19.11.2014Local Tax Court rules on obligation to provide due diligence report to tax auditor
The Local Tax Court of Muenster has issued a decision in which it expresses doubts about a taxpayer’s obligation to provide a due diligence report to the tax authorities for review in a general tax field audit.
In a decision dated September, 3rd 2014 (6 V 1932/14 AO), the Local Tax Court of Muenster questioned a taxpayer’s obligation to provide a due diligence report to the tax authorities for review in a general tax field audit, and issued an order suspending this obligation.
The question of whether certain documents must be provided to the German tax authorities for review in a tax field audit has been an area fraught with controversy, because of the tension between the tax authorities’ interest in obtaining information and taxpayers’ interest in protecting their privacy.
The case before the Lower Court of Muenster involved a German holding company that had been subject to due diligence in connection with a possible joint venture with a third party. In a transaction unrelated to the joint venture, the holding company later sold its interest in a subsidiary to its 100% shareholder.
During a tax field audit, the German tax authorities requested the due diligence report to determine the arm’s length nature of the purchase price paid by the shareholder. The authorities justified the request on the grounds that the report might contain information relevant to determining the fair market value of the transferred shares. The holding company produced a partly redacted version of the due diligence report, arguing that it should not be required to provide the full report, since the due diligence report contained conclusions (which are not subject to review by the tax authorities), rather than facts. The company also raised the point that a separate valuation had been prepared to determine the purchase price of the shares, which had been provided to the tax authorities.
In its decision, the Local Tax Court suspended the taxpayer’s obligation to comply with the tax authorities’ request (until a final decision is reached in the case). The court expressed doubts as to whether a due diligence report generally qualifies as a document that needs to be provided to the tax authorities during an audit. It further opined that, even if this were the case, it would be questionable whether the tax authorities would have the right to request the full report. In any case, the tax authorities would be required to thoroughly weigh their own interests against the taxpayer’s interests before making such a request.
The decision indicates that the tax authorities may not freely request information from the taxpayer in a tax audit without complying with the legal requirements and, particularly, taking into account the taxpayer’s interests.
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