Germany - Response to BEPS

Germany - Response to BEPS

Spurred by greater-than-expected public attention, Germany’s coalition government has shown strong interest in the OECD BEPS project. A verbal commitment to the 15-point OECD BEPS Action Plan has been made. The Ministry of Finance has specified as central objectives the adequate taxation of multinational companies, the prevention of non-taxation or low taxation, and the involvement of emerging and developing countries in the OECD process. Because Germany already has extensive anti-avoidance laws, reform is not expected to be disruptive.

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Germany BEPS

Media coverage has made the tax affairs of multinational corporations a public issue. While media coverage and public anger toward tax evasion has somewhat abated, multinational companies that pay minimal tax in Germany continue to receive negative publicity.

Tax authorities have become much more aware of, and active in, their audits of international transactions. Key issues are combating perceived aggressive tax planning, strengthening transparency between different tax authorities and improving the coordination of national tax regimes, as authorities cooperate not only across different German regional offices but also across international borders with neighboring tax authorities, for example, in France and Austria. The German Ministry of Finance hosted the October 2014 conference on tax transparency and fairness at which 50 states signed the multilateral agreement on the automatic exchange of tax information.

Auditors are paying more attention to issues that are also being discussed at the OECD, such as PE or hybrid mismatches. Stricter audits may also be encouraged by a government that wants to maximize revenues. Whatever the motivation, certain structures that were not questioned 5 years ago are now subject to challenge from the tax authorities.

Tax controversy and disputes have risen accordingly. While rising public attention to tax has not influenced the courts’ objectivity in deciding BEPS-related issues, the courts’ stance toward issues in this area could change in the future.

Country-by-country reporting

CbyC reporting is one area where German enthusiasm for the BEPS project has waned in the past year. In light of the high volume of activity of German multinationals in the BRICs (Brazil, Russia, India and China) and other emerging countries, there are fears that the CbyC reports could cause the tax authorities in these markets to pursue a greater share of tax. Nevertheless, Germany continues to show constructive engagement in the development of these proposals.

Hybrid structures

Corporations in Germany have become much more aware of the risks associated with strategies such as the use of hybrid structures. If these structures are already in effect and being employed in accordance with current regulations, for the most part they are being left in place as corporations await the details of possible refinements to domestic law in response to the OECD proposals. Companies that wish to implement new strategies and structures are waiting before committing themselves to anything that might have to be unwound.

Anti-avoidance rules

Germany already has anti-treaty shopping rules, CFC legislation and an anti-hybrid rule with a correspondence principle for dividends.

To date, unilateral measures have not been introduced in reaction to BEPS, but if BEPS and G20 initiatives are not realized by 2015, the government intends to introduce such measures.

A first legislative draft might be released at the beginning of 2016 implementing the anti-hybrid recommendations of the OECD and CbyC reporting.

Substance requirements

International tax practitioners know that substance requirements are likely to be part of any reform package. In anticipation, they are examining structures to ensure that transactions are completed for sound business reasons.

Public perception

As companies rethink their international tax strategies, public perception and reputational concerns will enter into consideration. Recent history shows that a great deal of damage can be done to a brand when the public reaction to certain practices is not accounted for.

Exit strategy

Because of the political nature of these reforms and the OECD’s accelerated timetable, it is expected that rules will continue to be refined, challenged and changed. Companies must consider that a strategy that works for them today might not work in the future. A carefully planned exit strategy is essential. 

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