Spurred by greater-than-expected public attention, Germany’s coalition government has shown strong interest in the OECD BEPS project. Following on the government’s commitment to the 15-point OECD BEPS Action Plan, some laws covering central BEPS measures have already been implemented in Germany. The German government’s primary objectives are adequate taxation of multinational companies, prevention of no or low taxation, and involvement of emerging and developing countries in the OECD process. Because Germany already has extensive anti-avoidance laws, reforms have caused little disruption.
Media coverage has made the tax affairs of multinational corporations a public issue. While media coverage andnpublic anger toward tax evasion have 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 combatting perceived aggressive tax planning, strengthening transparency between different tax authorities and improving the coordination of national tax regimes. The tax authorities are cooperating 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.
Germany has also signed the Multilateral Instrument on 7 June 2017. However, as Germany has applied for the special notification procedure according to Article 35(7) of the instrument, the implementation of the chosen changes in the German covered tax agreements may take several years.
Auditors are paying more attention to issues discussed at the OECD, such as PEs, hybrid mismatches and transfer pricing issues. 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 could change in the future.
CbyC reporting is one area in which German enthusiasm for the BEPS project has waned during the BEPS discussions. 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 CbyC reports could cause the tax authorities in these markets to pursue a greater share of tax. Germany has already introduced CbyC reporting in its domestic law. However, the German tax authorities do not support the EC’s proposal to make CbyC reports public.
Corporations in Germany have become much more aware of the risks associated with strategies involving, for example, hybrid structures. Where these structures are already in effect and being employed in accordance with respective regulations, some companies are monitoring them closely or have already resolved them as a precautionary measure. This is because Germany has already implemented some refinements to domestic law. More exhaustive law changes affecting hybrids are expected to be tabled after the German parliament elections in September 2017. These reforms will also implement the EU anti-tax avoidance directive.
GGermany already has anti-treaty shopping rules, CFC legislation and some anti-hybrid rules with a correspondence principle for dividends and expenses of a partnership member regarding their interest in the partnership.
In July 2016 and May 2017, the EU adopted the ATA Directives 1 and 2. Although the adopted rules are already in force in Germany for the most part (e.g. earnings-stripping rules, CFC rules, exit tax, GAAR, some anti-hybrid rules), theGerman legislator will need to introduce some new rules by 2019 or 2020.
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.
As companies rethink their international tax strategies, public perception and reputational concerns have entered 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 considered.
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.