Partner, German Public Auditor, Tax Consultant
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Starting from 2021, the changes in the German Value Added Tax Act will also have an impact on the VAT liability of corporate bodies under public law. Among others, this applies to municipalities, federal authorities, authorities at federal state level, universities and medical insurance companies. All institutions mentioned above are required to implement efficient processes in respect of tax compliance, so as to avoid financial disadvantages or criminal proceedings. Having systems in place to meet transparency and documentation requirements is therefore indispensable, which may also work to the advantage of the party affected in case of omissions or non-compliance. Under certain circumstances, providing evidence that a tax compliance management system has been implemented may prove allegations of tax evasion wrong.
Public institutions are liable to tax
Public institutions have to check to what extent their income or agreements are subject to VAT in future, or if they are subject to new reporting requirements. They also have to inform their staff members on using correct VAT clauses in agreements and adjusting internal processes. Experience shows that it takes quite a while to implement such processes, as all departments have to be involved. The changed requirements coming together with the new VAT law may be used to establish or extend an efficient tax compliance management system. Such a system comprises for all staff members binding written guidelines and procedures in respect of tax issues, such as deadlines, settlement rules and documentation requirements.
Why is it reasonable to have a tax compliance management system in place?
Tax legislation is complex. Employees must be able to identify relevant tax issues also in larger structures and pass these on to the competent department. This is the reason why the filing of incomplete or incorrect tax returns by the public administration can never be completely excluded. Unfortunately the tax authorities increasingly consider mere corrections of tax returns as a voluntary disclosure of tax liabilities. This means that they imply tax fraud or grossly negligent tax evasion. Thus, the correction of involuntary errors bears the risk of criminal proceedings. In the meantime, the tax authorities have issued a statement on the distinction between the obligation to amend incorrect tax returns and the voluntary disclosure of tax liabilities. According to this statement, organisational malfunction can normally be excluded if a working internal control system for taxes is in place. Thus, personal and financial liability risks can be avoided by having a convincing concept for a tax compliance management system.