30.06.2016
With a circular ruling issued by the Federal Ministry of Finance the application for Sec. 153 General Tax Code (Correction of tax returns) has been amended and adjusted to the current jurisdiction.
Basic principle is that a declaration obligation for the tax payer is given in case the tax payer after filing tax returns recognizes that the tax returns filed are objectively incorrect or incomplete and that this has led to an incorrect tax assessment. Assuming that a corrected return is filed immediately there is neither a tax fraud nor a tax evasion provided that there has been neither intent nor negligence. In case the tax payer refrains from filing such corrected returns, this usually leads legal actions by the tax authorities.
The newly introduced application rules also clarify that intent and thereby tax fraud does not depend on the amount of the tax impact resulting from incorrect tax returns filed. Of relevance is whether the action of the tax payer was intent or not.
If legal actions by e.g. the tax authorities have already been taken, the tax payer can not be forced to file corrected tax returns which incriminate himself.
The application rules also clarify who is obliged to file the corrected tax returns. Primarily this obligation is with the tax payer, his legal successor (e.g. heir) or a legal representative (e.g. managing director).
The adjustments to the application rules for Sec. 153 General Tax Code provide for guidance on correction of tax returns. This guidance takes into account the current developments in relation to voluntary self-disclosure to avoid penalty, which became more and more important in recent years.
With a circular ruling issued by the Federal Ministry of Finance on May 18, 2016 the official guidance for the application of Sec. 17 VAT Act has been amended and adjusted to the current jurisdiction.
The adjustment of the VAT basis and input VAT due to the irrecoverability by law of the remuneration is allowed according to sec. 17 para. 2 No. 1 sentence 1 in conjunction with para. 1 sentence 1 VAT Act. In connection with the irrecoverability the further receipt of the payments pursuant to sec. 17 para. 2 No. 1 sentence 2 VAT Act can result in a second adjustment. It is of no relevance that the first adjustment due to the irrecoverability and the second adjustment due to the further receipt of payments could be performed in the same assessment period. Furthermore, the second adjustment pursuant to sec. 17 para. 2 No. 1 sentence 2 VAT Act is in contrast to the first adjustment an insolvency mass liability.
The principles set out above for insolvency cases are applicable in case of preliminary insolvency proceeding through so called weak and so called strong insolvency administrator.
Please note that outstanding remuneration for the performed services in the past are irrecoverable at the time an insolvency proceeding was opened. In case of the insolvency proceeding through a so called weak insolvency administrator a receivable is irrecoverable if the weak insolvency administrator was appointed with legally compulsory approval and with the right to collect debts. Furthermore, the weak insolvency administrator had to be entitled to treasury management. Irrevocable are also remuneration which were paid through insolvency debtor between the appointment of the weak insolvency administrator and the termination of insolvency proceeding.
By judgement of 21st January 2016 in case I R 22/14 the German Federal Tax Court (BFH) held that the authorization of unpaid use of the name rights among related parties within a group has to be accepted by the fiscal authorities and does not lead to a correction of the profit determination according to the provisions of the German Foreign Tax Act (AStG). The mere right to use the business name within a group does not constitute a business relationship pursuant to Sec. 1 para 4 AStG and does not give the right for an income-increasing correction by the fiscal authorities.
In the case at hand, the plaintiff conducts his trade in Germany and had developed a company logo. He committed this company logo to a subsidiary in Poland without any consideration. The company logo had been used on business papers, vehicles and on the website of the subsidiary. The fiscal authority assumed for the tax assessment of the taxpayer an incomeincreasing correction pursuant to Sec. 1 para 1 AStG because of the commission of a trademark right free of charge.
The BFH upheld the plaintiffs action and holds that the mere commission of the right to use the company name from the shareholder to the company is not a chargeable action. The free of charge commission of a company name or logo does not allow to increase the taxable income of the taxpayer.
Following the judgement of the BFH a different assessment is possible, if, for example, a Trademark License Agreement, which provides the right to use the company name or logo as a trademark for products sold and/or offered for sale creates a inextricable link between the name rights and the product-related trademarks. Can in this case an independent value be noted, at arm`s length transfer prices can be demanded for the commission with the attention of a diligent business man. In the case at hand this criterion was not fulfilled.
The background of Sec. 1 AStG is, that in international company groups the internal service relationships can be determined free of the conflicts of interest and market conditions. In the case of a worldwide acting company group this influences the distribution of the accumulated tax substance among the countries concerned. The internationally accepted principle „dealing-at-arm’s-length“ aims at an objective distribution of the accumulated tax substance oriented towards the conditions of the free market. Simultaneously it counters tax advantages that are generated by the tax optimized determination of transfer prices.
The BFH clarifies in its decision that the usage of trademark rights free of charge at least without further indications does not lead to an income correction pursuant to Sec. 1 para 1 AStG, because a comparable business advantage on national territory with the participation of subjects to unlimited taxation without an underlying partnership agreement would not be subjected to taxation.
The Federal Council adopted the “Law for modernization of the taxation procedure” on 17 June 2016 and agreed to the introduction of the new Sec. 6 para. 1 No. 1 (b) German Income Tax Act which provides clarity regarding the scope of the manufacturing costs that have to be capitalized under tax law.
The “income tax amending directive 2012” introduced by the German tax authorities determined that the reasonable costs for general administrative expenses, welfare facilities, the cost of voluntary social payments and for occupational pensions are mandatory components of the manufacturing costs. Before this directive, such costs were - as in commercial law - optional.
Thus, this change through the “income tax amending directive 2012” resulted in a deviation between the lower limit of the manufacturing costs under commercial and tax law and triggered a public discontent from the industry. The additional expenses from this regulation had been estimated at EUR 1.5 billion.
For this reason, the financial authorities introduced with the decree from the German Federal Ministry of Finance dated 25 March 2013 an indefinite transitional phase during which the manufacturing costs could be determined under the old practice.
As a consequence of the introduction of Sec. 6 para. 1 No. 1 (b) of the German Income Tax Act, there is now a legal option to include the general administrative expenses as well as expenses for social amenities, voluntary benefits and occupational pensions in the calculation of the manufacturing costs.
With this amendment, a synchronization of commercial and tax rules is achieved and a difference between the commercial and tax balance sheet is avoided. It remains with the capitalization option for both the tax balance sheet and the German GAAP balance sheet. It should be noted that the tax option right has to be exercised in accordance with the GAAP balance sheet.
The law change comes into force the day after promulgation by the federal president. It is possible to apply the new law for previous fiscal years.
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