The results of a Deloitte Germany survey released October 20 indicate that inbound investors generally have many open tax years and undergo lengthy German tax audits, resulting in considerable tax uncertainty.
As countries seek to increase tax revenue in the wake of the global financial crisis, enforcement measures, including tax audits, have received renewed and increased attention. Such is the case in Germany, where tax audits have historically played a significant role in the overall taxation and tax revenue collection process. Deloitte Germany recently conducted a Web-based survey to provide an overview of the status of tax audit experiences and perceived trends for multinational groups with German investments. This survey focused on income taxation (including transfer pricing); indirect taxes were not included in the scope of the research.
In June and July, 234 respondents from at least 18 countries answered 35 questions on their experiences with German income tax audits in the following areas:
- technical aspects (years covered, duration, and so on);
- most important issues raised;
- perception of the process;
- results (that is, tax payments and/or tax refunds); and
- response to the results.
Most respondents were publicly quoted groups with annual sales of more than €1 billion globally and €50 million to €500 million in Germany; most were headquartered in the U.S., the U.K., and Japan. The German operations were mainly in the form of corporations. Most German operations are classified as large and thus subject to continual and comprehensive German tax audits.
The survey reveals that inbound investors have on average six open tax years and undergo lengthy German tax audits (67 percent of respondents claim audit durations exceeding 12 months), which results in considerable tax uncertainty. On average, the German operations were audited through 2004. Current tax audits on average covered years through 2006. Interestingly, many inbound investors have been able to obtain tax certainty faster than comparable domestic groups and have closed their German tax audits quicker.
Transfer pricing is by far the most important issue in past and current tax audits, and the survey suggests that the significance of transfer pricing will continue to grow. Transfer pricing adjustments mainly arise from a failure to adequately document compliance with the arm's-length principle, particularly in the areas of cost sharing, royalty arrangements, and personnel secondments. Close behind transfer pricing issues in importance are accruals and the deductibility of business expenses, even though the survey shows that tax audits in these areas do not necessarily generate high additional taxes. Other frequent tax audit areas include asset valuations, financing matters, reorganizations, tax losses, tax groups, and withholding taxes. Future tax audit topics are expected to include valuations, the relocation of functions, substance, antiabuse, business purpose, and the compatibility of bookkeeping with statutory requirements.
German tax audits tend to be costly for both inbound and domestic investors. On average, the last completed income tax audit resulted in (normalized) additional taxes of 49 percent of the respondents' average German income tax expense per year. However, the cash impact of tax audits can sometimes be more severe. Respondents who ranked tax group issues among their top three issues on average paid 97 percent of the annual average income tax (rather than 49 percent). While a group's overall tax planning approach affects the likelihood of German tax adjustments, the survey does not suggest that it is economically effective to be "very conservative."
The survey indicates that the shareholder and legal structure can affect the outcome of a German tax audit, with private equity investors suffering the highest tax audit adjustments, and partnership structures appearing to be more exposed than corporate structures.
The clear majority of surveyed companies (84 percent) responded to their last German tax audit by adopting measures to better prepare for future audits.
Seventy-nine percent of all German tax audits were perceived to be conducted in a professional, or even friendly, manner. Despite the reportedly negative reputation of German tax audits, the survey demonstrates that they are perceived as equally burdensome as French or U.S. tax audits, slightly less burdensome than Italian audits, and far more burdensome than Dutch or U.K. audits.
Just as companies focus on reducing future tax costs through tax planning, they should address historic tax risks. Proper preparation for the next tax audit is necessary to mitigate relevant exposures. Such preparation includes knowing the risk areas (for example, through a special tax review exercise), having appropriate documentation in place, and creating the right organizational framework for dealing with the tax audit by assigning clear internal and external responsibilities. These measures help to reduce the burden of dealing with a tax audit on an ad hoc basis. In today's unstable tax environment, reducing historic tax exposures may be one of the best investments to make in the tax sphere.
Fuente: Tax Analysts