German Regulations, Part 440

The usual title for this feature is “Silly German Regulations, Part Whatever” but this one isn’t silly at all.

As you may have read, Germany has something of an unemployment problem. One of the responses has been to encourage self-employment. The jargon phrase is “Ich AG”, which is roughly “Me Ltd”. Theoretically, the newly self-employed can get all sorts of support for starting out: financing, advice, reduced bureaucracy. It’s a laudable effort, particularly as one of Germany’s standing problems has been its comparative inefficiency in business formation.

But the new entrepreneurs also take on all the obligations of a business, including VAT. And there’s the rub.

A friend and colleague of mine, we’ll call her Friend AG, reports that the local Finanzamt, the local tax collection office, is engaging in a practice that looks an awful lot like state extortion.

Here’s how it works. The Finanzamt estimates how much VAT Friend AG owes for a particular quarter. Friend AG has to pay that amount by a deadline set by the Finanzamt. So far, so reasonably unobjectionable. What’s actually happening, though, is that the Finanzamt has been estimating Friend AG’s turnover, and thus Friend AG’s VAT obligations, at five to 10 times the real turnover. She’s thus liable for five to 10 times the VAT that she actually should be paying. She can appeal the figure, but she has to pay the inflated figure, which the Finanzamt holds until the appeal is ajudicated. And the kicker is that if she does not pay the inflated figure by the deadline, she’s judged to be late in her payments and thus liable for a 10 percent penalty, even if the Finanzamt has wrongly estimated what she owes. This penalty cannot be recovered even if the amount is successfully appealed.

So the Finanzamt gets too much money, holds it for too long, and keeps a penalty even if it has been wrongly assessed. How bout them apples.

On the other hand, perhaps Friend AG should be happy that her assessments are coming in at only five to 10 times what they should be. With a system like that, the Finanzamt has every incentive to set the assessments 50 to 100 times too high and let the money roll in.

To say nothing of strangling fledgling businesses with bureaucratic entanglements and cash flow constrictions. What a way to reduce unemployment.

This entry was posted in A Fistful Of Euros, Germany and tagged , by Doug Merrill. Bookmark the permalink.

About Doug Merrill

Freelance journalist based in Tbilisi, following stints in Atlanta, Budapest, Munich, Warsaw and Washington. Worked for a German think tank, discovered it was incompatible with repaying US student loans. Spent two years in financial markets. Bicycled from Vilnius to Tallinn. Climbed highest mountains in two Alpine countries (the easy ones, though). American center-left, with strong yellow dog tendencies. Arrived in the Caucasus two weeks before its latest war.

12 thoughts on “German Regulations, Part 440

  1. Wow, that’s almost Czech in its awfulness. Has anybody ever heard anything else about this? Has it ever received any media coverage? Has anybody gone to court over it and won (or lost)? Is there ANYTHING being done about it? Etc.

  2. When I was an independent small businessman in the US, I paid taxes quarterly. The way it worked was, *I* would estimate my quarterly income, and pay accordingly. If I paid too much, I got a refund; too little, and I had to pay the difference at year’s end, plus interest.

    My accountant warned me that willfully underestimating could get me slapped with a fine. It never happened, so I don’t know how the IRS would judge this.

    Anyhow, it seemed to work reasonably well.

    Doug M.

  3. VAT ain’t my speciality (corporate tax only, really), but if memory serves me right from my exams, the British alternative to making a full VAT calculation for small businesses is to enter into the flat rate scheme, where one pays over a percentage of one’s turnover (allegedly based on the averages for your sector) to HMRC instead of the painful task of analysing your expenses for input VAT.

  4. Can someone explain to me the supposed advantages of collecting VAT at each stage of the supply chain over collecting a sales tax at point-of-sale?

  5. In theory, I can see two main advantages:-

    a) The exemption or otherwise is in relation to the supply itself, not the customer – which makes the process of selling, if not completing the VAT return, simpler;

    b) there’s less scope for ‘absent-minded’ evasion by ensuring that at least one of the stages in preparing goods for sale will be taxed (however, those familiar with the concept of missing trader fraud will know how this isn’t the safeguard it once was).

  6. I cannot be certain, but it reminds me of one of the way to pay VAT here in Spain. I’m no longer current, it’s been more than 10 years. Still there was a way to aproximate the “modulos” to the real factor, or else you could opt to bear a full accounting system.


  7. Can someone explain to me the supposed advantages of collecting VAT at each stage of the supply chain over collecting a sales tax at point-of-sale?

    1. What defines a point of sale?

    2. The intermediate traders have no incentive to cheat.

  8. 2. The intermediate traders have no incentive to cheat.

    Well, there’s the missing trader fraud mentioned above[1] and faking VATable inputs seems to be a cottage industry in the clothing manufacture trade…

    [1] Essentially, a trader sets himself up in business importing goods (generally low-weight but high value goods like computer chips or mobile phones) from outside the EU. As such, he is actually responsible for paying the VAT on the goods on import. He then sells the goods on to genuine and honest intermediaries, charging VAT on top. He then disappears before paying any of this VAT to HM Revenue and Customs. As the honest trader can usually reclaim the VAT paid from their own VAT bill (except in cases where Customs can prove this fraud has gone on, IIRC), the net effect is that the fraudster has stolen 17.5% of the value of the goods sold from the government…

  9. Just to add a bit of detail, the carousel fraud is the same basic procedure above, except with the twist that the original overseas vendor (in cahoots with the fraudster0 buys back the goods before selling them back to the UK scamster again and again – in other words, there’s not even any underlying economic activity…

  10. I don’t understand this. I pay VAT in Germany and mine doesn’t work like that. At the end of a quarter, I file my VAT return, and then I have to pay the VAT I’ve collected, set off against VAT on business expenses. I can even get four weeks’ grace if I make a once-only request to be allowed to file a month later. All the VAT I pay is money I’ve
    I wonder if Friend AG has the right advice. It almost sounds as if she has neglected to report her own VAT and therefore the tax office is allowed to estimate it. I am not an expert, but it sounds weird.
    I do have the freelance advantage of paying what I really received. Friend AG may have to pay VAT on the invoices she has issued, i.e. before receiving payment. That would explain some difficulties, but it would never explain this exaggerated assessment.

  11. Doug,

    this sounds more like the way income taxes are collected. I think the reason behind “official” assessments of non-dependent income tax payers is a justice argument: employees taxes are paid by the employer to thethe fiscal authorities as the salaries are paid to the employee, they’re kind of a source taxation – but – they’re legally the same kind of tax that freelancers or entrepreneurs pay – personal income tax, that can be paid up to two years after the income has been created. So in order to reduce the advantage “independents” have over “dependents” (in this respect) there are official estimations of future income that… can be a little off. Let’s all hope the German tax system will get a transaction cost break soon. Really. We don’t need a flat tax (and we won’t get one). But reducing the absurd (usually justics induced) complexity that is creating so much injustice in itself would be immensely important.

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