Beware of tax traps

When tax risks become reputational risks

The fact that the customs authorities – the “weapon-carrying troop of the tax administration”, so to speak – stood at the door of some companies unannounced in the run-up to Christmas must have caused some red-hot faces.

The reporting clearly shows how quickly tax risks can only become accelerants for reputational and criminal law risks from the usual “different interpretations of tax law” – especially in Germany, where despite the national sport of “tax saving”, people like to point the finger at such cases. Even if in the end a raid remains without result – the damage to reputation leaves an unsightly stain on the vest. And for companies that are already struggling with liquidity problems due to the weakening economy, unplanned back tax payments come at an inopportune time.

Organized chaos in tax law increases tax risks for companies …

The problem: In the organized chaos of tax laws, taxpayers are often in the dark about how they are to be implemented in practice. The costs of companies to implement the increasing bureaucracy of unclear laws by armies of tax experts are rarely in proportion to the additional tax result – and do not bring the company a cent more sales. The tightening of tax laws also fails to recognise that they rarely serve to curb tax evasion, because criminals work past the law anyway, find loopholes and use them in an abusive way. It thus affects the companies that actually only want to comply with the tax laws properly.

… and opportunities of the tax authority for additional tax revenues

The question of whether, when, in what amount and under what conditions taxes are to be paid is often difficult to answer. Laws are deliberately formulated abstractly in order to be applicable to many cases – but the reality is usually much more complex. The “overall picture of the circumstances”, on which the tax authorities often rely, rarely agrees with the taxpayer’s point of view. In this respect, there is a high risk that the tax office may take a different view on the application of the laws. In addition, the state has to plug significant budget holes and the tax authorities therefore naturally try to take up more facts where they suspect sufficient financial strength. And the chances are not bad that the companies will shy away from effort, costs and time to argue with the tax office and in such cases make compromises that lead to unplanned additional burdens for the company, but to welcome additional revenue for the state coffers. How does this fit in with the basic principles of taxation according to ability to pay or tax justice?

Organized chaos in tax law

The solution: To prevent such conflicts from occurring, companies should act preventively. The most effective measures include:

✅ Establishment of internal processes and control systems to ensure compliance with tax regulations and identify risks at an early stage (tax risk management).

✅ Continuous monitoring of tax law changes in order to identify potential risks in good time – from existing laws, new regulations or changed case law.

✅ Regular review and adjustment of structures and contracts with regard to tax changes.

✅ Risk provisioning against tax risks, e.g. through binding information or tax insurance, in order to minimise unplanned cash outflows, reputational and criminal law risks.

Nice to know: Tax risks, e.g. from legal uncertainties in the interpretation of regulations on bogus self-employment or (import) VAT, can now be efficiently insured: liquidity-friendly, liability-reducing and fast.

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