Until the end of 2014, the VAT treatment of electronically supplied services within the European Union, such as the provision of online video or music streaming and online casino games, depended on the place of business from which the service provider operated (“country of origin principle”), often leading to a minimal or even no VAT liability at all in Germany of providers located within another EU Member State.
From 1 January 2015, however, the VAT treatment of electronically supplied services within the European Union changed to the place where each consumer of the respective services resides (“destination principle”). This means that all electronically supplied services provided to German residents are now generally subject to German VAT (current rate of 19%).
Even though these taxation rules have been in place for quite a while now, a relevant number of providers have not yet updated their tax reporting procedures to take these changes into account. As a consequence, the competent Financial Authorities commenced investigation proceedings against various providers offering electronically supplied services, requesting information on their business operations in Germany to verify their tax compliance.
Consequences of non-compliance
Cross-border enforcement of tax law obligations within the EU is possible. Also, the non-payment of taxes is considered a criminal offence in Germany. Several criminal investigations against providers and the responsible executives (e.g. managing directors) offering electronically supplied services to German consumers without having paid German taxes have already been commenced. If more than 1 Mio EUR of German taxes have been withheld, probation will generally not be an option anymore, but the responsible executives are likely to face imprisonment. Thus, providers offering their electronically supplied services to German consumers should assess very carefully whether they are obliged to pay taxes in Germany and what steps they should take in order to achieve tax compliance.
Importantly, it is possible to rectify historical non-compliance with German tax law through a voluntary disclosure of tax liabilities to the financial authorities. A subsequent tax declaration and payment of taxes for past liability (plus interests and potential fines) may lead to a full exemption from criminal sanctions in Germany, which may be a sensible way for many operators to legalise their German activities from a tax perspective.
Making a historical tax declaration can be a bureaucratic and potentially onerous process:
- It must be provided for the time frame during which the non-payment of taxes may be prosecuted (i.e. from 1 January 2015 for VAT payments).
- The due taxes (plus interest and fines) must be paid within the period set by the competent tax authority.
- The tax evasion must not yet have been discovered by the authorities. If the discovery is imminent, the discharging effect will only take place if the provider does not know and could not have known that the tax crime is about to be discovered.
Furthermore, the subsequent tax declaration has to be complete and cover all taxes to be paid during the taxable period. Otherwise, the voluntary disclosure and subsequent tax declaration will not have discharging effect. Still, a voluntary disclosure can be a good option to achieve tax compliance and avoid high penalty payments or even imprisonment.