A few years after the coronavirus pandemic, my firm faces the fact that tax authorities have changed their strategies. The number of inquiries, audits, and often inappropriate fines is increasing. It is also becoming more evident that, as a result of digitalization, tax authorities have the capability to obtain additional information about companies, their owners, and counterparts from other sources. The tax authorities use this information to request specific explanations. The only correct approach under such conditions is to take proactive measures that justify the transparent economic background of a company’s decisions, supported by corresponding documents and legal provisions.
The information obtained by tax authorities is not limited to the territory of Germany. European tax authorities are increasingly interacting with each other and finding more ways to quickly obtain the necessary information from the internet and third-party sources. For example, it has been found that Spanish tax authorities receive information about the flights of individuals, which enables them to track their tax residency. Customs and municipal authorities also freely exchange data.
Banks do not yet have the right to freely transmit information to tax authorities, but literally a wrong tick in a tax return already allows tax authorities to make a qualified inquiry to the bank of the company or individual.
We are eagerly anticipating changes in the environment related to the introduction of electronic invoicing. It is already planned that the tax authority will “receive” all invoices from a company and can evaluate them as needed. It is clear that all information about a transaction will be immediately available to the tax authorities.
The introduction of mandatory registration in the transparent register has already given tax authorities the ability to identify the owners and economic beneficiaries of companies. Accordingly, changes in the ownership composition of a company are fully monitored, which can lead to tax consequences, for example, when it comes to real estate.
Thus, transparency is increasing. This has a positive component as well. The possibility of deception when companies interact with each other is reduced, but on the other hand, this situation requires a thoughtful approach in choosing one’s own actions.
In addition to all the insights mentioned above, there is an increasing need for knowledge of international tax law. There are many pitfalls here. For example, it is no longer possible to open a company in an offshore zone and hope that it will be possible to avoid taxation of its income in Germany if you live in Germany and manage this company from Germany.
The only way out is to think ahead about a business strategy, taking tax details into account before decisions are made and transactions are carried out. This includes:
- Identifying risks,
- Contract design,
- Preparing documents,
- Proactive pricing and documentation, especially with affiliated companies,
- Clear communication and coordination of necessary measures with counterparts.