Enforcement

Compliance with tax laws

How does the tax authority verify compliance with the tax laws and ensure timely payment of taxes? What is the typical procedure for the tax authority to review a tax return and how long does the review last?

Compliance with the tax laws is verified by way of enforcing submission of tax returns and reviewing these in terms of consistency, plausibility, cross-checks and select documentary evidence. If any material clarifications are required, the tax authorities will question the taxpayer in writing before rendering notes of assessment. The duration of such desktop review depends on the quality of the tax return and the taxpayer’s responses if questioned, the fiscal impact of the matter and, finally, the workload of the officer and his or her superiors. The review may take a few weeks for individuals up to permanent reviews for large corporate entities. Timely submission of tax returns and payment of taxes are ensured by way of enforcing penalties and interest charges (see questions 11 to 14).

Types of taxpayer

Are different types of taxpayers subject to different reporting requirements? Can they be subjected to different types of review?

Individuals have fewer reporting requirements because they are typically only subject to one form of tax (ie, income tax). In contrast, businesses are generally also subject to VAT, trade tax and other taxes that increase reporting obligations. It follows that tax returns of individuals are mostly not as complex as the returns of corporates and can thus be verified in a shorter period of time compared with businesses. In addition, an individual’s income is largely evidenced by way of documents that can be cross-checked easily, whereas the income of businesses is largely only evidenced by their financial statements where a review of plausibility and cross-checking tends to be more difficult.

In addition to the statutory field audits all taxpayers may be subjected to, businesses may be exposed to specific on-site reviews regarding, for example, payroll tax and VAT without receiving notice.

Requesting information

What types of information may the tax authority request from taxpayers? Can the tax authority interview the taxpayer or the taxpayer’s employees? If so, are there any restrictions?

Taxpayers have statutory documentation and document-retention responsibilities regarding taxation. As per the law, tax authorities investigate the facts and circumstances of taxation ex officio. Consequently, an authority may determine the form and extent of its enquiries at its reasonable discretion on a case-by-case basis. This may include interviewing the taxpayer and requesting any kind of documentary evidence, for example, files, accounts, business records, correspondence, agreements and financial information. The tax office may request the details of the taxpayer’s creditors or of recipients of payments made by the taxpayer. It may also question third parties, for example, employees or expert witnesses, or even conduct visual inspections. Given such wide discretionary powers, there need to be codified formal and material restrictions to such enquiries, for example, the queries need to be relevant for the taxes of the respective taxpayer - and not of other persons. Third parties should generally only be questioned if the taxpayer is not willing or able to provide the requested information. Relevant facts and circumstances relating to tax events outside Germany need to be documented, recorded in good time and provided by the taxpayer. If not provided by the taxpayer to the reasonable satisfaction of the tax office, such offshore facts and circumstances may be disregarded and the tax office may estimate the tax base (see question 6). Even more cumbersome cooperation obligations for the taxpayer are prescribed regarding dealings with tax havens.

Available agency action

What actions may the agencies take if the taxpayer does not provide the required information?

The tax authorities may request the taxpayer to render an affidavit regarding the information he or she provided. If the data is proven incorrect or incomplete the taxpayer may be subject to criminal prosecution. In addition, the administration has several means to apply pressure, for example, fines of up to €25,000 as well as direct or substitute execution by instruction of the court. Finally, the tax authorities are entitled to estimate the relevant tax base if the relevant facts and circumstances cannot be determined or computed. This shall specifically be the case if the taxpayer fails to cooperate in providing requested information. Experience shows that the estimates by the tax authorities tend to exceed the actual tax liabilities. So in practice, the tax officer’s entitlement to estimate the tax base and ultimately the tax to be paid is often the most persuasive incentive for the taxpayer to provide requested information.

Collecting overdue payments

How may the tax authority collect overdue tax payments following a tax review?

Prior to enforcing tax collections, the tax authority should render a payment reminder with a notice period of one week. If the overdue tax amounts are not settled within two weeks, the tax authority may request the taxpayer to render an affidavit disclosing all current assets and properties, as well as all sales of assets to related parties within the prior two years and any properties transferred free of charge in the past four years. On that basis, the tax office may seize movable and immovable assets, attach claims or even arrest the taxpayer under certain conditions in order to effect collections.

Penalties

In what circumstances may the tax authority impose penalties?

The most relevant penalties are imposed for late filing of tax returns and late payment of tax debts. There are other penalties for breaching other obligations of the taxpayer in specific situations, for example, the coercion fine mentioned in question 6.

How are penalties calculated?

The penalty for late filing principally amounts to 0.25 per cent per month of the assessed tax minus down payments. The minimum penalty is €25 per month and the total penalty is capped at €25,000. Penalties for late payment are 1 per cent of the late tax amount per month, equivalent to 12 per cent per annum, whereby a partial month triggers a full month’s penalty.

What defences are available if penalties are imposed?

Ultimately, appeals may be lodged against both late-filing and late-payment penalties. Penalties for late filing may be challenged if the delay was excusable (eg, in case of severe illness, accident or old age). Reliance on the accountant or tax adviser is not considered a reasonable excuse, in general even in the event of an excessive workload of such professional.

Criminal consequences

Are there criminal consequences that can arise as a result of a tax review? Are these different for different types of taxpayers?

Tax fraud is a criminal offence sanctioned by a fine or by prison for up to five years. In severe cases, the prison sentence is six months to ten years. Tax fraud is prescribed as the intentional provision of incorrect or incomplete significant information to a tax or other authority, or the failure to provide significant tax-relevant information to a tax authority in breach of the perpetrator’s obligations, causing an incomplete or delayed assessment of taxes or generating an unjustified tax refund or benefit for the taxpayer or a third party. As this definition demonstrates, the law does not differentiate between types of taxpayers. If the tax fraud is committed by gross negligence instead of intent, it is categorised as a misdemeanour, carrying a fine of up to €50,000. In addition, several other criminal and misdemeanour tax offences are prescribed (eg, aiding and abetting an offence, obstruction of tax and smuggling). All such offences are heard by criminal courts and not by the tax courts. The legal representatives of entities, for example, their directors, are personally responsible and liable for the entity’s tax obligations. In the case of doubt, legal assistance is strongly recommended.

Enforcement record

What is the recent enforcement record of the authorities?

In 2017, field audits (see question 4) generated additional revenues of €17.5 billion in taxes and interest. Some 180,000 large and 790,000 medium-sized entities were in business. Tax audits, covering up to four fiscal years, were completed at 40,000 large and 50,000 medium-sized businesses by some 13,600 tax auditors; €13.8 billion or 79 per cent of the additional revenues were derived from large-entity audits, with corporate income tax (€4.5 billion), trade tax (€3.8 billion) and income tax (€2.6 billion) generating the top revenues. Figures for 2018 are expected in October or November 2019. Further tax revenues were generated by voluntary disclosures of evaded taxes (see question 20). There are no official figures for these, but revenues are estimated to be some €4-5 billion since 2010.