It has become an unwelcomed and somehow unlawful method by the financial authorities to combine tax audit and tax criminal prosecution procedures, using so called “flank protection investigators”. These public officers visit the unsuspecting taxpayer, asking for access to their private rooms (which is often granted because of the “surprise effect” but actually not enforceable by the authorities without any reasonable suspicion!) and thereby hoping to discover facts that might lead to further taxation and to criminal prosecution in some cases. This might be a question of whether craftsmen invoices presented by a landlord for tax deduction reasons were actually used for his rental buildings or for his private home. Also, even a delay in VAT registration applications today might lead to a fine. In earlier days, such issues were regarded as misfeasance that can happen to everyone from time to time.

While taxpayers have extensive duties to cooperate in tax assessments, they have a right to remain silent in criminal proceedings. For prosecution issues, no one can be forced to incriminate himself, the principle “in dubio pro reo” (innocent until proven guilty) is applicable.

We therefore appreciate the opinion of Mr. Mellinghoff and wish to support a development that treats taxpayers as what they are: the foundation of our legal democratic system. Criminalization of taxpayers without reasonable suspicion therefore must be abandoned immediately!

Amongst Russia, India, China and South Africa, Brazil as one of the biggest emerging markets is an important strategic partner for Germany. Still, Brazilian economy struggles with the prejudice of corruption and has to improve its image to attract German business to “go Brazil” – where German technology and knowledge is very welcomed.

The absence of effective bilateral agreements complicates the economic relationships. The double taxation treaty of Germany and Brazil (as of 1975) was cancelled in 2005 because the German Federal Ministry of Finance did not see sufficient interest and cooperation from the Brazilian side as to renegotiate the treaty.

German export to Brazil easily exceeds the sum of German exports to Greece, Ireland and Portugal. Still, but politics rather spend energy on recovery of last-mentioned than to build up new bridges and to negotiate free trade agreements and double taxation treaties with the upcoming markets in Brazil.

Hopefully, the new consulate in Düsseldorf, state capital and important business location of North Rhine-Westphalia, will help to improve the situation!

In July 2012, the Federal ministry of Finance of Germany has published a model convention for the implementation of FATCA into federal national law. The next step would be the negotiation of a bilateral convention between Germany and the USA which is supposed to attenuate the effect of the FATCA on German financial instates:

• No contracts of German financial institutes with US government shall be necessary. Instead, Germany shall provide information about bank accounts that US-clients maintain here. This is supposed to make sure that German banks do not directly and by “free will” report to US authorities – which would cause nonconformity with national law
• German financial institutes generally shall not be subject to the 30% withholding tax.

The EU commission is also looking for a European solution on behalf of the FATCA.

Consequences are foreseeable not only for financial institutes but also for other companies (of all sizes) in regards of business financing, especially for consortium agreements of US-subsidiaries.  Banks which do not agree to comply with the provisions set forth in the convention implementing the FATCA will – under the usual contractual bank provisions – deduct those 30% payable to the US regime from their beneficiaries. Thus, companies would be soaked twice – paying 30% to the US-tax authorities and another 30% to their bank. Increase of credit costs would be the bitter consequence.

• Why would it be safer to receive an entry certificate from a contractor in Sicily rather than from the respective forwarding agent?
•  Why would it be easier to force a non-German EU-contractor (who, by the way, is not subject to German Tax provisions) to sign an entry certificate rather than the respective German-speaking forwarding agent?
• Who would be authorized to sign the certificate for the contractor?
• How would chain transactions be handled?
• Who would sign the certificate in cases where the customer directly receives the goods?

The new provision therefore was criticized by trade associations, entrepreneurs and tax advisors. As a consequence, the period of interim ruling (application of the former provisions) has been prolonged for the third time meanwhile – and the provision is expected to be modified. Since it is not clear yet in how far the new provision will then rather involve elements of the actual or the former provision, the business practice is – as always – confronted with the challenging task to adapt to the developments.

Tax exemption for Share Capital Gains

Under current law, 95% of dividends and realized capital gains from corporate shares owned by corporations that are subject to tax in Germany are exempt from German corporate income tax. Pursuant to the proposals of the legislative authority, this exemption shall no longer apply, unless the respective company represents 10% or more of the share capital of the other company. Therefore, minority shareholdings would be fully taxable at a 15% tax rate without grandfathering for the year 2012.

The draft proposal is a reaction to the decision of the European Court of Justice as of 20 October 2011. The Court held that the German withholding tax levied on dividends paid to foreign recipients infringes European Law in cases in which the EU Parent Subsidiary Directive is not applicable.

“Cash GmbH” (Gift and Inheritance Tax Law)

The legislative authority plans to amend a provision in the German gift and inheritance Tax Act to prevent the preferential gift or inheritance tax treatment of cash claims (e.g. fixed bank deposits). By contributing such claims to a business entity, major cash asset positions recently can be transferred tax favored. That makes the law favorable to those who can afford planning such (legal!) constructions, but it converts the intended purpose of the law, which was to keep a transferred business alive in order to save employment and the economic system, and not to favor private assets.

The proposed regulations are supposed to enter into force directly after the Act passes the German Federal Parliament (Bundestag), presumably at the end of October 2012.

Transfer Pricing and Authorized OECD Approach

With the Annual Tax Act, the new article 7 of the OECD model tax convention and its commentary, in accordance with the Authorized OECD Approach, are to be transposed into national law. It is intended to clarify the rules for cross-border profit allocation irrespectively of the type of incorporation such as “corporation”, “partnership” or “permanent establishment”. A permanent establishment therefore might be treated like an independent company. The arm’s length principle shall then apply to non-incorporated as well as incorporated firms. Also, the Profit Allocation Documentation Regulation shall be adjusted.

Miscellaneous

Another issue raised in the draft of the Annual Tax Act is based on the very political and publicity affecting “merger” of VW and Porsche – the legislative authority plans to close a legal loophole which makes it possible to buy another company and thereby saving some billion Euros of taxes – see our earlier post for more information!

Again, and only shortly after the last announcement of this kind in July, rumors have come up that the ministry of finance of North Rhine-Westphalia has bought even more CDs with valuable tax information from Switzerland. The federal state thereby contradicts the negotiated tax agreement, which was signed by the responsible authorities in September 2011 and was meant to become effective in 2013. Until now, the social democrats (SPD) and the green party (Grüne) are blocking the ratification of the agreement in the German Federal Council (Bundesrat) because they deem the agreement unfair to the broad mass of tax payers. Especially the tax rate (21 to 41 %) for “washing clean” tax evaded money is too low from their point of view. On the other hand, the idea of the agreement was that Germany would receive a deposit of 2 billion Swiss Francs and in the following years, due to the tax agreement, tax evasion to Switzerland should not be possible any longer (25% withholding tax). Therefore, the purchase of CDs would not be necessary anymore.

Since the ratification process of the tax agreement is not yet accomplished, Germany at this phase is still allowed to buy such information, as Wolfgang Schäuble, minister of finance in Germany, announced a few weeks ago. For Germany, this is certainly useful as a considerable number of tax evaders, in fear of being discovered, will be filing amended tax revenues these days. And without consent from the social democrats in the question of admissibility of data purchase under the agreement in the Federal Council (and thereby minister of finance in North Rhine-Westphalia, Norbert Walter-Borjans), the tax agreement will not be ratified and therefore would not come into force.

In Switzerland, on the other hand, a referendum on the tax agreement is to be expected in late November 2012, provided that 50.000 signatures can be collected from the Swiss. A solution of the problem of tax evasion to Switzerland is therefore put at a distance since the Swiss will probably not be pleased with a German behavior that is supposedly contradicting the negotiated agreement.

The relevant passage of the agreement states that Germany agrees to not “actively” make an effort to receive tax information from Swiss banks. The understanding of “actively” still is subject to discussion. The minister of finance of Switzerland, Eveline Widmer-Schlumpf, is of the opinion that a purchase is certainly contained within the term. She clearly speaks against renegotiation.

As of last Wednesday, August 1, 2012, the operational Porsche AG is a part of VW AG, as pronounced in the press in June 2012. Due to what is known to the public as a “tax deal”, this transaction was possible without a formal buy-out. Instead, the deal took the form of restructuring of the companies: VW gave one share to Porsche SE and therefore acquired the Porsche AG company on a purchase price of 4,46 billion Euros. The tax savings were estimated at about 1,5 billion Euros. Those taxes would have inured to the benefit of the federal state Baden-Württemberg, Porsche’s place of business.

Denying an illegal “tax trick”, Hans Dieter Pötsch, CFO of VW, stated that 100 millions of taxes would result from the deal anyways. He put emphasis on the fact that otherwise a merger of the companies would have been possible tax-free in 2014. Earlier attempts of merging Porsche and VW had failed because of numerous claims of damage compensation from investors against Porsche SE. Therefore, VW now only took over the operational Porsche AG, the risks of the claims remaining with Porsche SE.

The “trick” that now seems to irritate the public is a legal method of restructuring companies, incorporated in the German Reorganization Tax Act. As a consequence to critical public interest, the Federal Council of Germany (Bundesrat) is now trying to close this legal loophole within the annual Tax Act 2013 – the federal states fear that due to the restructuring of VW and Porsche, more companies might think about using this legal method to save taxes.

Bundespräsident (Federal President) Christian Wulff has been the subject of tremendous public criticism for the last few months. Since his office and the cause of this uproar is relatively obscure in the political landscape, we will strive to outline what has incited the outrage and lay out possible scenarios.

It all began with a private loan Wulff negotiated to favorable conditions and a number of private holiday visits to friends during his tenure as premier of Lower Saxony in the years 2009 and 2008. Which, is, essentially all that really happened. However, crisis management does not seem to be a skill Wulff values highly.

Germany’s favorite tabloid “BILD” published the details on these private loans on December 13, citing a statement Wulff made in February 2010, in which he claimed that he had not had any business relations with the issuer of said loan for ten years. This proceeding in conjunction with the holiday invitations he accepted earlier, albeit claimed to have been legal transactions at the time (which, from our viewpoint without detailed knowledge, seems plausible) lead to the public viewpoint shifting critically.

Where Wulff had been somewhat of a moral poster boy, generally applauded by both the tabloids and big papers – after these allegations surfaced though, that moral high ground seemed to have evened out. The feeling that the president, of all people, had been a “cheapskate” permeated the minds of the people. However, the general criticism had, by and large, distilled down to the question whether such action would have been fitting to the office Wulff had been elected into. An official statement was made where Wulff provided full disclosure into any travel arrangements he had made since 2003 and the date for the private loan was evaluated.

Until, on January 1st, the “Frankfurter Allgemeine Sonntagszeitung” published an article claiming that Wulff had left inappropriately threatening voice mails for Kai Diekmann, editor in chief of the aforementioned “BILD”, citing among others an inquiry on “how the war would be fared”, that “Rubicon had been crossed” and that there would be a “final break with Springer” (BILD’s publisher). These messages had been left one day before BILD released the information regarding the private loan.

Not surprisingly, the publication of these choice quotations flared up the scandal once more – but this time with a rather different twist to it. Where previously, Wulff had left the impression of nothing more than a normal person trying to save money, a sentiment many Germans shared, in a position where public opinion no longer thought it to be acceptable, the new evidence suggested an attempted cover-up, a direct attempt to influence the media. Some even boldly stated that he was violating the freedom of the press.

While such a statement might be a little extreme (after all, the Bundespräsident does not have any significant decision making power in Germany in a position more similar to the Queen of England than a typical “president”), Wulff certainly was trying his best to influence the media with the limited “power of the word” that is so often named and associated with his office. Wulff gave a public interview, explaining that his statements had been made in the heat of the moment, that it was a hard time for him and that he was merely asking for a delay of one day in publishing the information BILD had been given. These statements, however, have been falling on deaf ears, considering his total refusal to allow the publication of a complete transcript of the phonecall.

To sum the rather tragic story up, Wulff had made some rather minute errors in judgement that lead to the original scandal, which then, due one of the most horrendous PR disasters since Guttenberg, turned it from a relatively modest affair to the onslaught it has become now. However, since there is no way to get rid of a Bundespräsident short of a criminal trial, the only way for him to go is for him to step down – which he, to his credit, refuses to do.

We will see how this turns out. The most likely scenario is that he will simply stay in office and lets this all blow over. He has just been in office for little more than one of his five years as Bundespräsident – more than ample time to simply sit this one out and move on to more dignified things. Stepping down, the choice of his predecessor, would only lead to yet another public outcry. While harshly criticized, said predecessor’s (Horst Köhler) most grief failure had been his political selfdestruction in stepping down. It would be almost comical (yet fitting the topic of worst-possible PR) and therefore unlikely to see Wulff step down.

For years, Germany has been struggling with its right extremist neo-nazi party, the so called NPD (Nationaldemokratische Partei Deutschlands). The party has, over the years been subject to numerous investigations regarding its constitutionality. In 2001, a suit for disbanding the party was filed with the Bundesverfassungsgericht (BVerfG), which ultimately had to be dismissed due to procedural errors in what is known in Germany as the “V-Mann-Affäre”.

So what is the NPD? Founded in 1964 as an answer on arising extremist views usually characterized as similar to the NSDAP in both program and language, the NPD has, after the reunification of Germany, focused its efforts on the former GDR areas. While a small party, it has achieved some successes and is struggling on and off with the hurdle of 5% of voters to gain entry into any legislative body. The NPD is generally assumed to have strong connections if not direct control over violent organizations responsible for the recent acts of terrorist activity in Germany. Is is also an openly racist organization essentially comprised of Neo-Nazis.

In the 2001-2003 legal affair, the government tried to outlaw the party in the highly regulated and extremely hard process for banning a political party, a legal possibility that has rarely been used in German history, and had so far been reserved for direct successor parties to the NSDAP and has only once been used in a controversial way with the ban of the Communist Party (KPD) in 1956. The NPD case, however, failed due to the problematic involvement of police informers in the party leadership which then lead to confusion of acts admissible as evidence. Ever since the failure of that first try, voices have been heard that want to instigate a new attempt at the banning of the party – and with good reason.

However, most recently the full involvement of police informers in the party has been coming to light and has proved shocking. There are over 130 police informers currently active in the party, which in the minds of many has raised the question: “Are there actually any Nazis left, or is it all just police informers spying on each other?” – A cynical remark, surely, but certainly an extreme problem with a new trial, if it should come to that. The hopes of the investigators are now on proving ties between the NPD and the so called “Zwickauer Zelle”, a terrorist organization responsible for a number of murders and a bombing in the time from 2000-2007. If they succeed in proving this, the police informer affair might just become a minor point.

Karl-Theodor zu Guttenberg is back. After allegations of plagiarism against the former Minister of Defense surfaced just less than a year ago, Guttenberg has not been in the public eye very much. After his doctorate was taken back by the University of Bayreuth, the prime staff member of Angela Merkel’s cabinet absconded to the United States for some time, while waiting for the public debate to subside somewhat.

The charges of plagiarism against Guttenberg, however, did not end with the withdrawal of his doctoral degree – criminal charges were brought up against him as well. The proceedings, however, have been suspended on the condition that he pay 20 000€ to the German Child Cancer Aid charity. In the midst of all this, Guttenberg has announced an interview book under the title of “Vorerst Gescheitert” or, loosely translated, “Failed For Now”. In this book, he outlines all the facets of his political career – and, obviously, the circumstances which led to his temporary downfall. He states how he was too busy due to the dual load of his private life, his political career and the need to continue writing his dissertation.

On a similar note, he is returning. Stating in his book that he does not have a concrete intention of returning yet, the facts speak for themselves: Maybrit Illner is running a show on his return, he seems to have reimagined his look with a few more pounds, sans glasses and with a new hairdo, “Bild” already ran a title story: “as Gutt as ever”. The fascinating thing is that rarely has such a fuss been made over a politician in Germany. Guttenberg is and remains a superstar of politics in this country, and a controversial one at that. Magazine “Stern” has run a poll on support for a return of the christ-democrat politician. Split right down the middle, 49% of the interviewed people were for a return to the political scene, leaving 51% against it. Interestingly, 53% believe that he can not be trusted, leaving at least 2% thinking that he can’t be trusted and still wanting his return.

The news are bulging with updates on the Guttenberg situation. Germany’s most popular online news site, Spiegel Online alone has been running around 25 articles on the situation since the announcement of his book. If there ever was the climate for a comeback, this is the time. However, would it be a smart step? It depends on what kind of portfolio Guttenberg wishes to please in the future. Predominantly liked by the elites at first as a person that could woo the masses while still making smart decisions and of integrity, he has lost many of those early supporters with his blatant disregard of academia. However, the masses he had wooed during his run still remain firmly behind him, mainly due to a marginalizing of what he did. Many of those voters see his crimes as akin to the cheating in a random school test.

Maybe the people wanting his return were inspired in part by his comments on the scandal in his book: “If I had tried to cover something up, I would have altered it so that no one would have noticed. You can trust me on this.” How very reassuring.