year. This is due to the fact that many of the farmers’ customers, e.g. slaughterhouses, dairies and mills, can claim the reduction of input VAT from their VAT liability.

We demanded that the Federal Finance Ministry review its calculation. It also must alert the legislature to enable it to fix an appropriate FRA.

 

2015 Annual Report No. 80 - Reconsider provision concerning liability in the VAT Act

A provision as to liability introduced in 2002 to fight VAT fraud has turned out to have little practical effect. In spite of an amendment of this provision, the tax offices continue to have problems with applying it. The states pointed this out to the Federal Finance Ministry already years ago. Nevertheless, no review has been undertaken so far to determine whether the provision makes sense as a contribution to fighting VAT fraud. The Federal Finance Ministry must now carry out such a review without delay.

As part of a package of measures to counteract VAT fraud, the Legislature introduced a provision on liability in 2002 by inserting Art. 25d in the VAT Act. Its aim is to impose liability on traders for VAT not paid by their business partners. However, the tax offices faced major difficulties applying this provision. Therefore, the Legislature amended this provision two years later.

In 2014, we found that the tax offices scarcely apply the amended provision on liability. This was due mainly to the difficulty of proving that the conditions for enforcing the liability were actually met. Some states had drawn the attention of the Federal Finance Ministry to these problems already years ago.

We found that the Federal Finance Ministry had not responded to the advice given by the states. We asked the Federal Finance Ministry to carry out the long overdue review of Art. 25d VAT Act without delay.

The Federal Finance Ministry now intends to set up a joint federal/state working group to look into this legal provision. However, the Ministry stated that the working group could not be convened at this time due to other pressing business but that this was to be done as soon as possible, taking regard to the workload.

We consider the intended setting up of a working group as a step in the right direction. However, given that the practical problems that have been known for years, no further delay is acceptable. Should it turn out that the provision on liability does not constitute any significant contribution to fighting fraud, it should be repealed.

 

2015 Annual Report No. 79 - Ensure the data retrieval from agricultural authorities

Since 2009, the German states have been authorised to retrieve data needed for tax assessment from the agricultural authorities. Up to now, the fiscal administration has not made use of these powers.

In the past, we and our counterparts in the German states had repeatedly pointed out deficiencies in the taxation of income from farming and forestry. These deficiencies were frequently attributable to the lack of knowledge in the tax offices about tax-relevant situations. Since 2009, the agricultural authorities and the real-estate offices have the duty to furnish the fiscal authorities with data by means of a computerised procedure. The data are to serve for determining a tax liability or for collecting tax.

We looked into the data retrieval procedure. We found that, in none of the German states, data of the agricultural administrations and real-estate offices were made available to the tax authorities by means of a computerised procedure. In our opinion, this information is absolutely needed for the discharge of tax-monitoring duties by the tax offices. We therefore consider it imperative that the computerised retrieval of data be implemented as soon as possible.

Since the procedure is to implement a legislative amendment, it has utmost priority in the development of common taxation software by the states. We consider the tax claim to be at risk if the project is given lesser priority. Furthermore, the lack of verification possibilities would impede administration. We expect that the retrieval of data from agricultural authorities will be made possible without delay.

 

2015 Annual Report No. 78 - Uncoordinated field inspections of wage tax result in losses of tax revenue

Inspections of wage tax on the premises of groups of companies and employers that run permanent establishments at various locations are often the responsibility of many tax offices. The respective tax audits are not centrally steered and coordinated. The tax offices do not share information. This results in losses of tax revenue.

Wage tax is one major source of public revenue. Employers have to deduct wage tax from their employees’ wages or salaries and remit it to the tax offices in whose jurisdiction the permanent establishments are located. The tax offices’ units responsible for wage tax inspections on employers’ premises check whether employers have deducted and remitted the wage tax.

Groups of companies and large enterprises often run numerous permanent establishments in several German states. They have to file self-assessed wage tax returns with many tax offices. These offices are also responsible for wage tax audits on the companies’ premises. In such cases,

  • they frequently ignored that employers belonged to groups of companies or associated companies,
  • they did not match inspection fields with periods,
  • they assessed similar sets of circumstances differently and
  • they did not share information.

We asked the Federal Finance Ministry to liaise with the states and put into place the prerequisites for coordinated field inspections of wage tax on the premises of groups of companies. These inspections should be carried out under a single management and in accordance with uniform requirements.

 

2015 Annual Report No. 77 - Unjustified privilege for profits from the sale of free-float shares

Since March 2013, gains from free-float shares paid out as dividends (free-float dividends) are taxable, while profits from the sale of free-float shares remain tax-free. The government thereby renounces tax revenues of about €600 million annually.

Where an incorporated company (e.g. a public-stock corporation or a limited liability company) holds an interest of less than 10 per cent in another incorporated company are considered as free-float shares. The free-float dividends obtained from the shares have been taxable since March 2013. Where an incorporated company sells free-float shares, the profits generated by such sales are tax-free.

By privileging these profits from sales, the government annually renounces tax revenues of about €600 million. Moreover, it thus permits tax-saving strategies: By selling the free-float shares to a tax-exempt investor before the dividend record date, the seller may obtain tax-free profits. After the dividend record date, the seller may repurchase the shares, usually at a price reduced by the dividend.

The Federal Ministry of Finance has produced an exposure draft for the reform of the taxation of investments. One of the legislative amendments proposed relates to corporation tax. The Finance Ministry’s proposal is the uniform taxation of free-float dividends and profits from sales of shares. It remains to be seen to what extent the recommendations will be included in a draft law.

 

 

2015 special report - EUROFISC – a multilateral warning system of the Member States for combating VAT fraud 

“VAT fraud causes significant shortfalls in tax revenues. In order to effectively combat VAT fraud, European Member States need to work more closely together. They need to share information more speedily about presumptive fraud cases and increase the quality of their data”, said Kay Scheller, President of the Bundesrechnungshof, on the occasion of the publication of a joint report of the supreme audit institutions of Austria, Germany and Hungary on combating VAT fraud.

Progress is being made. Since 2011, EU Member States have implemented EUROFISC, an early warning system, which enables them to share information on suspected companies and their customers. EUROFISC increases the chances of national administrations to detect fraudsters in due time. The quality of data, IT support, response times and response rates of the Member States, however, need to be enhanced to effectively combat VAT fraud within the EU. For example, the feedback ratio to mutual requests among the Member States on the status of companies in 2011-2013 was at only 33 per cent in one working field of EUROFISC.

This is the conclusion of a joint audit mission carried out by the supreme audit institutions of Austria, Germany and Hungary. They reviewed how their countries use the EUROFISC network. As to Germany, the Federal Ministry of Finance has promised to take up the recommendations of the SAIs and to address the existing weaknesses of EUROFISC.

The European Commission estimates the annual shortfalls in tax revenues within the EU to be about €168 billion. A part of this is due to carousel fraud in roundabout transactions. Fraudsters take advantage of weaknesses in the EU’s VAT system. They sell goods imported tax-free to domestic missing traders and earn the VAT amount incurred. Instead of transferring this amount to the government, they keep it and disappear from the scene.

 

2014 Annual Report – spring report No. 06 - Arrangements to administer insurance tax in line with the state-of-the-art needed

By virtue of the 2009 Federalism Reform, the Federal Government has taken charge of administering insurance tax. Since then, it has not succeeded in implementing the IT systems for a state-of-the-art administration of insurance tax. Thus, a large input of manual work is required. Moreover, the Federal Government must rely on the assistance of Bavaria when it comes to collecting the assessed insurance tax. The Federal Finance Ministry must take speedy remedial action.

Insurance tax generates annual federal revenues of more than €11 billion. Until the 2009 Federalism Reform, the German states administered this tax. Effective from 1 July 2010, the responsibility for this tax was transferred to the Federal Central Tax Office. Following that transfer of responsibility, we found that the Federal Central Tax Office did not have an IT system for administering insurance tax. To ensure tax collection, the Federal Government had purchased IT support from the State of Bavaria. At that time, the Federal Ministry of Finance told us that it would take steps to ensure full federal IT support. However, hardly any improvements were made from 2013 to 2014. The staff of the Federal Central Tax Office had to manually enter the data of each taxable person several times. Moreover, there was a lack of functional IT support for tax audit, statistics, dunning and enforcement. To collect insurance tax, the Federal Central Tax Office still had to rely on Bavarian assistance. For this, it paid €200,000 annually. The date of implementing the Federal Government’s own IT solution was unclear.

We called for a speedy development of the necessary IT system, which is a prerequisite for state-of-the-art administration of insurance tax. We urged the Federal Ministry of Finance to strive for independence from Bavarian assistance still in 2015.

The Federal Ministry of Finance admitted the need for functional IT support but argued that it was necessary first to draw on external expertise in order to develop an appropriate technical concept. The Ministry argued that the contract for such consultancy would probably be awarded in 2015 and that it was impossible to estimate when the technical concept could be implemented. In any case, the Federal Government would have to rely on Bavarian technical assistance in 2015.

Since the 2009 Federalism Reform, insurance tax is the exclusive domain of Federal Government. We would have expected that the Federal Government would use this amendment to demonstrate its capabilities in the field of tax administration and IT support. Against this background, we consider progress made so far and expected for the coming years as dissatisfactory. It is likely that, in 2016, the Federal Government will still have to rely on the costly support from Bavaria for the collection of insurance tax. We demand that the Federal Ministry of Finance not permit any further delays and take speedy action to ensure appropriate IT support. The target should be to become independent from the support of any state government for collecting insurance tax by 2017.

 

2014 Annual Report No. 76 - Measures taken to secure the tax revenue due from pensioners residing abroad

The Federal Ministry of Finance presses for the more frequent application of tax deduction at source from pensions drawn by beneficiaries residing abroad. Under that procedure, the pension insurance bodies deduct the estimated tax directly from the pension and remit it to the tax office. We had recommended that this method should be applied more often. We consider it as an effective tool for securing tax revenue.

Since 2005, beneficiaries of statutory old-age pensions permanently residing abroad have to pay tax on their pensions in Germany. One tax office has the nation-wide responsibility for all pensioners residing abroad and liable to pay tax in Germany only on their pensions. We found that the pensioners for which this tax office was responsible often did not pay their taxes. The rate of arrears was significantly higher than in similar cases where the pensioners resided in Germany. The main reason for this was that the tax office was largely unable to enforce payment of the tax liability. In Germany, most pensions were exempt from seizure due to their small amount. Tax liabilities of pensioners residing abroad were regularly uncollectible due to the obstacles to obtaining administrative assistance from the state in which they resided.

However, tax deduction at source pursuant to Art. 50a para.7 of the Income Tax Act proved an effective tool for securing the tax revenue. Under that procedure, the pension insurance body has to directly deduct the estimated tax liability from the pension and remit the amount to the tax office. However, the tax office ordered this collection method to be applied only in isolated cases.

We urged the Federal Ministry of Finance to press for the significantly more frequent application of deduction at source. The Ministry took up our recommendation. It intends to speedily develop, in conjunction with the German states, a support software for tax collection at source. The first steps to do so have been taken.

 

2014 Annual Report No. 75 - Federal Ministry of Finance revises statutory provisions on penalties payable for obstructing the work of tax inspectors

In response to our audit findings, the Federal Ministry of Finance intends to undertake, in conjunction with the German states, a fundamental revision of the statutory provisions on penalties for obstructing the work of tax inspectors.

One of the circumstances, in which the fiscal administration may impose such a penalty, is the failure of taxable persons to appropriately cooperate with tax inspectors in connection with tax audits on their premises. This is to encourage cooperation and to speed up the conduct of such field audits. The underlying legislative intent is to avoid disadvantages for the public exchequer that may be caused by a delayed assessment. Thus, these penalties are to help comply with the budgetary law requirement of timely and complete collection of revenues.

We found that the tax offices rarely imposed penalties on taxpayers that cooperated inadequately. They did not do so in many cases where such penalties would have been warranted. To justify this, they argued legal uncertainties and the concern that the ‘audit climate’ could deteriorate. Moreover, the tax offices imposed such penalties for purposes for which they were not intended, e.g. to enforce the submission of documents not connected with a field audit.

We expressed considerable doubts as to whether the previous practice of imposing penalties for inadequate cooperation accomplished an improvement of such cooperation in field audits on the part of taxable persons. In our opinion, it is questionable whether the statutory objectives of penalties for inadequate cooperation have been achieved. We therefore recommended that the Federal Ministry of Finance comprehensively evaluate the outcomes of these penalties, looking especially into acceptance and target achievement. In addition, we asked the Ministry to issue a circular clarifying the application of this tool in order to eliminate the uncertainties in the tax offices.

The Federal Ministry of Finance discussed the recommended evaluation with the German states. It was decided to fundamentally revise the legal provisions on penalties for inadequate cooperation. We believe that doing so could provide the basis for a more effective application of this enforcement tool.

 

2014 Annual Report No. 74 - Advances in the evaluation of automatic risk management

The Federal Ministry of Finance took up our recommendation to improve the evaluation of automatic risk management in employees’ income tax assessment. It took corrective action in the evaluation or aims at remedying deficiencies. In addition, it intends to exercise its federal supervision more actively than in the past.

The tax authorities process the employees’ tax returns by means of an automated risk management. A programme-controlled risk filter decides whether the income tax is automatically determined or whether tax office staff select cases for review. In order to ensure an equal and legal taxation, risk management needs to be constantly evaluated. For this purpose, the states develop data supposed to give information on the risk management’s effectiveness which are known as standard evaluations.

We found that standard evaluations were based on incomplete and at times inaccurate data, a fact which can be attributed to conceptual inaccuracies and programming errors. Furthermore, the data were not proper for a national evaluation.

The Federal Ministry of Finance did not gather sufficient information on the evaluation by the states and could not appropriately assess the risk management’s effects on the tax enforcement. We believe that the Ministry exercised its federal oversight function only insufficiently.

We pointed out that the standard evaluations were only partly reliable due to the deficiencies found. This may affect the evaluation results and thus lead to undesirable developments of the risk management. In a number of cases, an equal and legal taxation would not be ensured. We therefore demanded that the standard evaluations be improved. Furthermore, we recommended to the Federal Ministry of Finance to more actively exercise its federal oversight function.

The Federal Ministry of Finance took up our recommendations. Some deficiencies of the standard evaluations have already been remedied; others have been addressed by the federal government department. Moreover, it intends to monitor the risk management’s evaluation more closely. We believe that the initiated or implemented steps can enhance refining automated risk management.

 

2014 Annual Report No. 73 - VAT tax on exports – plans to reduce the risk of fraud

There is a risk of fraud in the exports’ VAT taxation if goods which are supposed to be exported into a third country actually remain in the European Union. In response to that, the Federal Ministry of Finance approaches in coordination with the states the deficiencies in the exports’ VAT tax control. The objective, in particular, is to improve the data exchange between tax authorities and customs departments.

In 2013, the German economy exported goods for more than €470 billion in countries outside the European Union (third countries). Such exports are exempt from VAT tax if the goods are exported to third countries. Fraud is possible if traders make use of the tax exemptions but just pretend to export the goods into a third country. That is why the tax authorities have to check in cooperation with the customs departments whether the deliveries are really exported into a third country.

We found, however, that there were deficiencies in the export control. In particular, the data exchange between the tax authorities and the customs departments was inadequate, which contributes to an insufficient awareness-raising by the states’ tax authorities as to risk of fraud in case of exports. In our view, frauds could at best be identified coincidentally.

The Federal Ministry of Finance recognised the risk of fraud and admitted that a systematic approach to supervision for exports is so far missing. It responded to our findings by reminding the states of the risk to tax revenue. With their cooperation, the federal government department wants to improve the export control. A possible instrument should especially be an improved automated data matching between customs departments and tax authorities.

We acknowledge that the Federal Ministry of Finance takes up our recommendations. In cooperation with the states, it plans to remedy the deficiencies. We will monitor whether the tax authorities’ control practices really improve.

 

2014 Annual Report No. 70 - Finally updating the central information system for VAT control

The German part of the information system for VAT control in the European Union is obsolete. However, an efficient exchange of information between fiscal authorities is a key element of the control in order to prevent tax losses and fraud. The Federal Ministry of Finance therefore has to provide for the information system’s immediate update after eight years of planning and previous unfulfilled promises for completion.

In the case of the intra-Community movement of goods between traders, despatches to other EU Member States are exempt from tax for the selling trader. The purchaser has to pay VAT for the imported goods in the country of destination. For monitoring the compliance with this requirement, the Member States’ tax administrations exchange information on intra-Community supplies and purchasing transactions. In the 1990s, the VAT Information Exchange System (VIES) was set up for this exchange of data.

The responsible Federal Ministry of Finance has known for a long time that the German part of the system is obsolete and lacks user-friendliness. An update until 2009 was already proposed in 2006 but remained unsuccessful. In 2011, the federal government department still developed a detailed strategy for the update. We therefore demanded in our 2011 annual report that the update be completed immediately. The federal government promised the Public Accounts Committee to complete the updated system (VIES-neu) by 30 June 2014.

In April 2013, however, the federal government department postponed further implementation of VIES-neu for at least two years. We criticised the new delays and referred to the Public Accounts Committee’s clear decision. 

The federal government department admitted that VIES-neu had to be implemented immediately. It stated that the development, however, had to be postponed in favour of priority projects but it intended to use all possibilities resulting from available resources for an accelerated implementation.

We consider this declaration as insufficient. After eight years of planning, VIES-neu has to be implemented immediately. The federal government department’s reference to other projects does not justify the postponement. All IT systems required for fighting tax losses and VAT fraud have to be developed. We therefore demand that a binding overall planning for the information system’s update be established by the Federal Ministry of Finance. The planning should include clear deadlines and milestones. The federal government department has to carry out regular reviews, and, if necessary, make adjustments.

 

2014 Annual Report No. 69 - Accurately determine the results of special VAT audits

For statistical purposes, the tax offices frequently overstated the additionally assessed amounts of tax generated by special VAT audits. The overall statistics therefore do not reflect the real success of such tax audits. This distorts the comparison between the German states and may lead to a misallocation of tax audit staff. Therefore, the Federal Finance Ministry has to take steps to ensure consistent and accurate assessments.

The tax offices carry out special VAT audits to verify VAT final or provisional returns. These audits focus on fighting VAT fraud. The German states keep statistics about the results of these special VAT audits. In particular, these statistics serve to disclose the additional amounts of VAT assessed as a result of these special audits. The methods for calculating such additionally assessed amounts are prescribed by statistical principles that apply nation-wide. The Federal Finance Ministry aggregates the data furnished by the states to produce national statistics. According to these, amounts additionally assessed on the basis of special VAT audits totalled €2 billion in 2013.

We found that the tax offices frequently did not comply with the statistical principles. Some German states had even instructed their tax offices to calculate the additionally assessed amounts by other methods. Therefore, the amounts reported were higher than the additional tax liabilities of businesses. In a number of cases, the tax offices reported additional assessments even in cases where the VAT liability after the tax audit was actually lower than before. Already years before, several states had drawn the attention of the Federal Finance Ministry to interpretation problems and ambiguous wordings in the statistical principles. However, the Federal Finance Ministry did not act on this information.

We hold that the Federal Finance Ministry has to ensure that the additionally assessed amounts are calculated accurately. It eventually must revise the statistical principles so as to unambiguously prescribe the methods for calculating the additional assessments. A meaningful analysis of the results of special VAT audits is possible only if they reflect the real success of the special VAT audits. Conversely, in accurate figures will distort the comparison between the states. They do not lend themselves to being used as performance indicators and may lead to a misallocation of audit staff.

 

2014 Annual Report No. 68 - Simplify flat-rate calculation of taxable profits

If the prerequisites for the flat-rate calculation of profits of farmers and forest owners are no longer met, the tax office has to officially notify the taxpayer accordingly. Only after receiving such notification are farmers and forest owners no longer allowed to calculate their profits on the basis of flat rates. This procedure involves a high administrative burden and is vulnerable to misuse. Moreover, it leads to unequal tax treatment. Abolishing these notifications would therefore also contribute to tax equity.

Subject to certain prerequisites being met, the Income Tax Act allows farmers and forest owners to use a simplified method of calculating their profits on the basis of flat rates. If these prerequisites are no longer met, the tax office has to officially notify the taxpayers that they have to change their profit calculation method. Only after receiving such notification are farmers and forest owners no longer allowed to calculate their profits on the basis of flat rates. This applies from the beginning of the subsequent financial year.

We audited the respective reasons for notifying taxpayers that they may no longer use the flat-rate method. In many tax cases which we reviewed, necessary information was missing. In addition, farmers and forest owners used this formal procedure to their advantage. When an official notification had been issued, they claimed that they would meet the prerequisites again in the future. However, the subsequent income tax returns showed that a simplified calculation of profits was no longer admissible. Tax offices were able to demand that another profit calculation method be used only in the subsequent financial year.

 

2013 Annual Report –spring report No. 12 - Special VAT arrangement for farmers – Federal Finance Ministry must inform Parliament better

The Federal Finance Ministry has for years failed to inform Parliament about the trend of the input VAT burden on farmers to whom a special arrangement applies (flat rate farmers). Legislature uses the burden of input VAT as an important criterion for fixing the special VAT rate for flat rate farmers. Due to the lack of information, the Legislature was unable to take an appropriate decision about whether the special VAT rate for these farmers was to be adjusted. Failing such adjustment, considerable losses of tax revenue may ensue.

The farmers who benefit from this arrangement may use a special provision on VAT. They may charge VAT at an average rate on the goods and services they deliver. They are not obliged to remit to the tax office the VAT they have collected. Instead, the additional revenues they thus obtain are to compensate farmers for the burden of input VAT charged to them by other traders. Under EU law, this special arrangement is not permitted to lead to a tax subsidy. Therefore, no Member State may fix the average rate at a level enabling them to receive VAT in excess of their input VAT burden. The Federal Finance Ministry must calculate the input VAT burden of the German flat rate farmers to enable German Legislature to determine the appropriate average rate. Such a calculation has to be based on the economic data of the recent three years. In 1990, the Finance Committee of the German Parliament decided that the Ministry should inform the Committee annually about the input VAT burden of the flat rate farmers.

The average rate of 10.7 per cent has remained unchanged for years. We found that, since 1998, the Ministry had not informed the Finance Committee about the trend of the input VAT burden. The Ministry told us that the Finance Committee had not objected to this. Therefore, the Ministry had assumed that the Committee did no longer need such information.

We demanded that the Ministry report to the Finance Committee annually about the development of the input VAT burden. Such reporting is absolutely needed for the Legislature to take a reliable decision as to whether the average rate is to be adjusted. Such decision will have a considerable financial impact. A change of the average rate by only one percentage point is already equivalent to a VAT amount of €150 million annually, which the flat rate farmers may or may not collect from their customers and treat them as their own revenue.

 

2013 Annual Report – spring report No. 11 - Accurate taxation of foreign internet provider

Inspection by the German tax authorities of foreign enterprises which provide internet services in Germany is insufficient. A large number of unregistered traders raise concerns that losses of related tax revenues may amount to millions of euros. The Federal Finance Ministry is called upon to step up the tax inspection of internet services and to eliminate deficiencies in the taxation procedure.

Internet services giving access e.g. to music and videos, e-books, live cams and software are provided also by traders with headquarters outside the European Union (‘third-country traders’). Turnovers generated by providing such services are liable to value added tax (VAT) in the Member State in which the user of such services resides. Therefore, the traders must register for VAT in all Member States in which they generate turnovers (general taxation procedure). Since 2003, they have been permitted to declare all their turnovers in the EU in one Member State which remits the VAT collected to the other Member States in proportion to the respective turnovers (special taxation procedure).

We found that only few third-country traders are registered for VAT in Germany. Under the special taxation procedure, Germany obtains VAT revenues of only about €23 million annually. In practice, there are no checks for such VAT liabilities. Thus, it is very easy for third-country traders to provide internet services without paying VAT on them. The market for internet services is in the range of billions of euros and is growing steadily. In our opinion, the related VAT revenues of only about €23 million suggest that there is a large number of third-country traders who do not pay VAT on the internet services which they provide.

Therefore we have called for an improvement of tax inspection. Procedural deficiencies, e.g. non-serviceable data bases, inadequate exchange of information with other Member States and the lack of information in English, will have to be eliminated.

The Ministry has questioned the fact that there is a large number of unregistered traders. Rather than that, it assumes that third-country traders who provide internet access to music, videos, e-books, live cams and software essentially meet their tax liabilities. However, the Ministry admitted that there are some procedural deficiencies and intends to consider e.g. bilingual information.

We believe that it is wrong to assume that service providers from outside the European Union essentially meet their tax liabilities despite the absence of tax inspections. We therefore uphold our demand that tax inspection and the taxation procedure be improved so as to increase Germany’s VAT revenues from third-country traders.

 

2013 Annual Report No. 81 - Federal Finance Ministry failed to inform the Legislature about changes in tax subsidies

The Federal Finance Ministry failed to inform Parliament about the results of effectiveness evaluations in the field of tax subsidies. If Parliament is not informed, there is the risk that effectiveness evaluations become futile.

Effectiveness evaluations in the field of tax law are particularly important because tax legislation regularly has large financial effects. Especially the legal provisions on tax subsidies should therefore be reviewed at regular intervals.

We conducted an extensive study on tax subsidies. On behalf of the Federal Finance Ministry, expert advisors carried out structured effectiveness evaluations of the 20 biggest tax subsidies. They proposed the abolition of five tax subsidies (€4.8 billion) and to revise ten tax subsidies (€10.5 billion). The Ministry considered most of the proposals as helpful. Nevertheless, it did not inform Parliament about the results of the expert evaluations and the need for change.

If, after performing effectiveness evaluations, the Finance Ministry is convinced that provisions of tax law do not accomplish the intended objectives or have undesired side-effects, we believe that it has the duty to inform Parliament accordingly and to point out options for legislative action. Only thus can Parliament decide whether and what legislative action is to be taken in response to the results of effectiveness evaluations. If the Federal Finance Ministry omits such information or furnishes incomplete information, there is the risk that effectiveness evaluations become pointless.

 

2013 Annual Report No. 80 - Taxation of interest income from private loans has been improved

The Federal Finance Ministry and Germany’s constituent states have created the prerequisites for improving the accuracy of the taxation of interest income from private loans. In response to our recommendation they simplified the income tax return form and intend to adjust the IT programmes for tax assessment accordingly. Moreover, the states provided intensive training for their tax inspectors.

Yields on private capital are subject to the final withholding tax of 25 per cent. To preclude the possibility that high-income taxpayers obtain an undue advantage in respect of this tax by granting private loans, the Legislature has provided for exceptions. Thus, interest income has to be taxed with the individual tax rate of up to 45 per cent where

  • the lender and the borrower are closely associated with each other and the interest expenditure generates operational expenditure or work related expenses of the borrower;
  • a loan is granted by a partner or shareholder to the partnership or company and where the lender holds at least a 10 per cent interest in the borrowing partnership or company.
  • We found that the tax offices frequently applied the final withholding tax rate of 25 per cent to interest income to which the higher individual tax rate should have been applied. We therefore recommended that:
  • Tax inspectors be once more instructed about the circumstances in which the individual tax rate and not the final withholding tax rate must be applied.
  • The schedule “capital assets” should be simplified.
  • To adjust the IT programmes to facilitate the identification of the exceptional cases by the tax inspectors.


The Finance Ministry and the states have taken up our proposals.

 

2013 Annual Report No. 79 - Successful efforts to combat VAT fraud due to sustained international cooperation

The Supreme Audit Institutions of Belgium, the Netherlands and Germany jointly audited the implementation by the EU Member states of their recommendations for combating intra-Community VAT fraud. The auditors found cases of initial success: Fraudulent traders can be identified earlier. To make the fighting of VAT fraud even more effective, the tax administrations should be authorised to delete traders from the VAT register.

The audit institutions found, in particular, that information exchange throughout the European Union has improved. Generally, data on intra-Community sales are shared earlier. As a result, potentially fraudulent traders can be detected earlier. In addition, the EU Member States have set up the Eurofisc network to facilitate cooperation among the fraud-fighting units.

The audit institutions have identified need for action in the following fields, among others: The registration and deletion of businesses for VAT. For instance, the tax administrations need to be authorised to delete valid VAT identification numbers of businesses in order to prevent fraudulent have acquired through the purchase of the business in question. 

 

2013 Annual Report No. 78 - Better VAT inspection of taxable construction work performed by foreign contractors

The Federal Finance Ministry has taken up our recommendations for taxing turnovers generated by foreign contractors in Germany. The tax offices will step up their VAT inspections concerning construction work performed by foreign contractors, increase the number of tax audits in the field and thereby prevent losses of VAT revenue.

As a rule, the trader who delivers goods or services owes the payment of VAT on taxable supplies or services. In deviation from this rule, the recipient of such supplies or services has to pay the VAT on supplies or services delivered by foreign contractors.

In recent years, we audited the impact of this legal provision. We found that the tax offices were not able to rule out losses of tax revenues. This was essentially attributable to the following causes:

  • The tax offices omitted comparisons between the VAT returns of the contractors and the recipients of goods or services.
  • he tax offices did not identify cases where recipients of construction services declared these services either not at all or incompletely.
  • Tax auditors in the field addressed the taxation of construction services only in a few cases.

The Finance Ministry has acknowledged that VAT inspection in relation to construction services provided by foreign contractors needs to be stepped up. The tax authorities of Germany’s constituent states should take appropriate steps to ensure that the tax offices intensify their inspections concerning the VAT liability generated by the provision of construction services by foreign contractors.

 

2013 Annual Report No. 77 - adequate combat of VAT fraud after changes in ownership of businesses

Offenders use a gap in the VAT legislation for fraudulent purposes. This is so because tax offices may not demand monthly preliminary VAT returns in cases where traders acquire more or less active businesses as so-called shell companies and generate turnovers under their names. We hold that these traders need to be obliged to file monthly VAT returns. This is the only way for tax offices to collect timely information about turnovers and cases of fraud, thus preventing losses of tax revenue.

Founders of new businesses have to file monthly preliminary VAT returns in the year of establishment and in the subsequent year. This enables tax offices to prevent VAT fraud. For existing businesses, the traders generally have to file quarterly preliminary returns. Fraudulent traders use the non-obligation to file returns monthly: They acquire businesses with little or no activity as shell companies. They achieve large turnovers under the name of the shell company but do not pay the related VAT they owe to the tax office. The shell companies have often been already dissolved before the tax offices become aware of the turnovers via the quarterly returns. This results in losses of tax revenue.

We recommended amending the legal provisions to the effect that traders who acquire shell companies need to file monthly preliminary returns with the tax office. This serves to identify and combat cases of fraud at an earlier stage.

 

2013 Annual Report No. 76 - Taxable turnovers of physicians not completely taxed

In many cases, taxable services provided by physicians are not taxed. The reason is that the tax administration does not have information about these taxable turnovers. Initiatives taken by the Federal Finance Ministry are ambiguous and insufficient to ensure equitable and complete taxations of these turnovers.

Medical treatment by physicians is exempt from VAT, if it is medically indicated. Apart from that, physicians increasingly provide taxable services such as liposuction, cosmetic breast surgery, the removal of tattoos and the bleaching of teeth. In recent years, the volume of such taxable services has strongly increased. Frequently the tax offices did not identify these taxable services because they lacked the necessary information. The respective turnovers therefore remained untaxed. In cases where tax auditors in the field addressed the problem of distinguishing between taxable and tax-free services, it often turned out that the portion of taxable turnovers was higher than expected. As a result, VAT revenues increased.

The tax administration needs additional information in order to ensure equal and complete taxation. We recommended that the Federal Finance Ministry develop a specific questionnaire for physicians. This would enable tax inspectors to ask for information needed for accurate tax assessment. In addition, they should be made aware of the need to identify cases in which physicians’ tax returns need to be scrutinised more thoroughly. Only thus will the tax administration be able to equally and completely tax the taxable services of physicians.

 

2013 Annual Report No. 75 - Regulation on bonded VAT warehouses needs to be reconsidered

The tax administration is neither fully aware of the total number of bonded VAT warehouses actually approved by the local tax offices nor of the volume of turnovers of the traders. Losses of tax revenue and cases of fraud cannot be excluded. The Federal Finance Ministry has not assessed the financial importance of the bonded VAT warehouses and not scrutinised whether the regulation is appropriate.

Traders may store certain goods, e.g. grain in bonded VAT warehouses and sell them without creating a VAT liability. The goods remain on the traders premises in the bonded warehouse. VAT becomes due only when the goods are processed or leave the bonding warehouse.

We found that the tax offices did not know the number of bonded warehouses in place, since they did not record the approvals. In addition, the tax offices failed to check the bonded warehouses. The Ministry did not know whether the arrangement for bonded VAT warehouses actually improved the competitiveness of domestic traders, which had been the objective of the relevant legislation.

The tax offices have to record the approved bonded VAT warehouses and to check them as well as the connected turnovers. The Federal Finance Ministry, in conjunction with Germany’s constituent states, will have to develop rules for this. We expect the Finance Ministry to verify whether the legislative provision on bonded VAT warehouse has proved successful.

 

2013 Annual Report No. 74 - Legislation against ‘goldfinger scheme’ to prevent tax revenue losses

The Legislature has changed provisions on tax exemption with progression. Taxable persons can no longer use provisions to avoid taxes by means of the ‘goldfinger scheme’. Our recommendations helped to bring about this change.

Profits and losses of certain foreign partnerships domiciled in the European economic area are tax exempt in Germany by virtue of double taxation agreements. However, tax law calls for an exemption with progression.

For years, taxable persons exploited the German rules on tax exemption with progression by means of an arrangement known as the ‘goldfinger scheme’: They established partnerships, e.g. in the United Kingdom. These partnerships acquired precious metals destined for sale, preferably gold. The metals bought thus became current assets. Since the partnerships had no or only little profits in the year of establishment, the costs of acquiring the current assets generated losses. In a number of cases, these losses were very high which resulted in a zero tax rate on total profits. If the partnership sold the gold in the subsequent year, tax offices took these profits into account under the taxation with progression rule. However, this scarcely had an effect on the progression to be applied because the taxable persons were already subject to the top tax rate due to their large incomes so that the sale of the gold did not increase progression.

We found that the ‘goldfinger model’ caused annual losses of tax revenue in an 8-digits euro amount. We therefore urged the Federal Finance Ministry to prevent the use of the ‘goldfinger model’ by changing legislation.

The Legislature changed the rules for exemption with progression by means of the Mutual Assistance Directive Implementation Act which also modified certain taxation rules. According to the new provisions, foreign partnerships may claim expenditure deductions for current assets such as gold only at the time when they make a profit or transfer the gold to their private assets.

 

2013 Annual Report No. 73 - Lump-sum deduction of operational expenditures in forestry businesses amended

The Legislature has taken up our recommendations. It reduced the lump-sum deduction of operational expenditures from forestry earnings and limited it to smaller forestry businesses. An accurate tax assessment of forestry businesses is now possible.

Proprietors of forestry establishment that do not keep accounts may on application deduct their operational expenditures from the earnings generated by the sale of wood. They may choose each year between the lump-sum deduction and the deduction of actual operational expenditure. If lump-sum deduction is chosen, no further claims to deductions of forestry operational expenditures from earnings generated by the sale of wood in the financial year can be made. Previously, this also applied to reforestation costs irrespective of the year in which they were actually incurred, e.g. to compensate for storm damage.

We compared the calculation of profits of forestry businesses and found that the lump sums for the deduction of operational expenditure were excessive. This meant that earnings of medium-sized and larger forestry businesses were assessed inadequately. Moreover, the annual choice between lump-sum deduction and deduction of actual expenditure permitted forestry businesses to claim the deduction of reforestation costs several times.

We recommended that the Federal Finance Ministry restrict lump-sum deduction to small forestry businesses. We further recommended that lump sums be reduced significantly and reforestation costs be excluded from lump-sum deduction.

The Tax Simplification Act 2011 amended the rules for the lump-sum deduction of operational expenditure from earnings generated by forestry accordingly.

 

2013 Annual Report No. 72 - Urgent need for legislative provision on the tax exemption of recapitalisation gains

Applicable legal provisions on the tax exemption of recapitalisation gains might impair the financial rehabilitation of companies in distress. Municipalities and tax offices decide, independently of each other, about the exemption of recapitalisation gains from taxes on earnings. Therefore, companies do not have the planning reliability they need for financial rehabilitation.

Companies in distress undergo financial rehabilitation in order to avoid their complete breakdown. One of the most frequent rehabilitation measures is the waiver by creditors of their claims. This generates recapitalisation gains. By virtue of administrative guidance issued by the Federal Finance Ministry, these gains are to be exempted from income and corporation tax. The decision about the exemption is incumbent on the local tax offices. Municipalities decide about the exemption from trade tax and are neither bound by administrative guidance nor by the decision of the local tax offices.

Companies need to file their applications for tax exemption both with the responsible tax office and with each municipality involved. Deviating decisions are likely and actually occur. This makes it difficult for companies to plan and implement financial rehabilitations and causes avoidable administrative burden.

We recommended legislation which automatically exempts recapitalisation gains from tax liability. This would considerably reduce the administrative burden and provide the necessary planning reliability.

 

2013 Annual Report No. 63 - Verification of income for determining the claim to parental allowance simplified

In response to our recommendation, the Federal Legislature simplified the calculation of the claim to parental allowance. The new regulations make it easier for the states’ units responsible for administering parental allowance to verify the incomes of the claimants and to accurately calculate the claims to the federally-funded parental allowance. This may also reduce the states’ administrative burden.

With the support of our field offices, we found that the units administering parental allowance had inaccurately assessed claimants’ net incomes in one third of all parental allowance cases audited. We attributed this to the complex provisions on calculating incomes. The staff of the units administering parental allowance often did not have the required knowledge of accounting and tax law for calculating net incomes accurately.

We repeatedly recommended that the Federal Family Affairs Ministry simplify, in conjunction with the states, the calculation of parental allowance. In 2012, the Legislature decided to facilitate the calculation of incomes. In the case of claimants who are employees, the parental allowance units calculate claimants’ net incomes by deducting lump sums for social security contributions and taxes. Self-employed claimants present the latest income tax assessment notice issued before the birth of the child to prove the amounts of their incomes. In our opinion, this legislative amendment considerably simplifies the work of the parental allowance units. The amended provisions contribute to the accurate administration of the Parental Allowance Act and the proper use of federal funds. Moreover, they may reduce the administrative burdens on the states.

 

2012 Annual Report No. 89 - Taxation of foreign insurance companies is improved

The Federal Finance Ministry has taken up our suggestions concerning the taxation of foreign insurance companies. It has issued guidance for federal and state tax authorities. This enables the Federal Central Tax Office to better audit and tax foreign insurance companies that do business in Germany. The Ministry intends to supplement this guidance by new IT systems for the assessment and collection of insurance tax.

As a rule, the insured parties pay insurance tax to their insurer along with their premiums and contributions. The insurers remit the tax to the tax administration. Foreign insurance companies doing business in Germany are also obliged to do so. The revenues from insurance tax belong to the Federal Government. This tax is administered by the Federal Central Tax Office. Not all foreign insurance companies fulfilled their tax-related duties. Tax authorities had noted this in the course of their audits on the premises of domestic taxable persons that had paid premiums or contributions to foreign insurance companies. Only the results thus generated enabled the Federal Central Tax Office to monitor and tax the foreign insurance companies.

We found that the tax auditors responsible for conducting the audits mentioned above did not have sufficient guidance at their disposal for discharging this function. Moreover, the Federal Central Tax Office lacked a uniform IT application for administering insurance tax.

We therefore recommended that the tax auditors should be encouraged to pay even more attention to insurance tax. Moreover, we suggested that the Federal Finance Ministry take steps to improve IT support.

The Ministry has followed our suggestions and has taken first steps.

 

2012 Annual Report No. 88 - Declining and erratic wage tax audits on employers’ premises

On average, the percentage of employers on whose premises tax offices carried out wage tax audits and the volume of additional tax revenues generated by such audits have declined for years. The percentages of employers audited and the additional tax revenue generated per audit differed considerably among the German states. The Federal Finance Ministry should take steps to counteract this trend.

Wage tax is one of the most important sources of revenues for public budgets. Employers are obliged to deduct wage tax from the wages of their employers and remit the amounts deducted to the local tax offices. Wage tax audits carried out on employers’ premises by the local tax offices are to provide assurance as to the accurate deduction and remittance of wage tax.

The percentage of employers on whose premises a wage tax audit was carried out declined from 7.1 per cent in 2005 to 5.4 per cent in 2010. Similarly, the additional tax revenues generated by these audits dropped from €911 to €787 million during the same period. At the same time, the number of posts for wage tax auditors has declined by 8.5 per cent.

Moreover, a comparison between the German states revealed considerable differences in such wage tax audits. In particular, there were large differences in the percentages of employers audited and in additional tax revenues generated by each audit. The more wage tax auditors employed by each state, the larger was the percentage of employers audited and usually also the additional tax revenues generated by each audit.

The Federal Finance Ministry should exercise its supervisory powers over the tax administrations of the states to urge the latter to conduct sufficient and uniform tax audits on employers’ premises.

 

2012 Annual Report No. 87 -Tax offices verify revenue from rents inadequately

Lessors of residential premises often furnished inconsistent information in their tax returns, e.g. concerning utility costs. Although the tax offices use a computerised risk management system, they frequently failed to object to such information.

Tax offices have the statutory duty to verify whether the information furnished in tax returns is complete, consistent and unambiguous. This verification of consistency is often left to a computerised risk management system. It decides on the basis of specified parameters (e.g. by comparison with a benchmark amount) whether the tax return information involves risks and thus have to be checked by staff. In those cases where no risks are identified, the assessment notice is produced automatically without involvement of staff.

In the tax returns we audited on the basis of samples, lessors’ declarations of their revenue from rents and of income-related expenses were frequently inconsistent. In many cases, utility charges paid to the lessors by the tenants were not declared. At the same time, lessors deducted utility charges which they usually pass on to their tenants as income-related expenses. The computerised risk management system did not alert tax office staff to these inconsistencies.

We pointed out that the tax offices did not follow up on such inconsistent information. The computerised risk management system did not detect these inconsistencies. It therefore remained uncertain whether the lessors had declared their revenues completely and whether their claims for the deduction of income-related expenses were accurate.

We asked the Federal Finance Ministry to take appropriate steps, especially by improving the computerised risk management system, to ensure that the tax offices clarify inconsistent tax return information, demand missing information and record the relevant data electronically for the future. Thus, these data would be available for future checks of inconsistencies.

 

2012 Annual Report No. 86 - Taxation of allowances for child-raising periods in pension income

Allowances for child-raising periods are tax-exempt for civil service pensioners. In contrast, similar allowances for statutory retirement pensioners have been taxable since 2005. Although the Federal Finance Ministry considered this tax exemption as unjustified, it has not addressed the problem.

The Federal Constitutional Court had objected to the different taxation of general statutory pensions and the civil service pensions, because it gave statutory pensioners an advantage over civil service pensioners. The Retirement Income Act therefore changed the taxation of general statutory pensions. They become gradually taxable as from 2005. Since then statutory pensioners also have to pay tax on the allowances for child-raising periods which they receive as part of their pensions. In contrast, civil service pensioners continue to receive these allowances tax-free. The Federal Constitutional Court had objected precisely to such unequal taxation of retirement incomes.

We demanded that the tax exemption be abolished. The Federal Finance Ministry also considers the tax exception of allowances for child-raising periods paid to civil service pensioners as unjustified. Nevertheless, it has so far refrained from recommending the abolition of the tax exemption to the Legislature. It should do so soon.

 

2012 Annual Report No. 85 - Legal amendment for the taxation of the adjustment benefit necessary

Dismissed coal mining workers receive a tax-free adjustment benefit. Similar benefits such as severance pay, unemployment benefits and compensation for workers put on short time are taxed or increase the tax rate on other income. We consider it necessary to bring this matter to the attention of the Legislature.

Dismissed coal mining workers receive an adjustment benefit. When the Legislature introduced the adjustment benefits in 1972, it made the benefit tax-exempt. At that time, similar other benefits also were tax-free. The adjustment benefit is comparable to wage replacement benefits such as unemployment benefits or compensation for workers put on short time and severance pay for the termination of employment. Wage replacement benefits have the purpose of providing social security. Severance pay replaces the lost wages. The adjustment benefit was introduced for similar reasons. Wage replacement benefits are not taxed. However, since 1982, the amounts were taken into account for determining the tax rate on other income. This is to reduce tax advantages enjoyed by recipients of wage replacement benefits in comparison with persons who have taxable incomes in the same amount. Since 2006, severance pay has been taxable.

The Federal Finance Ministry has not considered whether these amendments of tax law should apply similarly to the wage replacement benefits. Therefore, the recipients of adjustment benefits enjoy a tax advantage over employees that have received severance pay or recipients of unemployment benefits and short-time compensation.

The Federal Finance Ministry has classified the adjustment benefits as a wage replacement benefit for purposes of taxation. Taking regard to the social policy objective of the adjustment benefit, the Ministry wishes to continue the tax exemption for it. It did not draw the Legislature’s attention to this matter. We, however, consider this as necessary. Being aware of this issue will enable the Legislature to decide whether the reasons given by the Federal Finance Ministry warrant the tax privilege for the adjustment benefits.

 

2012 Annual Report No. 84 - Procedure for the refund of input VAT to foreign traders must be improved

Foreign traders may claim refund of VAT which they paid in Germany. The procedure for such refund is error-prone and involves a large administrative burden. This resulted in processing backlog and interest payable. The Federal Finance Ministry should make good its announcement to implement organisational improvements and should upgrade the IT system.

Subject to certain conditions, traders domiciled abroad may claim the refund of VAT paid in Germany. The claims are processed by the Federal Central Tax Office by means of a largely computerised procedure.

In the course of our audit, we found that staff had to use four different special IT programmes and databases in order to consider a claim. The procedure thus was error-prone. There were large processing backblocks. The numbers of claims assigned to individual staff members were unequal. In many cases, interest was payable on the claims to be refunded because the Office was not able to process the claims within the prescribed deadline. In the IT system, staff was not able to identify the total amount of all interest payments. From January 2010 to June 2011, the Office paid a total amount in excess of €8 million only for cases in which it had to change its administrative ruling concerning the claims. The cases detected so far have shown that the procedure for the refund of input VAT involved a large risk of fraud. The causes were electronic processing and the large number of claims. The IT system did not allow for risk-oriented processing.

We recommended that the Federal Finance Ministry improve the IT system and reallocate responsibilities among staff. Thus, the Office is able to reduce the large processing backblocks, to avoid interest payments and to reduce the risk of fraud.

The Federal Finance Ministry should speedily implement the organisational and IT improvements. To this end, it should without delay make sure that the staff can identify the total amount of all interest payments by means of the IT system.

 

2012 Annual Report No. 83 - Inadequate checks of rental income declared in tax returns

Due to inadequate possibilities for checking, tax offices are not always able to ascertain whether lessors have declared rental income for all the premises they have let. Cases where lessors have not filed income tax returns in spite of receiving taxable rental income may not be detected. The Federal Finance Ministry should take leadership to ensure that real estate data available in the public administration be put at the disposal of the tax offices.

Taxable persons who draw income from letting real estate are obliged to file income tax returns. We carried out sample audits to check whether lessors had declared all revenues for the properties they had let. Moreover, we checked whether all lessors obliged to file income tax returns had actually done so. We found that, in isolated cases, lessors had not declared rental income in their income tax returns. They had to pay tax retroactively. Several lessors had not filed income tax returns, although they were obliged to do so. They infringed the law by not paying income tax. In the case of a single tax office, four previously unknown property leases led to retroactive tax payments of more than €25,000.

The tax administration may not rely solely on the honesty of taxable persons. It has to check whether lessors declare all their rental income. We recommended that the Federal Finance Ministry take steps to make the data available elsewhere in the public administration for the purpose of checking compliance by lessors. Such data are held by other units of the tax administration or at the land registries. Nevertheless, the Ministry intends to tolerate these inadequate controls for a prolonged period, arguing that efforts to improve controls would generate little value for money. This leads to reduced tax revenues and infringes the principle of equality in taxation. The Ministry’s attitude is therefore not acceptable.

 

2012 Annual Report No. 18 - Delays in the modernisation of the taxation software used by the local tax offices

There have been repeated delays in the modernisation and harmonisation of important software for the local tax offices. Under the KONSENS project, the Federal Government and the German states committed themselves in 2005 to jointly develop, procure and use uniform taxation software for the local tax offices. The Federal Finance Ministry must take rigorous leadership in the relevant bodies to prevent further delays.

As early as in 1989, the Federal Government and the states agreed to introduce uniform taxation software nationwide. The project FISCUS, which was launched in 1992, failed 13 years later. It had cost nearly €400 million and did not generate any serviceable products. As a result, the Federal Government and the states agreed in June 2005 on the KONSENS project. Under this project, all German states and the Federal Government committed themselves to jointly developing, procuring and using uniform software for the taxation process, for the prosecution of tax-related offences and penalty proceedings.

A central purpose of the KONSENS project is harmonising and modernising three key taxation procedures. We found that there were repeated delays in accomplishing this purpose. The Federal Finance Ministry was not able to submit a plan showing all work necessary to conclude the project.

We reminded the Federal Finance Ministry of the negative experience with the FISCUS project. We called upon the Ministry to exert pressure in the joint bodies formed to manage the project. The Federal Government and the states should focus more strongly on harmonising and modernising the three key procedures. To this end, the Federal Government and the states should get an overview of what work has still to be done and by when it has to be completed.

© 2019 Bundesrechnungshof