University of Cologne

Austrian Development CooperationREPARIS Vienna Workshop

14.-15. March 2006

Tax versus Commercial Accounting in Germany

WP/StB Prof. Dr. Norbert HerzigDirector at the Chair of management administration

and taxation University of Cologne

WP/StB Prof. Dr. Norbert Herzig 2

University of Cologne

Current specification of the conformity principle

Overview:

Third Book of the commercial code (HGB) contains generally accepted accounting principles (mostly regulated by law) In line with 4. and 7. EC-Directive Tax Accounting (§ 5 Abs. 1 EStG) sets link on these principles conformity principle

Initial Point: Simplification Idea of the unitary balance sheet

Later: equality assumption

fiscal authority as „sleeping shareholder“

WP/StB Prof. Dr. Norbert Herzig 3

University of Cologne

Current specification of the conformity principle

Principles and Objectives:

Objectives of Commercial Accounting: information and payment measurement

Principles of Commercial Accounting: Principle of prudence (prevailing rule)

calculating profits as cautiously as possible (nominal capital maintenance and protection of the creditors)

Concretion: Realization Principle

(profits have to be confirmed by means of sales acts; connected with acquisition cost principle)

Imparity Principle (principle of loss anticipation, profits and losses not treated equally)

True and Fair View-Principle has supplementary function

WP/StB Prof. Dr. Norbert Herzig 4

University of Cologne

Current specification of the conformity principle

Reverse conformity principle:

Options in determining profits have to be claimed in conformity with the commercial balance sheet (§ 5 Abs. 1 S. 2 EStG)

Criticism at the (reverse) conformity principle:

tax accounting affects commercial accounting and distorts the objectives of the commercial balance sheet

Consistency with the 4. and 7. EC-Directive (true and fair view)

Conformity Principle as a torso: independent tax-clauses increase in complexity and importance (e.g. provisions for imminent losses)

jurisdiction emphasises discrete purpose of the tax balance sheet

WP/StB Prof. Dr. Norbert Herzig 5

University of Cologne

Increasing influence of the IAS/IFRS

IAS/IFRS develop as a global standard for accounting

Primary function of the IAS/IFRS is Information

Paradigm shift:

up to now: protection of creditors in a HGB-Balance-sheet new: information-oriented IAS/IFRS-Balance sheet

Continuance and future definiton of commercial accounting (HGB) in Germany is contingent

„Bilanzrechtsreformgesetz“

planned: „Bilanzrechtsmodernisierungsgesetz“ Problems:

Future of the conformity Principle?

connection of a tax accounting system?

WP/StB Prof. Dr. Norbert Herzig 6

University of Cologne

Impact of the IAS/IFRS on Tax Accounting

1. Link with HGB equity maintenance based accounting For a transitional period feasible

Maintenance of the conformity principle Stability threatened

HGB-Accounting develops towards a greater information-only role (see planned „Bilanzrechtsmodernisierungsgesetz“) Non-recognition of the capital-maintenance-principle in other member states of the EU

No forward looking solution

WP/StB Prof. Dr. Norbert Herzig 7

University of Cologne

Impact of the IAS/IFRS on Tax Accounting

2. IAS/IFRS conformity principle model link in tax law on IAS/IFRS

chance of a harmonization in the EU Maintenance of the conformity principle in a new guise

Problems: Aspects of constitutional law (legitimation for fiscal intervention in private capital is questionable)

Verification through courts of law and repercussion on implementing of the IAS/IFRS (danger: conflict between worldwide uniformity of IAS/IFRS and the possible creation of German-, Austrian-, Italian- oder EC-GAAP)

Divergency in purpose

WP/StB Prof. Dr. Norbert Herzig 8

University of Cologne

Impact of the IAS/IFRS on Tax Accounting

Divergency in purpose IAS/IFRS are information-oriented, tax accounting is the accurate

measurement of economic performance capability Accounting is always a compromise between „relevance“ and

„reliability“ IAS/IFRS: „relevance“ Tax accounting: „reliability“

Realisation principle important for taxation: determination of secure profits connected with the sales act

contrast: IAS/IFRS: Measurement mainly with Fair value Imparity principle dependent from fiscal mode of loss-allocation

No forward looking solution

WP/StB Prof. Dr. Norbert Herzig 9

University of Cologne

Impact of the IAS/IFRS on Tax Accounting

3. Independent tax accounting law

Formal: Independent definition of the fiscal base for taxation No conformity principle

Material: IAS/IFRS are „starting point“ in accounting and taxation Differences to this global standard need legitimation,

e.g. different purpose of the accounting system

Practical: transferring data from the IAS/IFRS-Balance-Sheet (IAS/IFRS as a starting point) independent tax accounting system

WP/StB Prof. Dr. Norbert Herzig 10

University of Cologne

Development in the European Union

2001/2003:

European commission‘s communication: „Towards in internal Market without tax obstacles. A Strategy for providing companies with a consolidated corporate tax base for their EU-wide activities“

2004/2005:

Establishment of a Working group to define a Common Consolidated Tax Base

(CCCTB)

2006 (Intermediary result of the CCCTB-WG):

Independent Tax Accounting system based on corporate-balance-sheets

IAS/IFRS are used as a starting point

No conformity principle is implemented

WP/StB Prof. Dr. Norbert Herzig 11

University of Cologne

Resume and forecast

Parallel development of a (new) Tax accounting system in the European Union and Germany:

Independent (consolidated) tax accounting system

IAS/IFRS as a starting point

No conformity principle

Function-specific accounting systems

No unitary balance sheet

Germany forces development of a CCCTB:

see agreement of the coalition of CDU/CSU und SPD