By adopting the law on modernization of taxation procedure ("Gesetz zur Modernisierung des Besteuerungsverfahrens") on 18 July 2016, the German government aims to achieve the mainly automated processing of tax returns where appropriate in order to minimize administrative burden for German tax authorities. Tax assessments will be processed without human intervention unless there are reasonable grounds for manual intervention and processing. Consequently a new box and a special free text field have been implemented in German VAT returns (the same applies to returns/declarations of several additional taxes). By checking the new box, the taxpayer notifies the tax office about additional or deviating information/facts which have to be considered when examining the VAT return or about the application of a legal opinion which differs from the one of the tax administration. The free text field allows a limited number of 60 digits in order to provide the relevant information. Therefore, in most cases the use of a separate enclosure document will be required to provide additional information.
Checking the box and making an entry in the free text field (or sending a separate enclosure) will result in manual processing of the VAT return.
German taxpayers already had to face quite strict compliance and disclosure obligations in the past. The new box and free text field should not have an impact on the scope of such obligations. Nevertheless, the new box/free text field strengthens the awareness of the taxpayer to disclose additional facts or a legal opinion which differs from the one of the tax administration (maybe also the VAT treatment of transactions for which no guidelines were published by the tax administration) each time he prepares and files a VAT return.
On the one hand, it is beneficial for the taxpayer to have the option to select that the VAT return is manually processed by a tax officer and that the issue explained in the free text field (or in the enclosure) will most likely be examined at the time of the filing (and not in a later tax audit). In the case, the tax office comes to a different opinion and assesses additional VAT or denies input VAT deduction, the interest run has not yet started, i.e. the assessment of interest can be avoided. Moreover, it might be easier to agree on a satisfying solution with the respective business partner (e.g. subsequent payment of additional VAT against issuance of corrected invoices) than at a later stage.
On the other hand, in the future the German tax offices and prosecution departments might argue in a more offensive way that taxpayers acted with criminal intent when they underpaid VAT due to the application of a legal opinion which was not in line with the opinion of the tax administration since they should have known that this application had to be disclosed to the tax office in the respective VAT returns.