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Promoting Peer Pressure — Germany's Anti-Tax-Evasion

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Promoting Peer Pressure — Germany's Anti-Tax-Evasion Volume 55, Number 1 July 6, 2009 (C) Tax Analysts 2009. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. Promoting Peer Pressure — Germany’s Anti-Tax-Evasion Act by Wolfgang Kessler and Rolf Eicke Reprinted from Tax Notes Int’l, July 6, 2009, p. 51 (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. Promoting Peer Pressure — Germany’s Anti-Tax-Evasion Act by Wolfgang Kessler and Rolf Eicke Wolfgang Kessler is the director of the tax department of the business and economics faculty at the Uni- versity of Freiburg and a partner with Ernst & Young in Freiburg, Germany. Rolf Eicke is his assistant at the tax department of the University of Freiburg and is with Ernst & Young in Freiburg. The views ex- pressed here are entirely their own. E-mail: [email protected] and [email protected] freiburg.de he fight against tax havens has caused some major that was approved by the government on April 22, Tdistortions in the relationship between Germany 2009, and is scheduled to pass the Bundestag before and Switzerland. Similar to the approach used in the summer break. United States in the Stop Tax Haven Abuse Act, Ger- many intensified its measures to prevent tax evasion by Marketing Against Tax Havens its own citizens starting with a German intelligence agency’s purchase of data on Liechtenstein bank ac- The term ‘‘Anti-Tax-Evasion Act’’ (Steuerhinterzie- counts. (See Kessler and Eicke, ‘‘Germany’s Fruit hungsbekämpfungsgesetz) was chosen wisely. The drafters From Liechtenstein’s Poisonous Tree,’’ Tax Notes Int’l, can always be sure to receive applause for fighting tax Mar. 10, 2008, p. 871, Doc 2008-3969, or 2008 WTD 52- evasion. However, a closer look reveals that the meas- 9.) As a result of that purchase, there were some verbal ure is intended to give the foreign tax authorities more battles not only between Germany and Liechtenstein information on cross-border transactions. but also between Germany and Switzerland. The peak The starting point for the act is that German rev- was reached when the German Minister of Finance, enue offices encounter difficulties in gathering informa- Peer Steinbrück, let loose with his much-cited Wild tion from foreign countries in tax evasion cases. The West rhetoric. Reportedly, Steinbrück said at the April German authorities depend on the cooperation of for- G-20 meeting in London that the OECD gray list of eign authorities in case they have to investigate Ger- tax havens is like the 7th Cavalry at Yuma in that it man investments abroad. Basically, the authority to need not necessarily go into battle, but it is important gather relevant information is restricted by interna- that ‘‘the Indians know that it is there.’’ tional public law to the territory of Germany. The OECD has developed standards of information re- Steinbrück’s statements caused much anger in Swit- quests regarding tax matters in article 26 of the OECD zerland. Later, Steinbrück rehabilitated the Indians in a model treaty. These standards require that tax-relevant speech in the Bundestag, saying that the ‘‘tax evasion information, such as bank account statements and phenomenon was not widespread with the Indians.’’ ownership structures, is open to access by foreign tax The reason for this speech was a debate on a legal ini- authorities. However, many German treaties (for ex- tiative against tax havens (the Anti-Tax-Evasion Act) ample, Germany’s treaties with China, Japan, Austria, TAX NOTES INTERNATIONAL JULY 6, 2009 • 51 FEATURED PERSPECTIVES Belgium, Luxembourg, and Switzerland) do not com- Moreover, the provision of tax-relevant information (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. ply with the OECD standards. Hence, from the stand- from abroad can only be rejected in case they are irrel- point of the German tax authorities, the refusal of for- evant for purposes of transfer pricing. eign tax authorities to provide information promotes Thus, even more extensive cooperation and docu- tax evasion. mentation rights are barely imaginable; but the Ger- This is what sparked the idea of an Anti-Tax- man government attempts to accomplish this by au- Evasion Act. Even though the naming is wise, the pro- thorizing the tax authorities to determine special posed act is fighting the wrong target. Instead of tar- cooperation and documentation rights regarding the geting uncooperative countries, it targets its own reasonableness of business transactions between related citizens and taxpayers by forcing them to provide infor- parties and between dependent businesses operations. mation regarding their international activities. The measures can be divided into three groups: Nonrelated Parties • Denial of the usage of beneficial tax provisions in Moreover, the draft version even extends the cooper- the case of business relationships to countries and ation and documentation rights to nonrelated parties. territories that do not comply with the OECD This proposal infringes on the spirit of the arm’s-length exchange of information standards in article 26 of principle that sets the standard for the relationship be- the OECD model treaty. tween related parties by analyzing the conditions be- • Extended investigation rights of the German tax tween nonrelated parties. The fundamental notion of authorities, including: the arm’s-length principle is that business relationships — extended cooperation and documentation du- between nonrelated parties follow a strict business- ties of the taxpayers; driven exchange of goods principle, in which the par- ties try to maximize their profit and position. In this — extended obligation to preserve statements; situation, there is no such thing as a free lunch; how- — extended rights for the tax authorities to claim ever, the German government figures there is, and affidavits; and therefore doubts that even business relationships with — permission of the tax authorities to enforce nonrelated foreign parties are manipulated. information rights against foreign financial institutions on behalf of the taxpayer in and Denial of Beneficial Tax Provisions out of court. Even more astonishing is the set of measures that • Creation of a list of countries that do not comply restricts or denies the application of beneficial tax pro- with the OECD standards by way of statutory visions in case of an infringement on the cooperation regulation. and documentation duties. The denial or restriction covers the following: Related Parties • The tax deductibility of business for business ex- The cooperation and documentation duties were penses or the tax allowable expenses paid to indi- tightened in the last few years. Some of the already viduals or corporations that reside in so-called existing rules are: ‘‘gray list countries’’ that do not comply with the • section 90 paragraph 2 AO (Abgabenordnung,or OECD standards. General Tax Code), which provides for a qualified • The tax exemption on dividends or capital gains cooperation duty in cross-border tax cases; (section 8b KStG (Körperschaftsteuergesetz, or Cor- • section 90 paragraph 3 AO and section 162 para- porate Tax Law), if these payments came directly graphs 2 and 3 AO in connection with a special or indirectly from a ‘‘gray list country.’’ profit-splitting documentation regulation (Gewinnab- • The withholding tax exemption or reimbursement grenzungsaufzeichnungsverordnung) provide for an if the shareholder resides in a ‘‘gray list country.’’ extensive transfer pricing documentation; The new rule applies together with the recently • section 162 paragraph 3 sentence 3 AO allows the tightened anti-treaty-shopping rule, which is al- tax authorities to penalize insufficient cooperation ready hard to handle and highly disputed. (See of involved foreign parties; and Kessler and Eicke, ‘‘Treaty Shop Until You • section 1 AStG (Aussensteuergesetz, or Foreign Tax Drop,’’ Tax Notes Int’l, Apr. 23, 2007, p. 377, Doc Act) in connection with the function shifting regu- 2007-8765,or2007 WTD 83-10.) lation (Funktionsverlagerungsverordnung), which pro- • The flat and final tax on capital income of indi- vides for extensive taxation rights in case of the viduals (Abgeltungsteuer) paid from a ‘‘gray list shifting of functions abroad. (See Kessler and country.’’ (See Kessler and Eicke, ‘‘Welcome to Eicke, ‘‘Out of Germany: The New Function the German Dual Income Tax,’’ Tax Notes Int’l, Shifting Regime,’’ Tax Notes Int’l, Oct. 1, 2007, p. Aug. 27, 2007, p. 837, Doc 2007-17722,or2007 53, Doc 2007-21017,or2007 WTD 195-6.) WTD 169-7.) 52 • JULY 6, 2009 TAX NOTES INTERNATIONAL FEATURED PERSPECTIVES Discharge From the Banking Secrecy der a general presumption of evading taxes, without (C) Tax Analysts 2009. All rights reserved. does not claim copyright in any public domain or third party content. defining the objective or subjective elements of tax eva- Taxpayers must inform the tax authorities about sion. The measure shoots the wrong target. The tar- business relationships with foreign financial institutions geted taxpayers have no influence to change the ex- and discharge these institutions from the banking se- change of information provision in the bilateral tax crecy. In the case of noncompliance, there is a pre- treaties, which is the ultimate and underlying main sumption that nondeclared foreign capital income ex- goal of the lawmaker. Instead of a direct peer pressure ists or that the actual foreign capital income is higher against uncooperative countries, the peer pressure is than reported. In that case, tax audits are permitted performed indirectly, holding the taxpayers in custody without further requirements. to achieve this goal. Also, the draft of the Anti-Tax-Evasion Act contains provisions that target wealthy German citizens. If a EC Law Critics taxpayer generates income of more than €500,000, comprehensive obligations to preserve statements apply The measure also infringes on European Commu- for the income and the expenses for more than six nity law because it violates the principle of the free- years.
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