On December, 24th 2010 newspaper „Die Welt“ quoted a poll with the Ministry of Finance and the regional tax offices of the federal states indicating that Baden-Württemberg alone received an impressive number of 7.409 self-reportings.

Magazine “Der Spiegel” had earlier pointed out that these self reportings attribute to around 1.6 billion € in 2010 and 200 million € in 2011.

Following on the list of federal states with the most self-reports are

1. North Rhine-Westphalia – with a total of 5.158 cases according to “Die Welt”
2. Hesse (3.286)
3. Bavaria (2.112)
4. Rhineland-Palatinate (1.845)
5. Lower Saxony (1.026)
6. Berlin (845)
7. Hamburg (678)
8. Schleswig-Holstein (590)
9. Saarland (214)
10. Bremen (149)

In the so called “New federal States” of the former GDR, less than 100 tax evaders have used the possibility of reporting themselves since February 2010, when the first Tax-CD with explosive data on accounts in Switzerland surfaced.

According to calculations by “Die Welt”, the sum each tax offender has to pay back to the fiscal authorities averages around 75.000 €. This number is based on the 23.529 self-reportings currently registered in Germany, and the already known amount of money paid back – calculated to amount 1.8 Billion €.

According to tax experts, the federal and local authorities can hope that the new found honesty in tax matters will continue growing in the long term. Following the mass self-reporting, it would be hard to hide one’s interest yields in the next years.

The European Commission believes that these obstacles can only be overcome in a systematic way by providing companies with a consolidated corporate tax base for their EU-wide activities.

Amongst others, the Commission´s Directorate-General responsible for Taxation and the Customs Union is currently working on the common consolidated tax base (CCCTB) to remove the tax obstacles which companies face in the European Union’s internal market.

This strategy was concluded in 2001. Its practical implementation is accomplished, together with other European Institutions, by the work of the Common Consolidated Corporate Tax Base Working Group (CCCTB WG).

The working group’s main functions are:
• to examine from a technical perspective the definition of a common consolidated tax base for companies operating in the EU.
• to discuss the basic tax principles,
• to discuss the fundamental structural elements of a common consolidated tax base and
• to discuss other necessary technical details such as a mechanism for ’sharing’ a consolidated tax base between Member States.

One part of the working group‘s function is regularly holding meetings to discuss work results and developments with regard to the CCCTB.

The most recent meeting, being part of the consultation process with European member states and key stakeholders on the CCCTB, was held as a workshop in Brussels on 20 October 2010.

The workshop focused on four papers, which were presented and discussed in terms of the workshop:
1. Eligibility Tests for Companies and Definition of a CCCTB Group
2. Business Reorganisation with regard to CCCTB
3. Transactions and dealings between the Group and entities outside the Group
4. Anti-Abuse Rules in the CCCTB
Meanwhile, several business organizations, which participated in the workshop, provided written statements on the working papers, which pointed out the following objections:

1. Concerning the definition of the group members and the coverage, some speakers were looking for a wide and others for a narrow scope. In addition, there is probably a need for simplification.
2. Concerning the business reorganizations, speakers expressed concerns about the use of a proxy for the valuing of intangibles.
3. The CCCTB intercompany transaction rules should be recognized for VAT purposes. Under no circumstances should transfer pricing issues in the VAT area be allowed to undermine the benefits achieved regarding income taxation within the CCCTB group.
4. Concerning the entities outside of the group, there is an interaction with double tax conventions. Additionally, there is a need for clarification as to whether the reference to third country companies is understood either as companies outside of the CCCTB area or as outside the EU. A clear and consistent definition is required.
Further written statements by business organizations are expected.

The Commission Services will consider the outcome of the workshop and any written statements submitted by the participating in terms of composition of a draft proposal for the CCCTB. It is planned to submit such draft proposal to the European College of Commissioner’s for acceptance in the first quarter of 2011.

Details on the workshop can be found under http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/common_tax_base/summ-record-ccctb-workshop_20-10-2010.pdf

The constitutional complaint is against the issuing of a search warrant in the preliminary proceedings of a tax evasion case. The appellants were being investigated under the suspicion of tax evasion in the assessment periods 2002-2006.
The district court of Bochum issued the search warrant in question. The necessary moment of suspicion was based on the information obtained in the investigation of a Liechtenstein escrow, which suggested that the appellant founded a trust and an S.A. in the country in 2000. Financial assets via these institutions are to be attributed to the appellants. Appellant 1 additionally is reputed to have not declared a bank account in his tax statement. The financial gain of the assets contained in both the trust and the S.A. to the amount of 2mil. DM were not declared, and thus in 2002-2006 taxes of between 16.390€ and 24.270€ were evaded.

The prosecuting attorneys’ office disclosed that the Liechtenstein data was provided to the prosecutors via administrative assistance by the Federal Intelligence Service (Bundesnachrichtendienst, BND). The appellants base their complaint on the assumption that the initial moment of suspicion is faulty due to the Liechtenstein data being inadmissible. This claim is founded on the allegation that the acquisition of the data was facilitated in breach of international law, and its use would be in violation of domestic law.

The district court denied these complaints as unsubstantiated. The necessary suspicion needed for a search warrant may be founded on contestable data and an exclusion of illegally obtained evidence would not be prevalent even if the method of gathering the data would have been illegal and even liable to prosecution in domestic law. Even if international law conventions had been circumvented, this would not affect the outcome of the trial, since the violation of an international treaty which does not grant personal rights, does not lead to an exclusion of evidence.

With their constitutional complaint, the appellants criticise the violation of their right on fair proceedings in accordance with the law, their basic right on privacy of the home in conjunction with the state under the rule of law and their constitutional right on due process of the law.

The first chamber of the BVerfG’s second senate denied certiorari on the basis that the complaint was partially inadmissible and, baring that, had no chance for success.

The decision was largely based on the following considerations:
The contested decisions do not violate the appellant’s basic right to privacy of the home according to Art. 13, Section 1 of the constitution (Grundgesetz, GG). Therefore, there is no reason to contest the basing of the initial moment of suspicion on the knowledge gained in the acquisition of the Liechtenstein Data.

Considering the question whether the Liechtenstein Data could suffice to provide an adequate suspicion for a procedural search of the appellant’s home, the question of the prevalence of the exclusion of evidence illegally obtained does not arise. Such an exclusion can only be seen in the usage of illegally obtained evidence within criminal proceedings and to assess the question of guilt.
If and in how far facts which are subject to such an exclusion may be used as basis for an initial moment of suspicion of a search, is henceforth related to the pre-emptive effect of the exclusion of evidence and is therefore part of the greater connection related to distant effects of the exclusion of illegally obtained evidence. Is has been established thus far that procedural errors, which may lead to an exclusion of evidence do not in and of them selves lead to distant effects on the entire criminal proceeding.

Aside from this, the constitution establishes no statute on the content, which in the case of a procedural error in the taking of evidence generally precludes the usage of the obtained evidence.
Judgement of the question, which consequences a possible violation of procedural rules entails and if an exclusion of evidence is one of these consequences is subject to scrutiny of the courts and is to be decided according to the individual case, especially based on the manner of the interdicting law and the importance of the offense – taking under consideration the conflicting interests.

The illegality of the acquisition of evidence does, according to the BVerfG, not automatically lead to an exclusion of said evidence. This is also prevalent for cases in which a search was convened under faulty assumptions. An exclusion of evidence based on the constitution is to be seen in cases of profound, intentional or systemic infringements on the procedural rules, in which the constitutional safeties have been ignored systematically or methodically. The court saw a complete exclusion of any evidence illegally obtained (if it is based purely on the constitution) only in cases in which the absolute core of private live is violated.

Within this background, the challenged decisions are not to be contested. No concluding judgement is needed, whether and in how far public officers have acted illegally in the acquisition of the data according to domestic law or international law. The courts of the preceding instances assumed such violations in their evaluations, whether the data could be used for an initial moment of suspicion. While the contested decisions under scrutiny have lead to the conclusion that the Liechtenstein Data is suitable for use in determining the initial moment of suspicion, it is completely agreeable and does not warrant a constitutional false positioning.
The case under consideration did not show any signs of profound, intentional or systemic infringements on the procedural rules.
The usage of the data does not touch the absolute core of private life. They only converge on business contacts of the appellant with credit institutions. That aside, evidence gathered by private persons, even if gathered in a manner punishable by law, are fundamentally admissible so that crimes committed solely by the informer don’t have to be accounted for in the process of establishing whether evidence has to be excluded or not.

Even the factual and legal assessment of the previous instance’s courts that a violation of the separation order as claimed by the appellant is not in order can not be challenged. This order states that intelligence services do not possess the right to interrogate, search or confiscate (which is reserved to the police) and thus can not be used to gain “chance finds” for causes not related to intelligence work. The courts assessed that the BND merely took delivery of and forwarded the data by means of administrative assistance, but was not involved in acquisition, gathering or creation of the data, as the informer had contacted the BND by himself. The appellants’ claim that the BND intervened to use its unique possibilities is not founded on evidence and thus dilatory.

• Non-taxability of sales of objects of daily use (adaption of case law into regulation)
• Determinations in the area of residential services: Excerption of certain public aided measures from tax deductions
• Simplifications and corrections with regard to withholding tax on capital gains
• Miscellaneous changes in general fiscal law (Abgabenordnung, AO), among them the relocation of electronic bookkeeping and improvements of transnational measures against value added tax (VAT) fraud.
• Adaption of the VAT legislature to EU laws and current developments (e.g. VAT fraud on imports)
• Equalization of registered domestic partnerships with registered marriages in inheritance- and gift- as well as real estate transfer taxation laws.

By approving the JStG 2010, the Bundesrat finalized the parliamentary legislative procedure. The JStG 2010 will now be reviewed and signed by the President (Bundespräsident), Christian Wulff. After this ratification, the act will become law by being published in the Federal Gazette (Bundesgesetzblatt).

In light of the law on modernizing and lowering bureaucracy in tax proceedings (Steuerbürokratieabbaugesetz) from the 20th of December 2008, §5b Income Tax Act (Einkommensteuergesetz, EStB) was introduced, which obligates corporations to submit their financial statements electronically (E-Bilanz). According to the law, beginning in 2011 corporations are thus obligated to use this E-Bilanz as well as the electronic submission of profit and loss statements together with their tax statements for the submission to the fiscal authorities. Within the parameters of this law, the Federal Ministry of Finance was authorized to decree the minimum extent of the data which is to be submitted. On August 31st 2010, the BMF used this authority in publishing their draft of the paper on E-Bilanz and on the publishing of the officially regulated structure for financial reports in regards to tax (taxonomy). At the same time, the ministry requested the affected organizations to submit opinions until the October 5th 2010 and invited them to a subsequent hearing at the ministry on October 11th 2010.

However, this hearing made it very clear that the introduction of these new methods did not receive good feedback in its corporate application. Among other things, the criticism pointed out that the technical and organizational requirements in the individual businesses were not yet fully implemented.

The German Association for Tax Advisers (Deutscher Steuerverband, DStV) has released a statement, calling for a delay of the enforcement of the law by two years. Additionally, the tax advisors criticise the exclusive relief of the financial administration on the shoulders of the taxpayers. By introducing the E-Bilanz system, corporate entities will have substantial additional costs – among them a change in internal processes, IT-customizations and instruction of employees, so claims the DStV. To quell added burdens stemming from later completing entries, the taxonomy would have to be introduced on January 1st 2011. Software solutions, however, would not be available until January 1st 2012. According to the DStV, the transmission of E-Bilanz data should first take place in the financial years beginning after 31.12.2012.

The related industry and tax associations also harshly criticised the extent of the taxonomy, which contained more than 800 declaratory possibilities for corporate bodies. The profit and loss statement alone amounted to more than 100 obligatory declarations, compared to a mere 26 as defined in the Commercial Law Act (Handelsgesetzbuch, HGB). In the case of partnerships, this hierarchical structure already clocks in at an impressive four-figure number, categorically defying the concept of bureaucracy reduction. The result is described by the associations as “outsourcing” of administrative duties to the taxpayer, leading to the addition of substantial technical, organisational and financial expenses.

The BMF reacted to this criticism and is going to delay the obligation to file the E-Bilanz and electronic declarations of profits and loss by one year, regulated in the BMF’s recent draft for a regulation on the specification of a later effective date of the obligations according to §5b Income Tax Act, on which the Bundesrat will decide in December 2010.

Meanwhile, the affected businesses and the financial administration can use that time until this stay has ended to optimize the technical and organizational prerequisites for the transmission of financial statements and the profit and loss statements. For this, a pilot project with voluntary participation by businesses will be established to test out the electronic procedure.

The decision is based on a case in which the plaintiff had to make additional payments of several million Euros after a tax audit. The plaintiff paid in due time, but appealed to the tax office on the matter of the changed tax bills. The tax office thereafter suspended the execution and refunded the additional tax paid without the plaintiff’s explicit request.
Responding to this unwanted refund, the plaintiff filed the case after failing in the appeal proceedings. She claimed that the stay of execution was unlawful, because it lead to the loss of interest income – she would be able to refinance the additional tax payments at an interest rate of around 2-4.3%, whereas a failure in the Finance Court proceedings when ordered stay of execution would lead to her paying the statutory interest rate of 6%.

German tax law does not provide an automatic stay of execution in the case of an appeal on a tax bill. Hence, if the taxpayer wants to make sure that no claims will become due, even though she appealed the initial tax bill, she has to file a petition for stay of execution. This petition will only be granted if there are compelling doubts in regards to the legitimacy of the appealed administrative decision or if the execution would lead to inequitable hardship for the petitioner which is not offset by overwhelming public interest, as laid out in § 361 (2) 2 Fiscal Code (Abgabenordnung, AO). Aside from this possibility, a stay of execution is also possible as an administrative decision by the fiscal authority (§ 361 (2) AO).

If during the appeal process, the execution of the tax statement is held and the appeal fails it will lead to the addition of a 6% yearly interest on the suspended taxes (§ 237 Abs.1 AO). If, however, the execution is not held, the taxpayer did pay the tax as ordered and the appeal is successful, the state has to refund the taxes with the same 6% markup (§ 233a Abs. 1 und 2 AO).

The court further assesses: Any forced stay of execution is in and of itself a mistake in the exercise of discretion. The stay of execution is a means for preliminary legal protection – there is thus no plausible reason to include the financial interest of the state in the discretionary process.
This forced stay of execution also violates the general rule of equality as laid out in the German constitution as any stay of execution against the will of the taxpayer is only used in a diminishing minority of cases and apparently only in cases with considerable amounts of dispute.

The reason for this is that in low interest periods, in which the capital market interest rates are well below the statutorily demanded 6%, it can be significantly more favourable for the taxpayer to forfeit a stay of execution and temporarily refinance the disputed amount of tax on the capital market. With this background in mind, the financial administration has begun forcing stays of execution on the taxpayer in lucrative cases to save the state from having to refund interests considerably higher than the capital market interest rates.

The senate has authorized appeals to the Federal Fiscal Court in Munich.

In signing the bilateral agreement, Merz and Schäuble agreed to start negotiations on an expansion of transnational collaboration in tax questions and the improvement of market access for banks. These negotiations will be based on the previous exploratory talks which a joint task force led in the preceding months. The negotiations are scheduled to start at the beginning on 2011.

The Federal Ministry of Finance stated that both Switzerland and Germany were confident that the negotiations would lead to a fair and durable solution in the interest of both nations. Both sides wanted to avoid distortions of competition in the field of taxation with this new solution. German taxpayers should not be hindered in maintaining an account in Switzerland – the prospect of possible tax evasion, however, should no longer be an element in the financial decision-making of these taxpayers.

In the preliminary talks, both Switzerland and Germany favored a solution which, on the one hand, respected the privacy of bank customers, but on the other hand ensured the enforcement of legitimate tax claims. This would lead to a system which would in effect bear comparison to the automatic exchange of information in regard to income upon investments. The solution, whose details are to be decided in the actual negotiations, at this stage contains the following points:

• Regularization of the past: Untaxed money currently deposited into Swiss accounts is to be “regularized”. It is currently undecided, what exactly is meant by this.

• Flat rate tax for the future: Future proceeds are to be subject to a flat rate tax - with the rate of taxation still up for debate. This flat rate tax is a tax deducted at source, after whose payment the tax duties of the state of residence are regarded as being exercised. To prevent against possibilities of circumventing this flat rate tax, an improved system of administrative assistance is being negotiated. This system includes a possibility for German authorities to state requests for administrative assistance which must contain the name of the customer, but not necessarily the name of the bank in question. These requests will be limited in number and require a plausible cause. So called: “Fishing Expeditions” will hence be prohibited.

• Further elements: Switzerland and Germany are planning to solve questions of bilateral market access for banks. The problem of buying tax-relevant data is to be solved as well. Another aspect of the planned tax negotiations is the solving of the problem of criminal prosecution of bank employees.

Merz and Schäuble further signed a revised DTA. This treaty contains a regulation for the exchange of information in accordance with the standard set in article 26 of the OECD Model Convention. It was initialled in March 2010. The new DTA also contains some beneficial regulation for both the Swiss and German economy - among others, the withholding tax on dividends is being lowered and an arbitration clause is being introduced.

As a result of the intended legislative project, Brandenburg is calculating an increase in its tax revenue of about 37.5m € due to the new tax rate, the main part of which would remain with the state department - 20% of the increase are to be deducted for municipal fiscal compensation.

The new tax rate is intended to come into effect on January 1st 2011. All transactions which are not closed before January 1st 2011 are subject to the increased real estate transfer tax rate.

The current real estate transfer tax rate is generally at 3.5%. Via an amendment to the German Grundgesetz, beginning on September 1st 2006, each federal state (as opposed to the federal government) was given authority to assess the real estate transfer tax rate. This authority has since then been used by three states:

Berlin increased the real estate transfer tax rate to 4.5%, (as of 01.01.2007)
Hamburg to 4.5% (as of 01.01.2009) and
Saxony-Anhalt to 4.5% (as of 01.03.2010).

Bremen is also planning an increase of the real estate transfer tax rate to 4.5% in 2011. Joining Bremen are Lower Saxony with 4.5% and Saarland with 4%. Schleswig-Holstein is planning the change in 2013, going for a 5% real estate transfer tax rate.

Under German law, a company set up in accordance with the company law of any other member state, which has its registered office outside Germany and place of effective management in Germany, cannot benefit from the fiscal unity regime (Organschaft) which is available to German companies, although said company is fully taxable in Germany. Therefore the company cannot enjoy the tax benefits resulting from the allocation of the group company’s income to the parent company (offsetting of profits and losses within the fiscal unity). Such provisions are considered to be discriminatory in comparison to domestic competitors and may restrict the freedom of establishment of businesses in Germany. It should be underlined that this case does not deal with the question of cross-border loss compensation.

Germany’s reaction to this situation remains to be seen.

The BVerfG further commented: A court can only petition for judiciary review of a law if it has itself previously reviewed the law in regards to its constitutionality. Doing this, the court has to keep in mind the binding effect of previous BVerfG decisions and has to consider the underlying considerations. In regards to already decided legal questions, there is a heightened level of these requirements.

The BVerfG thus denied the petition of the Financial Court due to the fact that the FG failed to amply consider the existing decisions of the BVerfG in regards to supplementary taxation. While the BVerfG had not yet fully affirmed the constitutionality of the Solidarity Surcharge in 1995 during the first proceeding in which it was involved, it has taken position on the general requirements of supplementary taxation to be in compliance with the constitution and decided that a time limitation is not such a requirement (BVerfG 9. 2. 1972, 1 BvL 16/69, BVerfGE 32, 333, NJW 1972, 757).
The FG of Lower Saxony claimed that a financial gap may only be closed through permanently raised taxation, but not by the continued use of supplementary taxation. The BVerfG held, that it did not consider that a raise in combined federal and state taxation with additional demand on only the federal side would be an inequitable hardship to the taxpayers and undesirable in regards to cyclical economic activity if such a raise is not deemed necessary from the viewpoint of the individual states.

The FG also did not answer the question of how a raise on income and corporation taxes would be a suitable alternative to the Solidarity Surcharge in regards to the share of the states in concert with the states’ share of tax revenue. The FG’s final thesis was that in light of the tax rebates of the previous years the Solidarity Surcharge was no longer necessary, which the BVerfG deemed void of any constitutionally relevant reasons. It assessed that the FG did not take into account that the lowering of the tax rate was – for the restructuring of the public budget – connected to a broadening of the assessment basis, which lead to numerous factual and numerical constraints on deductions from taxable income and thus an elevation of tax burdens.