Tightening of the Voluntary Self-Disclosure Likely in January 2015

For many months, the media has been reporting on voluntary self-disclosure exempting from prosecution. Several prominent tax evasion cases have also generated significant interest in this instrument. For the tax authorities, tax evasion has never been a trivial offence, and case law has for many years contributed to ensuring that tax evasion is severely punished. As a result, voluntary self-disclosure exempting from prosecution has become increasingly important. Self-disclosure under § 371 of the Abgabenordnung (AO) is a unique option under German law that allows an offender to avoid punishment despite having completed an act of tax evasion. However, numerous aspects must be observed, and we are of course happy to assist you with these.

© froodmat / photocase.de

At their annual conference in Stralsund on 9 May 2014, the finance ministers of the German federal states adopted several key points for tightening the rules on self-disclosure. The abolition of self-disclosure appears to be off the table, so that it will be retained in principle. The correction obligation will be extended. Previously, the correction obligation — that is, the period for which taxes must be subsequently declared — covered only 5 years in cases of ordinary tax evasion. Only from an evasion volume of €50,000.00, i.e. a particularly serious case of tax evasion, did a period of 10 years have to be covered by the self-disclosure. Under the finance ministers' proposals, this is now to be standardised so that, in all cases of tax evasion, the limitation period for prosecution is extended to 10 years. A taxpayer wishing to make a clean break through self-disclosure must therefore subsequently declare the taxes for the past 10 years and pay the evaded taxes for that period. Surcharge Under the previous statutory rules, an evasion volume of €50,000.00 or more triggered a surcharge of 5% of the evaded amount, payable by the taxpayer. This surcharge was imposed in addition to the standard interest of 6% per year. The finance ministers have now agreed that in future the surcharge will be waived only up to an evasion amount of €25,000.00. From €25,000.00 onwards, the surcharge is to be significantly increased. It will be tiered as follows: evasion amount above €25,000.00 up to €100,000.00: 10% surcharge; evasion amount above €100,000.00 up to €1 million: 15% surcharge; evasion amount above €1 million: 20% surcharge.

Considering the tightening of the voluntary self-disclosure on your behalf: Johannes Rudolph, LL.M., Rechtsanwalt (German Attorney-at-Law), Fachanwalt (German Specialist Attorney) für Steuerrecht, Fachanwalt für Handels- und Gesellschaftsrecht © Steffen & Partner Gruppe

Clarification of the exclusion grounds The previous statutory rules already provided for exclusion grounds that prevent a self-disclosure exempting from prosecution. Under those rules, if, prior to the correction, supplementation or filing of the tax disclosures,

• an audit order had been announced, or
• the offender had been notified of the initiation of criminal or administrative fine proceedings, or
• an official of the tax authority had appeared for a tax audit or to investigate a tax offence or administrative offence, or
• one of the tax offences had, at the time of the correction, supplementation or filing, already been wholly or partially discovered, and the offender knew this or had to reckon with it,

then a self-disclosure exempting from prosecution was no longer possible. It is now also to be clarified that a VAT or wage-tax inspection (Nachschau) likewise triggers such a blocking effect. Foreign capital income The finance ministers' conference has also suggested introducing a EU-law-compliant suspension of the start of the limitation period for foreign capital income, although this is to be limited in time. The specific legal implementation, however, will only be determined during the legislative process, and no further details are currently known. In essence, this would mean that taxes on undeclared foreign (capital) income would, due to the planned suspension, initially not become time-barred. Conclusion To return to the headline of this article, it can be noted that the rules on voluntary self-disclosure exempting from prosecution are to be significantly tightened. It is to be expected that a legislative proposal will be prepared in the near future, as the Federal Minister of Finance supports the key points of this tightening. According to the finance ministers' plans, the law is to enter into force as early as 1 January 2015.