Panama Papers accelerate the process of voluntary disclosures

Consequences in case of discovery of undeclared investment income through domestic tax authorities

If domestic tax authorities detect that a tax payer has undeclared investment income but no voluntary disclosure was submitted, it initiates criminal tax proceedings leading to a punishable offence from a fine up to imprisonment of ten years. Tax evasions of more than EUR 1,000,000 normally lead to prison sentence.

Consequences when a voluntary disclosure has previously been submitted to domestic tax authorities

The legal consequence of a successful voluntary disclosure is full immunity from prosecution in relation to tax evasion. In order to be successful the domestic tax payer has to declare all so far non-declared taxable income of the last ten years. Apart from that declaration he will only reach full immunity from prosecution if he pays the evaded taxes together with interest on arrears (6%), and in case certain limits are exceeded a penal surcharge between 10% for an evasion volume over EUR 25,000 per calendar up to 20% for an evasion volume over EUR 1,000,000, all within a specified and reasonable period stipulated by domestic tax authorities. Note that the limitation period for criminal prosecution is usually five years whereas the limitation period to change the tax returns is ten years.

Domestic taxpayers have to be aware of the fact that most of the foreign investments that were received as gift or inheritance may not yet be statute-barred and therefore might have to be included in voluntary disclosure as well. In case of gifts the ten year limitation period has often not even started yet, because the statutory period starts when either the donor dies or the tax department becomes aware of the gift.

Conditions for a successful voluntary disclosure 

Apart from sufficient liquidity for taxes, interest and surcharges, tax evasion has to be undiscovered at the moment of the filing of the voluntary disclosure. Typical blocking reasons for full immunity from prosecution are a prior announcement of a tax audit order and the prior initiation of criminal proceedings. But also in case of discovery, a voluntary disclosure declaration will always be grounds for mitigating the penalty and is therefore the best way to return to legality.

The most foreseeable change will be the inclusion of off-shore companies. The draft law has still to be ratified by Federal Council, but will enter into force at the latest by year-end. Tax evasion via an off-shore company will then be seen as severe case of tax evasion. Voluntary disclosures for off-shore companies will then only be possible with payment of the penal surcharge of 10% to 20% and the statute of limitation period for undeclared off-shore income will principally start ten years after the year-end in which the tax has been due, i.e. in case of long-term tax evasion a doubling of the period and therefore the taxes. Moreover banking secrecy diminishes. 

Will the Panama Papers accelerate the process of voluntary disclosure? 

Panama has so far not signed the OECD standard. Nevertheless the risk of data of German beneficial owners of Panamanian off-shore companies being sent automatically to the German tax authorities will become likely and might just be a matter of time. Germany and Panama will carry on negotiations about the inclusion of automatic exchange of information in a Double Taxation Treaty in June 2017. Due to the upcoming draft law changes, we recommend the prompt filing of a voluntary disclosure especially for off-shore earnings by advisors before detection to reach full immunity from tax evasion. Especially as bank account information is passed anonymously and for free, e.g. in April 2017, tax administration received information about 60.000 foreign firms and persons on Malta (so-called “Malta Leaks”), which will be shared with EU Member States. Therefore, German tax authorities anticipate a new wave of voluntary disclosures.