Although German Finance Minister Peer Steinbrück initially faced massive criticism from the majority CDU/CSU fraction in the German parliament as well as from trade associations for his “Act to Combat Destructive Tax Practices and Tax Fraud”, it now seems that the act will be approved and take effect during this legislative period.

On Wednesday, 22 April 2009, the German government finally agreed on the draft which will now start its way through the legislative procedure. The Bundestag (the lower house of parliament) is expected to deal with the draft act within the current week.

The act is intended to put pressure on countries which do not comply with the OECD standards regarding the exchange of tax-relevant information between countries. Since the OECD’s recently published “black list” of tax havens is now empty, however, with the four listed states — Costa Rica, Malaysia, the Philippines and Uruguay — having announced their intention to pass information exchange provisions which meet OECD standards and therefore being transferred to the “gray list”, some German politicians from the FDP fraction have referred to the act as being redundant and therefore unnecessary.

Nevertheless, it appears likely that the act will come into force. Mr. Steinbrück has pointed out that until the promises of the “gray-list” states are kept and the respective information exchange agreements are concluded, the need for regulations to prevent tax fraud resulting from an insufficient information exchange still exists.

Bearing this in mind, one would expect the act to lose its effect once such agreements or treaties are concluded. While this may be true for most of the regulations included in the draft, the provision which creates a data-retention obligation for persons with income exceeding EUR 500,000 a year from sources other than business, self-employment or agriculture is likely to remain in effect. The same will likely be the case for the provision which expands the audit authority of German tax offices to include such persons – currently, only those taxpayers can be audited who have income from business, self-employment or agricultural activities.

Therefore, even taxpayers who think they are not affected by the draft regulations regarding tax havens should be aware that the draft act may nevertheless affect them.