Tax administration – The German Experience

1. Tax administration – The German Experience

2. Introduction • Main Features of the German Tax System • Organisation of the Tax Administration • Consequences of decentralization in Germany • Summarization A. Ulbricht

3. Main Features of the German Tax System • Germany is a federal republic, made up of individual states with their own rights, competencies and tasks • Germany is structured in three basic levels (Federation – 16 Länder– Communities), 82 Mio citizens • “Connectivity of Task and Expense Responsibility“: Each level of government must finance the expenses incurred by fulfilling their constitutional responsibilities. A. Ulbricht

4. Main Features of the German Tax System A. Ulbricht

5. Main Features of the German Tax System The German Separation and Bonded System • Taxes are categorized in two groups • Separation system: Taxes belong only to one level of government (i.e. Solidarity surcharge) • Bonded System: Taxes are assigned to more levels of government (i.e. Income tax) A. Ulbricht

6. Statistics * A. Ulbricht *(not included in the revenue)

7. Statistics Tax Revenue 2004/2005 Fiscal period (Mio €)Rate of change 2005 2004 Mio € % Bonded Taxes 307.890 302.130 5.760 1,9 Seperate Federal Taxes 83.508 84.557 -1.046 -1,2 Seperate Land Taxes 20.579 19.774 805 4,1 Customs Duties 3.378 3.059 319 10,4 German tax revenue (without seperate 415.355 409.517 5.838 1,4 local taxes) (source: Federal Ministry of Finance, Feb 2006) A. Ulbricht

8. Statistics Federation • Federal Tax revenue 2005: 190,8 Billion € • Expenses for the federal tax administration: 3.192,0 Mio € Bavaria • Bavarian Tax revenue 2005: 25.759,6 Mio € • Expenses for the state tax administration: 1.625 Mio € (43% for the staff) (source: Budget reports of the Federal Ministry of Finance and the Bavarian State Ministry of Finance,) A. Ulbricht

9. Comparison Tax quota in % regarding the Gross Domestic Product 2004: • Germany: 20,4 • Canada: 28,0 • Spain: 22,9 source: OECD-Revenue Statistics 1965–2004, Paris 2005 A. Ulbricht

10. Organisation of the Tax Administration Federal Ministry of Finance Land Ministries of Finance Federal Offices Regional Finance offices Federal Directorates Land Directorates Federal Property Directorate Tax Directorate Land Property and Construction Directorate Customs and Excise Directorate Main Customs offices including agencies (Custom offices, Custom Commissariats) Federal Property offices Tax offices Revenue Administration/State Construction offices Federal Forestry offices (source: Federal Ministry of Finance, An ABC of Taxes, 2005) A. Ulbricht

11. Organisation of the Tax Administration Tax Administration in Bavaria: • State Ministry of Finance • The Bayerisches Landesamt für Steuern (BayLfSt, = Bavarian State tax department) as the regional tax office • 108 local tax offices • About 18.000 civil servants and employees • Annual tax yield 2005: 59,139 billion € A. Ulbricht

12. Organisation of the Tax Administration The Bavarian State tax department • One President • Two Vicepresidents, who are the heads of the Tax and IT department • 7 division (1 organisation and 1 personnel division, 2 tax divisions, 2 programming divisons and 1 electronic data processing centre) • 4 presidential positions (Presidential Office, 2 staff positions, Issuing authority) A. Ulbricht

13. Organisation of the Tax Administration The Bavarian local tax offices • 108 local tax offices (2 specialized enforcement offices, 1 specialized corporation tax office) • Originally one in every administrative district/county (now 26 outposts) • Range from 35 to 590 employees • Organisation as a mixture of task and type of tax A. Ulbricht

14. Organisation of the Tax Administration Regional differences: Organisation structure • Bavaria: 1 regional tax office, 108 local tax offices (2 specialized enforcement offices, 1 specialized corporation tax office) • North Rhine-Westphalia: 2 regional tax offices, 137 local tax offices (10 specialized investigation offices, 15 specialized offices for the examination of affiliated groups) • Berlin: 17 local tax offices (4 specialized corporation tax offices, 1 specialized investigation office) • Mecklenburg-Western Pomerania: 15 local tax offices A. Ulbricht

15. Organisation of the Tax Administration Regional differences: IT • 1953: punchcard • Seventies: first software program • 1993: first attempt to create a nationwide standard software (FISCUS = Federal integrated standardized computer supported tax system) • 2000: First signs of failure - fiscus GmBH founded; Bavaria seperated and started EOSS by itself (= Evolutionary oriented tax software) • 19.07.2005: termination of FISCUS developments; EOSS and KONSENS (consensual new software development) as future software solutions A. Ulbricht

16. Organisation of the Tax Administration Regional differences: Budget • Every Land has it‘s own budgetary system • Bavaria: regional tax office gets it‘s own budget (except personnel costs and constructional measures), administers partly the local tax office‘s budget – tax offices administer the budget e.g. for their own working equipment • Some other Länder e.g.: All the local tax offices have their own budget, personnel costs included • No nationwide working group concerning budgets A. Ulbricht

17. Organisation of the Tax Administration Regional Similarities: The tax return • „Uniform taxation in compliance with the law" as prime tax principle • No variation of the tax rates (except the municipal taxes) • Fiscal law and special tax laws as the common basis for taxation A. Ulbricht

18. Organisation of the Tax Administration Regional Similarities: Training system for new tax auditors • Same legal foundations • Same entry requirements • Same training‘s structure and contents A. Ulbricht

19. Organisation of the Tax Administration Regional similarities: Wages of (tax) administration • All members of the staff administration are members of the civil services • Nationwide basically the same wages (§1 Nr. 1 BBesG) • No differences between internal and external auditors • Gratifications may vary, working hours are different • Reform of Federalism may change that A. Ulbricht

20. Organisation of the Tax Administration Wage Tax as an example of Tax Administration • Wage tax = income tax on wages and salaries • Deducted at the source • Wages tax card as basis • Tax office responsible for the deduction may vary from the tax office responsible for the taxpayer‘s tax return A. Ulbricht

21. Organisation of the Tax Administration Community official community key local tax office number of childallowances tax class confession changes to the demographic characteristics special deductions A. Ulbricht

22. Organisation of the Tax Administration Wage Tax as an example of Tax Administration (cont.) • Federation: 42,5 % of the revenue • Länder: 42,5 % • Communities: 15,0 % • Tax offices report their tax revenues to the ministry. Ministry reports to the Federation – Federation allots proportionately A. Ulbricht

23. Coordinating a decentralized Administration • No uniform Coordination Authority • FMK (conference of the ministers of finance) as the main coordination board • 1998: more than 900 cross-state boards and committees at all, not only tax administration • 2005: about 210 necessary boards left • Tax administration: 26 necessary boards, 59 project-oriented committees, 123 occasion-oriented and 103 disbanded boards A. Ulbricht

24. Problems in a Decentralized Tax Administration Main Problem of the decentralization • Cross-state cases • Transferring and taking over tax files (due to a taxpayer‘s move) • Reasons: no real coordination; long, bureaucratic procedures for transferring files; different, often incompatible software A. Ulbricht

25. Problems in a Decentralized Tax Administration Tax equalization as a big obstruction • Missing motivation to spend more money and in particular manpower for auditing and examinations, if a high percentage of every earned Euro will be sent to some other Land • The same missing motivation to spend more money and in particular manpower for auditing and examinations, if you get your own share of the tax revenue due to the tax equalization anyhow A. Ulbricht

26. Problems in a Decentralized Tax Administration Various political influences on the Administration • State ministries have different plans and goals for their administration • Political influences complicate coordination • Policy often has to fend of accusations of starting a tax competition between the Länder to provide advantages to local companies A. Ulbricht

27. Advantages of a Decentralized Administration More democratic than a centralized system • Stronger financial responsibility on the part of the Länder • Not dependent on assignments for accomodating the demand; the Länder have a legitimate claim to get their share A. Ulbricht

28. Summarisation • Decentralization has an impact upon tax compliance • Awareness of a regional administration‘s existence varies • Structure and organisation could be improved for better results A. Ulbricht

29. Final quote „In a decentralised tax administration the quality of the finance minister ain‘t the linchpin – it‘s the quality of the head officials at the local tax offices. Compare it to a restaurant chain. Regardless of the quality of the management at the HQ – it‘s the local management that counts.“ - Prof. Dr. Kurt Faltlhauser, Bavarian Minister of Finance, April 2006 A. Ulbricht