StartCriminal tax lawVoluntary Self-DisclosureReform Radar: Voluntary Self-Disclosure

Periodical “Reform Radar”: Voluntary Self-Disclosure

Voluntary Self-Disclosure - Current Developments: Continuously updated information on the current legislative process (tightening up, changes). LHP Attorneys inform and advise on the current situation in respect of new regulation pertaining to voluntary self-disclosures.

Note by LHP Attorneys:  The new regulation only applies for voluntary self-disclosures submitted after the new regulation has become law. Protection of legitimate expectations (grandfathering) must be awarded to earlier voluntary self-disclosures. It is therefore important, to explain the former, more beneficial legal situation and the differences.

The options for a voluntary self-disclosure and the financial ramifications can best be discussed in an (initial) consultation. The respective limitation periods applicable to taxation and criminal matters should also be discussed. Special conditions of voluntary self-disclosures for self-employed (a company tax audit may estop a voluntary self-disclosure for certain types of taxes), heirs and public servants must also be considered. The currently shorter limitation period applicable in criminal law may simplify the handling of voluntary self-disclosures under current law. This area will become even more complex in the future. But even then, it will still be possible to professionally manage voluntary self-disclosures.

Future timetable for the legislative process in respect of the reform of voluntary self-disclosures under § 371 AO:

  • 23.10.2014 Discussion in the fiscal committee of the Bundesrat
  • 06.11.2014 First reading in Parliament
  • 07.11.2014 First debate in Parliament
  • 12.11.2014 First round and hearing of experts by the fiscal committee of the Parliament, as well as a decision by the cabinet in respect of an appeal
  • 03.12.2014 Final consultation by the fiscal committee of the Parliament
  • 05.12.2014 Second and third reading in Parliament
  • 19.12.2014 Second reading in the Bundesrat

19.12.2014 Consent granted by the Bundesrat

The Bundesrat granted his consent to the “Act for the amendment of the Tax Act and the implementation law to the Tax Act”. The draft bill will therefore become law on 1.1.2015. Most of the provisions pertaining to voluntary self-disclosures are tightened. Relief is also provided for, e.g. for sales tax advance-declarations. The new law applies to voluntary self-disclosures submitted on or after 1.1.2015. Note by the tax law specialists from Cologne: All voluntary self-disclosures submitted earlier are protected by grandfathering. It remains to be clarified, whether the relief provided by the new law might in certain circumstances apply to voluntary self-disclosures submitted before 1.1.2015 under the old law (cherry-picking theory). This has of course not been decided by a court yet.

5.12.2014 Approval by the Bundestag

Parliament has approved the federal government’s draft bill. It now requires consent by the Bundesrat. Amendments may be made until the last second, which means that there is currently no certainty for the legal situation after 1.1.2015. The current law only applies to voluntary self-disclosures submitted during the current year.

3.12.2014 Consent by the fiscal committee

A majority of the Parliament’s fiscal committee has consented to the modification of voluntary self-disclosures as set out in the government’s proposal dated 24.9.2014. The scope of the provisions in § 371 of the Tax Act pertaining to voluntary self-disclosures is to be much narrower than at the moment (but will also offer simplifications for companies). On Wednesday, the committee agreed to the federal government’s draft bill for the amendment of the Tax Act and the implementation law to the Tax Act (18/3018). The draft bill was supported by the parliamentary groups of CDU/CSU, SPD and the Greens. The parliamentary group of The Left abstained from voting.

For details please refer to the individual points below.  

24.09.2014 Draft bill by the government in respect of voluntary self-disclosures

The federal cabinet discussed a draft bill for the modification of voluntary self-disclosures under §371 Tax Act on 24.09.2014. This draft bill again differs significantly from the previous draft bill dated August 2014. This swift legislative process caused confusion in the daily press. We would like to outline the proposed changes based on the draft bill obtained by us.

  • The general extension of the statute of limitations to 10 years was dropped in this new draft bill. This means, that a differentiation of 5 or 10 years remains in place for the limitation period applicable to criminal matters. The Federal Ministry for Justice voiced its concerns against a general extension to 10 years.
  • But the legislator took a different, unique approach: The draft bill now provides for a strict, fictive limitation period of ten years for the submission of voluntary self-disclosures. The result is, that taxes withheld by tax fraud must in all cases be corrected by way of submitting amended tax returns for the last ten years and for all types of taxes.
  • The interest on undeclared taxes and interest on arrears, which is credited towards the interest on the undeclared amount, must be paid by the due date.
  • Compared to the draft bill dated August 2014, one option for relief has been provided for: The current draft bill provides for an estoppel in respect of a voluntary self-disclosure upon receipt of a tax audit notice, but only for the years specified in the audit notice. A partial voluntary self-disclosure may still be submitted for yearsnot specified in the audit notice.
  • The estoppels were also redrafted from the August 2014 draft bill.
  • Lowering of the threshold: Because voluntary self-disclosures are excluded for tax amounts greater than EUR 25,000 per offence (instead of the previous EUR 50,000), the only remaining option is to waive criminal prosecution under § 398a AO. The “price tag” has however increased significantly (up to 20% penalty surcharge plus interest on the undeclared amount will be payable). Whether a voluntary self-disclosure is still the least expensive option or a solution via § 153a Criminal Code is “cheaper” must be assessed on a case-by-case basis. This can only be clarified in an individual consultation, because every case is different. Generalised recommendations cannot be made.
  • Reopening of the proceedings: The legislator has stated, that “imperfect” voluntary self-disclosures (especially incomplete ones) do not result in the settlement of a case, even if the penalty surcharge as set out in § 398a AO has been paid. The proceedings may be reopened by the investigative authority, if the incompleteness is discovered later down the track.
  • The new regulation makes effective partial voluntary self-disclosures possible, if they form part of advance-declarations for sales tax and payroll tax. If an advance-declaration of sales tax or payroll tax is submitted too late or is amended, it is considered to be a voluntary self-disclosure and results in a waiver of criminal prosecution for the declared extent and does not estop a further voluntary self-disclosure for the same period, as is the case under current law. This correction must be welcomed, because the high-volumes of sales tax and payroll tax advance-declarations are prone to errors and it reduces the number of criminal proceedings commenced for negligible cases of tax fraud.
  • It is foreshadowed, that the new regulation for voluntary self-disclosures will apply from 1.1.2015. Voluntary self-disclosures under the former law will enjoy legal protection by grandfathering.

The government’s draft for the modification of voluntary self-disclosures. 

Synopsis of the voluntary self-disclosure under current regulation and the new draft bill

27.8.2014 - Draft bill: New regulation pertaining to voluntary self-disclosures

The federal government published a draft bill providing for the planned tightening of voluntary self-disclosures and tax surcharges on 27.8.2014.

The cabinet is expected to approve it in September. The tightened regulation is proposed to become law on1.1.2015.

The changes essentially correspond to the decision by the Conference of Finance Ministers dated 9.5.2014 Synopsis of the voluntary self-disclosure under the current regulation and the new draft bill

9. May 2014 - decision by the Conference of Finance Ministers:

The Finance Ministers of the federal states have adopted political cornerstones on their annual conference in respect of the tightening of voluntary self-disclosures. A press release by the state of Northrhine-Westphalia elaborates:

The prosecution-waving character of voluntary self-disclosures is essentially retained. The threshold for voluntary self-disclosures to grant exemption from criminal prosecution for tax fraud will be lowered from EUR 50,000 to EUR 25,000. In cases exceeding this new threshold, criminal prosecution is waived against payment of a 10% surcharge on the undeclared amount. A surcharge of 15% is payable for amounts greater than 100,000 Euro and 20% for amounts greater than 1 million Euro. Formerly, a surcharge of 5% for amounts exceeding 50,000 was payable.

The statute of limitation for criminal prosecution is extended to 10 years for all cases of tax fraud. Taxpayers who committed tax fraud must make a clean sweep for the previous 10 years and repay back taxes for these years in order for criminal prosecution to be waived.

In addition to paying the taxes withheld, interest in the amount of 6% must be paid immediately to secure exemption from criminal prosecution.

The key aspects of the tightened rules applying to voluntary self-disclosure are supported by the German Minister for Finances. He will now coordinate with the federal states to develop a draft bill on this basis. The law is proposed to come into force on 1.January 2015.

The state finance ministers have agreed on the following tightening and positions:

  1. The period for which amended tax returns must be submitted will be at least 10 years for all cases of tax fraud . This means, that the immediate payment of taxes withheld in all previous periods is a mandatory condition for criminal prosecution to be waived.
  2. For this purpose, the amended § 376 Sec 1 AO extends the statute of limitations for criminal offences from five to ten years, including in cases of once-off tax fraud.
  3. In the future, an exemption from prosecution in cases of large-scale tax fraud as set out in § 370 Sec 3 AO is only considered, if a surcharge is paid at the same time. § 371 Sec 2 AO is supplemented by the definition of the respective offence giving rise to an estoppel.
  4. In the future, an exemption from prosecution by submission of a voluntary self-disclosure will be limited to amounts of up to Euro 25,000. Above this amount, criminal prosecution will only be waived against payment of a surcharge.

  5. The surcharge under § 398a AO is assessed depending on the amount of taxes withheld:
    10% for amounts between 25,000 and 100,000 Euro, 15% for amounts from 100,000 Euro to 1,000,000 Euroand 20% for amounts exceeding 1,000,000 Euro.
  6. The immediate payment of 6% interest on amounts withheld from taxation will be an additional condition for waiving criminal prosecution.
  7. It is generally asserted, that sales tax reviews, payroll tax reviews and the receipt of a audit notice give rise to an estoppel for voluntary self-disclosures.
  8. The law provides for clarification for the purpose of resolving the existing practical and legal distortions in the area of reportable taxes.
    An amended or delayed (advance) tax declaration, which is not an annual return, must be valid for the purposes of a partial voluntary self-disclosure.
  9. A duty of completeness spanning over several types of taxes is not supported, because it would not be possible to warrant legal certainty, as is required by the stringent conditions associated with criminal law. In addition, the Tax Authorities would only be able to administer and verify it with great effort. 
    Due to the already existing legal and practical problems in the area of reportable taxes (in particular sales tax and payroll tax), these had to be excluded from the duty to completeness for reasons of legal certainty in order to bring a manageable regulation to life. This special treatment of sales tax would lead to distortions in respect of other types of taxes and could hardly be justified by law.
  10. A temporary suspension of the commencement of a limitation period for foreign capital income, which conforms with European law, will be introduced and its legal implementation will be determined by the legislative process.
  11. The introduction of an upper limit for the validity of a voluntary self-disclosure has been abstained of, in particular due to constitutional reservations in respect of the principles applying to self-incrimination and resultant prohibitions of exploitation. Such prohibitions of exploitation would have significant negative ramifications, not only in view of taxation consistence in an administrative view.

Source:
Press release by the Minister for Finances of Northrhine-Westphalia dated 9. May 2014.

Point of contact at LHP Luxem - Heuel - Prowatke, Attorneys for tax law, criminal tax law and tax-related civil and corporations law in Cologne and Zurich:

LHP: Attorneys at Law, Tax Law Specialists, Tax Advisers PartmbB

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Theodor-Heuss-Ring 14, 50668 Cologne,
Telephone: +49 221 39 09 770

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