What is the purpose and objective of a Tax Compliance Management System (Tax CMS) under German law?
Despite the utmost care on the part of any tax department, tax returns can contain errors. The most common cause is a lack of transparency and insufficient data quality for tax declaration purposes. The high complexity of internal processes requires a clear allocation and documentation of responsibilities and persons in charge. Missing or inadequate process and role definitions can lead to tax-relevant information not being passed on and considered accordingly. If an error is caused by inadequate processes or lack of controls, this will be categorised as a tax offence or at least as carelessness. Both could lead to fines, reputational damage and criminal or monetary consequences for the persons responsible, in particular for the management.
Proof of an adequate Tax CMS can refute the allegation of tax evasion or carelessness in connection with an incorrect tax return. With the guideline of the Federal Ministry of Finance dated 23 May 2016, the fiscal administration has paved the way for companies to correct errors in tax returns without being subject to criminal charges. This means that when an error is discovered and disclosed accordingly, the tax authorities will assume that the error was not caused by an organisational deficiency if an adequate Tax CMS is in place.
What are the benefits of a Tax Compliance Management System for companies?
Besides providing protection against consequences for the management and other tax responsible employees, a Tax CMS also protects companies against penalties, late payment interest, and non- budgeted tax payments. From an organisational point of view, a well-implemented Tax CMS also provides high transparency and efficiency in all tax-related processes. The implementation of a Tax CMS is furthermore a great opportunity for further standardising and automating processes and moving the tax department and the entire tax function to the next level. In the near future, the role of the tax department will be to organise, manage and control processes inside and outside the tax department instead of being reactive and wasting time and resources on the collection of poorly structured data. There is a significant outcome in freeing up resources within the tax function to generate additional value not only in terms of tax optimisation but also in terms of supporting management decisions with current and well-substantiated information and data.
Does the use of a Tax Compliance Management System provide advantages when dealing with the tax office in Germany?
Currently, German tax authorities start tax audits with the question of whether a Tax Compliance Management System is implemented in the company or not. If the answer is yes, the tax auditor usually requests a description of the Tax CMS. However, this does not currently trigger any direct consequences. In the near future, the expectation is that the existence of an effective Tax CMS will greatly influence how the tax auditor will deal with findings. Companies which can prove an effective Tax CMS might not undergo further criminal investigations by the tax authorities in the case of tax audit findings. The existence of a Tax CMS will also support the company and its representatives in negotiations with the tax auditor. The reason for this is that more substantial data and transparency provide an improved basis for argumentation. Furthermore, in this case, it becomes very unlikely that the tax auditor tries to support his position by threatening the negotiators of the company with criminal consequences.
From an organisational point of view, a well-implemented Tax CMS also provides high transparency and efficiency in all tax-related processes.
How can companies structure an effective Tax Compliance Management System?
A Tax CMS consists of three levels.
The first level is the conception of the Tax CMS. It includes the entire guidance and all principles for all personnel dealing directly or indirectly with tax matters, such as a group tax policy, single specific policies for all relevant taxes, documentation of tax-related processes and last but not least a training concept concerning relevant tax matters.
The second level is supervision. This includes risk management driven by a dedicated person or a team, the so-called Tax Compliance Officer or Tax Compliance Office.
Another key element is the risk assessment, providing a complete directory of all potential risks of error and all mitigating measures and controls belonging to these risks. Other elements of the supervision level are monitoring of processes, defined controls and an internal audit ensuring that all tax guidelines have been adhered to. The core of the supervision level is to link the level of execution with the level of conception.
The third level is the execution. All guidance and principles are worthless if they are disregarded in daily business. It is the main challenge of a Tax CMS implementation project to go live with the conception. With regard to limited resources and budgets, the digitalisation of processes and integrated controls has become a critical success factor. A greater share of manual work will lead to a higher density of the control framework and hence more money and resources are required.
What is the best way to start a Tax CMS Project?
Generally, this depends on the individual situation and the individual level of maturity of the tax function in a company. In tax fields in which robust processes are already in place, the first step should be a risk assessment including the review of the adequacy of measures and controls. In fields where nothing or nearly nothing is in place, the project should be started with the conception and implementation of the required elements.